The Japan Economic Scope - February 23, 2007

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SUBJECT: The Japan Economic Scope - February 23, 2007

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1. (U) This cable contains the Japan Economic Scope from February
23, 2007.


2. (U) Table of Contents


3. Vice President Cheney's Visit to Japan

4. Council on Economic and Fiscal Policy Reflects on Regulatory
Reform

5. Triangular Mergers: the Good, the Bad and the Possibly Ugly

6. Doha and Japanese Agriculture - the Wagons Remain Circled?

7. Japan-Australia FTA: No Date for Launch Yet

8. BSE Update

9. Universal Studio Japan listed on Mothers Board of Tokyo Stock
Exchange

10. New Trade Insurance for Japan's Energy Supply

11. Kyushu Electric Expands Business Ties with India

12. Medical Devices and Pharmaceuticals Working Group Meetings in
Tokyo

13. IPR Cooperation: USPTO and JPO Share Info, Seek to Coordinate
IPR Training Programs

14. Survey Says: Four of Top Five Best Places to Work in Japan
Are U.S. Companies

15. Autos: U.S. Automakers in Japan on Currency Manipulation
Question

16. CivAir: Kobe Airport's First Year: Little Cause for
Celebration (SBU)

17. KIX Upbeat on Upcoming Aviation Bilat

18. Internationalizing Hokkaido's Civil Aviation Industry

19. Rail: Shinkansen Tech Transfer to China; California High
Speed Rail

20. Maritime: MLIT's International Shipping Division's Work and
Reg Reform

21. Regions: Western Japanese Business Leaders Debate Reforms and
Workplace Issues in Kyoto

22. BOJ Raises Short-Term Policy Rate to 0.5%, First Rate Hike in
Seven Months


3. (SBU) Vice President Cheney's Visit to Japan
--------------

Vice President Cheney visited Tokyo February 20-22, meeting PM
Abe, Chief Cabinet Secretary Shiozaki, and FM Aso. He also
received briefings from several Japanese and U.S. military
officers, held a troop rally at Yokosuka Naval Base, and had an
audience with the Emperor.

News coverage of the vice president's visit was very full, with
all events covered. Largely positive, the press coverage focused
on the themes of U.S.-Japan cooperation in the six-party talks,
the strength of the alliance, and Iraq.


4. (SBU) Council on Economic and Fiscal Policy Reflects on
Regulatory Reform
--------------

The Prime Minister's Council on Economic and Fiscal Policy on
February 16 took up regulatory reform, reiterating its importance
as "an engine for economic growth," that can unleash innovation,
contribute to regional revitalization, and raise productivity
particularly in the services sector.

Takao Kusakari, Chairman of the Council on Regulatory Reform
(CRR),elaborated on its priority areas and cited some examples
on possible deregulatory measures, e.g., online medical receipts,
one-stop trade procedures, regulatory reform to realize the Asian
Gateway concept, reform of agricultural land use and financing.
The private sector members of the Council -- including Keidanren
Chairman Fujio Mitarai and a number of senior academic figures --
pointed to the work that remains even after a decade of progress
on reform, particularly in areas such as medical care,
agriculture, elderly care, education, and day care. They
recommended, for example, that the price of medical services
should reflect demand rather than solely be on a cost-basis, and
agreed that online medical receipts should be made available soon.
On agriculture, they emphasized the need for land reform
including the introduction of long-term leases, land ownership by
food companies, and consolidation of unused agricultural land.

TOKYO 00001324 002 OF 008


The Council stressed the need to examine what is not working in
the Special Zones initiative. The private sector members
suggested that the Expert Committee should negotiate directly
with ministries on selected proposals, and that the CRR could use
Special Zones as an option to realize certain regulatory reform.
The Cabinet will adopt a new Three-Year Regulatory Reform plan in
June, which kicks off the fifth round of the three-year cycle.


5. (SBU) Triangular Mergers: the Good, the Bad and the Possibly
Ugly
--------------

MOF draft legislation provides capital gains deferral to
shareholders of companies acquired by a foreign parent through
stock-swaps using a Japanese subsidiary, according to what METI
officials told ECOUNS on February 20.

The acquired company, however, may owe taxes on the market value
of its assets compared to the book value, depending on
characteristics of the subsidiary used to acquire the company, as
stated in a LDP tax committee decision last December.
MOF is in the process of interpreting this decision, and the
requirement that the subsidiary be a company "working" in Japan
could prove problematic.

On the issue of which stocks could be used in the swap without
requiring more-than-super-majority voting, the officials said the
LDP corporate law committee had discussed this several times with
no adverse result, but a final discussion will take place in
March.

We will continue to urge regulations on both issues that will
enable triangular mergers to be a useful tool for new investment
is Japan.


6. (SBU) Doha and Japanese Agriculture - the Wagons Remain
Circled?
--------------

The Vice Minister for International Affairs at the Agriculture
Ministry, Hidenori Murakami, headed to London this week seeking
bilateral meetings with counterparts from the United States, the
European Union, Brazil and India to discuss the Doha Development
Agenda.

Japan has very little new to offer to advance the Doha Round --
at least for public consumption -- but the Agriculture Ministry
(MAFF) remains concerned that the other parties to the talks
could be working to cut a deal that would leave Japan unprepared.
Officials continue to tell us they do not want a repeat of what
happened at the end of the Uruguay Round, when Japan was forced
to accept a deal on agriculture largely struck in bilateral talks
between Washington and Brussels.

Meanwhile, the press this week played up a comment from
Agriculture Minister Toshikatsu Matsuoka that the G10 countries
and EU were discussing the possibility of a joint proposal on
sensitive items for agriculture. The Embassy talked to a contact
at MAFF about the story. He told us that the remarks were taken
out of context, these discussions had been ongoing for over a
year, and there was nothing new to report.

Matsuoka indicated after the informal ministerial meeting in
Davos in January his interest in pursuing bilateral talks with
key countries. Part of his purpose has been to round up support
among key like-minded countries, such as India, bent on
protecting their agricultural sectors. Matsuoka indicated he
wants to stay in touch with Indian Trade Minister Nath.


7. (SBU) Japan-Australia FTA: No Date for Launch Yet
--------------

Since the announcement in December that Japan and Australia would
launch negotiations on an Economic Partnership Agreement there is
still no date for the two the sides to have their first meeting.
On February 15 protestors were all over the streets of
Kasumigaseki -- where the key ministries responsible for the EPA
negotiations have their offices -- to condemn the initiative.
Afterward, the organizers of the protest, including Japan
Agriculture, the large cooperative that protects Japan's small

TOKYO 00001324 003 OF 008


farm interests, took their complaints to the neighborhood in Mita
where their shouts could be heard by the Australian Embassy.
The Japanese press has put the spotlight on the opposition: The
Asahi Shimbun on February 21 described the "rural unrest" the
Japanese government faces as it contemplates when to launch the
talks.

For his part, the Australian ambassador, Murray McLean, is making
the case that an agreement will be a boon for both countries'
economies. He told a Fukuoka- based daily that Australia will
insist that a partnership agreement include agriculture, although
he has hinted that tariff reductions could be phased in over a
longer period. A deal, McLean said, could add up to $5.4 billion
annually to Japan's GDP.

Meanwhile, a JA delegation was in Australia for meetings with
their counterpart organizations on February 20-24. There is no
word yet on how the discussions have gone. JA told us before the
visit that they had no particular agenda, except to express the
organizations concerns about an EPA, and to do some fact finding.
According to Asahi, however, in what is probably a more accurate
characterization, JA is lobbying Canberra to exclude sensitive
agricultural goods from a deal.

We have sought a status report on the talks at MOFA and the
Australian Embassy. An official in MOFA's Economic Partnership
Division was very cautious.

Since the December announcement, she told us, "nothing has
happened." She pointed out that the problem was in part a
"manpower" issue for the ministries, which were otherwise
stretched thin right now in other negotiations. She conceded,
however, that the situation was "very delicate," particularly at
the Agriculture Ministry, where the bureaucrats are fighting what
another observer described to us as a "rear guard effort" to
scuttle the negotiations.

At the Australian Embassy on February 20, an official underscored
that the economics of a deal were good for both countries, but
recognized that in advance of Upper House elections in July,
progress will be slow.


8. (SBU) BSE Update
--------------

There continues to be fallout from the discovery earlier this
month of a couple of packages of beef banned under the export
agreement that Tyson Fresh Meats inadvertently shipped to Japan.
In the Diet, Agriculture Minister Matsuoka and Health Minister
Yanagisawa fielded at times difficult questions on the subject,
with Matsuoka stating that he saw no significant flaws in the BEV
program. Replying to one suggestion, the ministers said it would
be difficult for Japan to insist on blanket testing by its
trading partners.

Meanwhile, bowing to what continue to be relatively uninformed
consumer sensitivities, officials at Seiyu, a nationwide
department and grocery store chain majority-owned by Wal Mart,
told us that it had decided to delay its (internal) plans to
market U.S. beef.

According to press reports, two consumer interest groups -- the
Consumer Union of Japan and the Food Safety Citizen's Watch --
submitted requests to Matsuoka and Yanagisawa to block all U.S.
beef imports. The request came after Tyson admitted that it had
erred in shipping some beef to Japan that did not meet the
agreement between the two countries.

The GOJ has been fairly measured in its reaction since issuing a
press release on the incident February 16. Press coverage,
although continuing to gloss over the facts about BSE, has been
less sensationalistic than in the past. Authorities have refused
to discuss further market opening while the Tyson incident is
still being studied.


9. (U) Universal Studio Japan listed on Mother's Board of Tokyo
Stock Exchange
--------------

Universal Studio Japan in Osaka announced that the company would

TOKYO 00001324 004 OF 008


be listed on the "Mother's Board" (for new listings) of the Tokyo
Stock Exchange starting in March. After many years of debt, the
company expects to see a profit for the current fiscal year
ending in March, for the first time since opening in 2001.
Currently Goldman Sachs (GS) holds about 48 percent of USJ's
stock, Development Bank of Japan has 11 percent, and Osaka city
government has 10 percent.

The USJ Japanese sales manager commented that the amusement park
has been increasing its attractions and expanding its business,
so the firm is eager to use the market for more financing.


10. (U) New Trade Insurance for Japan's Energy Supply
--------------

At a press conference on February 20, METI Minister Amari
announced the establishment of new trade insurance to ensure
Japan's energy supply.

As a part of efforts to expand more aggressive and strategic
energy diplomacy, the new insurance plan will be established and
sold starting this April. In the current trend of strengthening
state control of energy resources and escalation of competition
for energy resources, it is necessary for the government to be
out in front strategically, Minister Amari said. METI will use
this new trade insurance as an important energy diplomacy tool,
and work strategically with the private sector to ensure the
supply of natural resources.

The outline of the new insurance is as follows: The Independent
Administrative Corporation (Nippon Export and Investment
Insurance (NEXI)) will accept the insurance. The GOJ will accept
the reinsurance, thus, the GOJ will cover the risk.

The ceiling of acceptance will be 300 billion yen and the premium
rate will be "irresistibly" low -- or 50 to 75 percent below the
current rate -- so that it will be accessible for private
development entities. Projects will be 100 percent covered for
both political and commercial risks.

When a private entity negotiates alone with another government,
it is difficult for the GOJ to get involved in the negotiations
with the other government; however, if we provide insurance, the
GOJ will be one of the interested parties, therefore, the GOJ
would be able to get involved in government to government
negotiations.


11. (SBU) Kyushu Electric Expands Business Ties with India
--------------

On February 19, Kyushu Electric Power (Kyuden) became the first
private Japanese utility to sign a Memorandum of Agreement (MOA)
with National Thermal Power Corporation (NTPC),India's largest
and mostly state-owned power producer, to explore possible joint
business development.

As part of its aggressive expansion strategy abroad to increase
business performance and profitability, Kyuden had already
entered into similar agreements with 13 other companies in 10
countries/regions.

While no specific business plans have been announced, Kyuden aims
to offer consultancy in power efficiency and environmental
protection technologies as well as participating in power plant
construction.

A Kyuden official notes that the MOA is also partly the result of
a request by Japanese companies operating in India (i.e., Suzuki
Motors) for more stable power sourcing.


12. (SBU) Medical Devices and Pharmaceuticals Working Group
Meetings in Tokyo
--------------

Good news emerged that could speed the approval process for new
drugs in Japan during Regulatory Reform talks February 8-9 in
Tokyo.

After some U.S. prodding about Japan's glacial approval process
for innovative new drugs, Japan's Pharmaceuticals and Medical

TOKYO 00001324 005 OF 008


Devices Agency (PMDA) agreed to double the number of drug
reviewers over three years to roughly 400.

To fund the increase, authorities plan to introduce higher user
fees for new drug reviews, effective April 1. When the U.S.
delegation expressed reservations that the increase in user fee
costs would be introduced without also being tied to performance
metrics, the Health Ministry (MHLW) agreed to extend the public
comment period until the end of February.

Also during the talks, the U.S. side expressed appreciation to
MHLW for the decision not to impose annual price cuts in

2007. The issue is expected to come up again in April

2008. Throughout the talks the Commerce-led delegation
emphasized the need to seek input from U.S. industry, especially
before making broad changes to the healthcare system.

The next round of talks is slated for early April in
Washington. The final round of talks will occur in late
May/early June, when the Report to the Leaders is discussed.


13. (SBU) IPR Cooperation: USPTO and JPO Share Info, Seek to
Coordinate IPR Training Programs
--------------

Following up side meetings during the week of Regulatory Reform
talks in Tokyo in January, the US Patent Office (USPTO) and the
Japan Patent Office (JPO) have begun exchanging schedules and
information on their training and assistance programs,
particularly in Asia.

USPTO is also proposing a meeting in Bangkok this spring to bring
together the main donor countries providing IPR training in Asia,
including USPTO, JPO, ECAP (the European EC-ASEAN Intellectual
Property Rights Co-operation Programme) and IP Australia, to
discuss information-sharing and better coordination among their
various activities and programs.


14. (U) Survey Says: Four of Top Five Best Places to Work in
Japan Are U.S. Companies
--------------

Nikkei Business magazine published in its February 19 issue the
results of an annual survey on Japanese workplace conditions
conducted by the Great Place to Work Institute Japan (GPTWJ).
Four of the top five companies on the list of best places to work
in Japan were U.S. firms.

The Japanese job search agency Recruit Agent received the highest
score, followed by Morgan Stanley, Microsoft, Eli Lilly and
Hewlett-Packard. GPTWJ collected survey data from 62 companies in
Japan utilizing two methods: an online questionnaire sent to
companies about company culture, office infrastructure,
opportunities for advancement and employee benefits; and an
online questionnaire sent to individual employees about feelings
towards management and the company as a whole as well as employee
levels of enthusiasm for their work.

Post's contact at Eli Lilly in Sapporo confirmed his company's
participation in the survey, explaining that 400 Eli Lilly
employees were randomly selected to respond to the questionnaires.


15. (SBU) Autos: U.S. Automakers in Japan on Alleged Currency
Manipulation Question
--------------

Ford responded to our inquiry to the Big 3 in Japan for
commentary on early February news reports that the Big 3,
buttressed by former Treasury Undersecretary for International
Affairs John Taylor's revelations in his book Global Financial
Warriors that the Japanese intervened the currency markets, had
launched a campaign to get the Administration to oppose alleged
currency manipulation by Japan.

Ford referred us to a 2006 report produced by the Automotive
Trade Policy Council, entitled, "The Economic Impact of Japanese
Currency Manipulation," which the automakers are using on the
Hill to make their case. (A 2005 version of the report is
available on the ATPC website. The 2006 report is a 2MB file.
Please contact Joy Progar if you want a copy.)

TOKYO 00001324 006 OF 008



The 13-page report has some quotes from Japanese government
officials, Japanese auto industry executives, and financial
analysts that suggest the Japanese government does intervene in
the currency markets to keep the yen's value artificially low and
provides a series of graphs and charts showing the effect of the
low yen on the auto market in the United States.

Ford also provided some talking points from their U.S. office
which underscored the importance of this issue to Ford. (See
attached e-mail)

Finally, Ford reported in their discussions with METI in late
2006, it became apparent Japan had two key strategies for
developing the Japanese auto industry: global technological
leadership, particularly through hybrids, and more exports, as
there is not an expectation of any great growth in domestic auto
demand.

Ford took from these discussions that facilitating more exports
is a GOJ objective and a weak yen is helpful to this end.


16. (SBU) CivAir: Kobe Airport's First Year: Little Cause for
Celebration
--------------

Kobe Airport (UKB),which opened last February, will not meet its
first year sales and passenger targets. Kobe City estimated 3.19
million passengers in the first year, but UKB is 500,000
passengers short of that goal.

The average annual load factor for all routes combined was 61.3
percent, with a low of 52.7 percent in January 2007. Cargo
volume is worse: Kobe only moved half of the target, at 24,000
tons.

The city government, which runs the airport, started issuing
public bonds in 1999 to raise 200 billion yen for land purchase
and airport construction. The city's financing plan appears to
have been wildly optimistic: Kobe has only sold 0.3 ha of the
82.6 ha of public land it had intended to sell in order to pay
for the bonds, keeping the city in heavy debt. A source in the
city government says it will consider dropping its asking price
for the property it is offering.

On the other hand, the airport's non-aviation business has had a
modest positive impact on the local economy. Since last February,
more than 30 companies, both domestic and foreign, have started
operating on neighboring Port Island, including Boehringer
Ingelheim, BMW group, and Estee Lauder. Local hotels are
reporting an increase in customers from the new airport.


17. (SBU) KIX Upbeat on Upcoming Aviation Bilat
--------------

Kansai International Airport Company officials told ECOUNS and
Econoff in Kyoto that in upcoming bilateral aviation talks, the
airport officials think MLIT is prepared to be more flexible on
"Open Skies" services than in the past, for airports outside of
Tokyo, if the USG is flexible on new Narita slot allocations.
For more details of this, views on PM Abe's Asian Gateway concept,
and other civair insights, please see Osaka Kobe 00036.


18. (U) Internationalizing Hokkaido's Civil Aviation Industry
--------------

Although Hokkaido's civil aviation industry is well equipped to
support international air travel, the market for such travel
remains underdeveloped. Despite heavy domestic traffic in Japan,
the number of direct international flights to Sapporo's New
Chitose International Airport is limited.

Hokkaido government officials are initiating a number of policies
aimed at transforming New Chitose into an international hub.
However, stronger local political support for the proposed
Hokkaido Shinkansen bullet train project and rising oil prices
both present tough obstacles to making this a reality. For more
information, please see Sapporo 0009.


19. (SBU) Rail: Shinkansen Tech Transfer to China; California

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High Speed Rail
--------------

The press in January and February reported on the start of high-
speed rail services in China using JR East's E-2 1000 Hayate
Shinkansen trains. Sixty trains consisting of eight-car sets
have been ordered by China, over 50 of which are to be
constructed in China on the basis of technology transfer.

News reports were unclear as to how much of this crown jewel of
Japanese transportation technology had been given away. Econoff
approached an official of JR Central for commentary.

The JR Central official felt that JR East had given away the
store. He related how a consortium of Shinkansen manufactures
led by Kawasaki Heavy Industries and including Japanese trading
companies had wanted to sell the high-speed trains to China. He
explained that the three Japanese passenger rail companies, JR
West, JR Central and JR East, however, own the design rights to
the Shinkansen trains they operate. Each rail company has its
own team of engineers that creates design specifications based on
the common Shinkansen technologies they all inherited in 1987
with the breakup of Japan National Railways. Manufactures then
produce trains to their designs.

In the case of overseas sales, he noted, JR Central prefers to
sell the whole system -- wagons, control systems, high-speed
signal system, tracks, etc. -- to maximize the sale and ensure
that high safety standards are maintained. China, however,
wanted to pick and choose the technology it wanted to buy. JR
East, he said, was willing to sell just the train design along
with its control and signal system and so that is how China ended
up with the E-2 train.

According to him, all parts of the wagons, including the
sophisticated distributed electric motors that drive the train,
will be manufactured in China.

The JR Central official worried about this tech transfer. Not
only does it give the Chinese the potential to copy and build the
wagons themselves for domestic use or export, but he speculated
that there might be some military tech transfer.

Econoff also contacted the California High Speed Rail Authority
about their manufacturing plans for the State of California high-
speed rail system when it is built.

They responded that it is estimated that 300,000 job years will
be needed for the construction of the system and an additional
450,000 jobs will be generated throughout the state as a result
of the train system. They said, however, it was too early to
decide whether the wagons would be manufactured in California.


20. (SBU) Maritime: MLIT's International Shipping Division's
Work and Reg Reform
--------------

EconOff and EconFSN met with MLIT's International Shipping
Division on February 20 to discuss the work of the Maritime
Subcommittee, the Maritime Economic Council and the Asia Gateway
Initiative in order to understand developments in Japanese
shipping policy and address some questions from the Federal
Maritime Commission, possibility relating to U.S. regulatory
reform initiatives vis--vis Japan.

The Maritime Subcommittee is looking at ways to increase the
number of Japanese flagged ships and seafarers through changes in
the tax structure. In addition, it is examining how to end a
program that buys out small and medium sized shipbuilding
enterprises to reduce over capacity in the industry.

As a result of a request from the Japanese Fair Trade Commission,
the Maritime Economic Council is reviewing whether liner
conferences are anti-competitive. MLIT has concluded they are
not, but the Council is looking into this matter nonetheless.
The International Shipping division is examining safety and
environmental issues for shipping in the Straits of Malacca as
its contribution to the Asia Gateway initiative.

For a memo on the meeting with more information see the attached.

TOKYO 00001324 008 OF 008




21. (U) Regions: Western Japanese Business Leaders Debate
Reforms and Workplace Issues in Kyoto
--------------

Major business organizations in western Japan held the Kansai
Zaikai Seminar (Kansai Economic and Management Summit),the
largest annual business event in the Kansai region, February 8-9
in Kyoto. LDP Secretary General Hidenao Nakagawa gave the
keynote address, and Senichi Hoshino, Senior Director of the
Hanshin Tigers, also delivered a business leadership lecture.
The participants broke into seven groups to discuss economic
topics of interest, but the most heated discussions were about
corporate ethics in the face of repeated business scandals across
Japan, and about the decline in the birthrate, productivity,
educational standards of the workforce, and related labor issues.
Employers described the difficulty in changing the ratio of
regular employees to contractors, although there was wide
acceptance that this was a problem that needed urgent
rectification.

There was a high level of interest in pushing for civil service
reform and institution of doshusei decentralization in the Kansai,
the latter of which the business community here has promoted for
decades. There was wide support for businesses playing a bigger
role in education reforms, and support for PM Abe's education
reform platform-along with criticism of the slow pace of actual
reforms. Executives such as Daikin Industry's Noriyuki Inoue
called for changes to Japan's "relaxed" education program in
order to revive the elite education model.

Other Osakan business leaders were unable to hide their unease at
the pace of globalization and westernization of the Japanese
economy, while at the same time improving their balance sheets
through Western management techniques, FDI, and an increasing
amount of M&A activity.

There was open hostility to the idea of boosting the declining
workforce through immigration, with executives citing French and
British immigrant community unrest while rejecting the
applicability of the U.S. immigration model in Japan. There was
a high level of support for increasing meaningful employment
opportunities and flexible work modes for women, especially when
faced with the choice of either boosting immigration or
increasing the participation of women in the Japanese workforce.


22. (U) BOJ Raises Short-Term Policy Rate to 0.5%, First Rate
Hike in Seven Months
--------------

On January 21 the Bank of Japan Monetary Policy Board decided to
raise its operating target for the uncollateralized overnight
call money rate by a quarter point to 0.5 percent.
This is the second rate hike since last July, when the BOJ raised
the policy rate to 0.25 percent by terminating the zero interest
rate policy (ZIRP).

In making this decision, the Board cited as determining factors
the likelihood of both continued modest expansion of the economy
with a moderate increasing trend of private consumption, and an
increase in consumer prices over a long-term perspective, as well
as its concerns about the increasing simulative effect of
monetary policy on economic activities.

The Board indicated that it would adjust interest rates
"gradually," and would maintain an accommodative stance with very
low interest rates for some time. Please see attached document
for more details.
DONOVAN