The Japan Economic Scope - April 6, 2007

UNCLAS SECTION 01 OF 07 TOKYO 001541 SIPDIS PARIS PLEASE PASS TO USOEDC STATE PLEASE PASS TO USTR SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ETRD ECON JA ZO EAGR SUBJECT: The Japan Economic Scope - April 6, 2007 Sensitive but unclassified. Please protect accordingly. ¶1. (U) This cable contains the Japan Economic Scope from April 6, ¶2007. 2.(SBU) Table of Contents ¶3. Japan Feels the Pressure from US-Korea FTA ¶4. Japan-Thailand Free Trade Agreement Signed ¶5. Hokkaido Gubernatorial Candidates Oppose EPA with Australia ¶6. Fukuoka Company Officials Charged with Foreign Bribery Offense ¶7. Chilly GOJ Response to U.S. Calls to Open Beef Market Completely ¶8. "Deregulation Warrior" Feels "Like a Broken Record" ¶9. Symposium Reveals Problems at KIX ¶10. KIX Launches Study Group to Regain U.S. Business ¶11. KIX Welcomes Asia Gateway Strategy Panel Interim Report ¶12. Central Japan International Airport Has New Leadership ¶13. Major Oil Distributor Withdraws from Electric Power Retail Market ¶14. Hokuriku Electric Power Hid Past Problem at its Nuclear Plant ¶15. California Looks to Japan for How to Bring Broadband to the Masses ¶16. Sharp's New LCD Plant in Hyogo ¶17. Part-Timer Pension Coverage To Be Expanded, Slightly ¶18. Unemployment Steady; Wages Remain Flat ¶19. Overall Economic Assessments ¶20. BOJ Tankan Survey Reveals Slight Deterioration in Business Sentiment ¶3. (SBU) Japan Feels the Pressure from US-Korea FTA -------------- GOJ officials felt the pressure this week from Japanese business leaders and editorial writers who worried that a U.S.-Korea FTA will hurt Japanese exports to the United States and Korea and that Japan must catch up and conclude more FTAs with its trade partners. Many Japanese had expected the U.S.-Korea talks to fail and were caught by surprise by the agreement. PM ABE commented that FTA talks with Korea should resume and that a free trade deal with the United States was something "Japan needs to consider as a future topic," while METI Vice Minister Kitabata stated that Japan should focus on strategic trade agreements in East Asia. The Agriculture Ministry responded with vague remarks about needing to study the deal, but was said to be relieved that rice was excluded from the agreement. Several Japanese business leaders argued that Japan should pursue an FTA with the United States, including the heads of Keidanren, the Japan Chamber of Commerce and Industry, and the Japan Association of Corporate Executives (KeizaiDoyukai). Editorials in the Yomiuri, Asahi, and Nikkei urged the government to speed up FTA talks, beginning with resuming talks with Korea. Industry, academics, and the press asserted that Japan must find a way to reform and liberalize Japan's agricultural market, which they recognize as the main obstacle for Japan in negotiating FTAs. While the press was full of warnings that Japanese auto and electronics exports would suffer because of the U.S.-Korea deal, others pointed out that Japanese companies could easily step up production in the United States, Mexico, and Canada, and would feel few ill effects. Indeed, Koreans now worry that U.S.-made Japanese cars will now gain easy access to their market. (ECON: Marilyn Ereshefsky) ¶4. (SBU) Japan-Thailand Free Trade Agreement Signed -------------- Prime Minister SHINZO ABE signed an "economic partnership agreement" (EPA) with visiting Thai interim Prime Minister Surayud Chulanont on April 3. Under the pact, Thailand will eliminate tariffs on 97% of imports from Japan in value terms over 10 years -- including steel products and auto parts -- while Japan will remove tariffs on 92% TOKYO 00001541 002 OF 007 of imports from Thailand including agricultural and fisheries products. In addition, Thailand will remove tariffs on auto parts -- whose rates are now set at 15 -30% -- by 2012. Japan will reduce tariffs on chicken and pork imported from Thailand. Rice was excluded from the agreement. The agreement will likely come into effect in the fall of 2007, following formal ratification by Tokyo and Bangkok. Japan and Thailand came to basic agreement on the terms of the EPA in September 2005 and were scheduled to sign the agreement in April 2006. Political instability in Thailand culminating in the coup in last September delayed the signing. Japanese press commentary has tended to compare unfavorably the relatively limited liberalization under the Thailand-Japan agreement to the much more significant terms of the Korea-U.S. agreement signed a day earlier. (ECON: Chris Wurzel) ¶5. (U) Hokkaido Gubernatorial Candidates Oppose EPA with Australia -------------- Hokkaido's three gubernatorial candidates for the April 8 elections oppose a Japan-Australia Economic Partnership Agreement (EPA). Liberal Democratic Party incumbent Harumi Takahashi joined Democratic Party of Japan challenger Satoshi Arai and Japan Communist Party challenger Satoshi Miyauchi in denouncing EPA negotiations in official campaign statements. Hokkaido government officials continue to predict that an EPA with Australia will have devastating effects on the local economy, bringing losses totaling $11.6 billion if tariffs are lifted on Hokkaido-produced wheat, dairy products, sugar beets and beef. (Sapporo: Ian Hillman/Yumi Baba) ¶6. (SBU) Fukuoka Company Officials Charged with Foreign Bribery Offense -------------- On March 16, the Fukuoka Public Prosecutor's Office indicted two officials of Fukuoka-based electrical engineering company Kyudenko Corp. on bribery charges involving Philippine government officials. This legal action is the first one to be carried out under the foreign bribery provision of Japan's 1998 Unfair Competition Prevention Law. The officials, who provided gifts to secure a fingerprint identification system contract, were fined approximately $5,900. While Kyudenko Corp. itself avoided indictment, prosecutors expect the Kyudenko case to serve as a warning to other Japanese firms. For more details see Fukuoka 0018. (Fukuoka: Yuko Nagtomo/Jim Crow) ¶7. (SBU) Chilly GOJ Response to U.S. Calls to Open Beef Market Completely -------------- Agriculture Minister Matsuoka told USTR Schwab in a phone call on April 3 that Tokyo would not accept the U.S. demand to open Japan's market to cattle under 30 months until Washington first accepted Japanese inspectors at U.S. meatpacking plants, according to Japanese press reports. The GOJ insists that it needs to verify which factories are in compliance with the export rules agreed upon between the two countries. Press reports also indicate that "senior government officials" do not want to take up the beef issue during PM Abe's visit to Washington despite President Bush's remarks that the beef issue should be discussed when the meet. (ECON: Ryoko Nakano/Marilyn Ereshefsky) ¶8. (SBU) "Deregulation Warrior" Feels "Like a Broken Record" -------------- TOKYO 00001541 003 OF 007 Council for the Promotion of Regulatory Reform (CPRR) member and Keio University Professor Ushio Chujo told EMIN that since the early 1990s, regulatory reform has taken on a variety of shapes and forms, but the issues remain fundamentally unchanged. Chujo cited civil aviation as an example, lamenting that while a law was passed in 2000 to liberalize the airline industry, few new companies had been able to enter the market due to MLIT's firm control of Haneda's landing slots. The lack of competition in the world's second largest domestic air transport is egregious, he said. The Japanese people fear competition when in fact competition can help companies become stronger, Chujo stated. JAL should be allowed to declare Chapter 11 bankruptcy so that it can re- organize and emerge healthy. Instead, the GOJ will continue to pour money into the beleaguered company to allow it to continue to stumble on, Chujo opined. The CPRR would like to reform areas which the Prime Minister has termed the "hard rocks:" medical, social security, agriculture, and international air transport. Chujo's own work will focus on international trade, civil air and legal issues. He told EMIN that he will push for an "open sky" agreement within Asia by advocating for more international flights at Haneda. Chujo believed that while PM Abe's Asian Gateway concept would necessitate liberalization for it to succeed, he doubts ABE would have the political tenacity to address such issues that would ensure that success such as foreign investment in national airlines or foreign management of Japanese airports. Professor Chujo is a long-time advocate of regulatory reform. In 1997, he was featured in Time magazine as a "Deregulation Warrior" and was once fired from an MLIT advisory group for his radical views. He told us that while he was named a "deregulation warrior" these days he feels more like a "deregulation worrier." See the attached memo for a complete read-out. (ECON: Sally Behrhorst/Masumi Ono) ¶9. (U) Symposium Reveals Problems at KIX -------------- At a Kansai Airport Research Institute symposium in Osaka, KIAC President Atsushi Murayama announced that if he could not reach 129,000 flights/year in 2007, he would resign. Another KIAC official told us off the record that KIAC's national budget injection had been cut by a significant yet unspecified amount due to missing the airport's 2006 flight target. KIAC cited a Sankei Shimbun front page article from last week claiming that KIX's success was dependent on the airport restoring its declining U.S. routes. Other local economic stakeholders in KIX proposed solutions to KIX's faltering business. The Kansai Economic Federation and KIAC suggested KIX increase its cargo business after its second runway comes online in August since the cargo business is recovering in parallel with the regional economy. An MLIT Kinki Regional Development Bureau official emphasized the Kansai is home to 50 percent of Japan's national treasures and five world heritage sites. He emphasized that the local governments of the Kansai need to collaborate on attractive tourism projects. (Osaka-Kobe: Phil Cummings/Naomi Shibui) ¶10. (SBU) KIX Launches Study Group to Regain U.S. Business -------------- At a new study group on increasing KIX's U.S. routes, participants got an earful from American Airlines' sales manager for western Japan, who went into depth as to why the company stopped its recently restored KIX "Dallas-Fort Worth flight. Airline economics were responsible for the move, but AA pointed out tangible ways for the airport to appeal to U.S. customers, TOKYO 00001541 004 OF 007 including U.S. military customers transferring from Okinawa. (Individuals interested in AA's presentation should contact post.) KIX currently operates only 14 weekly flights to two U.S. cities -- Northwest Airlines to Detroit and United Airlines to San Francisco -- down from 63 flights to seven cities in the peak year of 1998. The study group will meet three times per month for the next three months, and then issue recommendations for reversing the current trend. ConGen Osaka will continue to participate as a member, along with the Osaka Prefecture, JATA, KIAC and the Kansai Economic Federation. (Osaka-Kobe: Phil Cummings/Naomi Shibui) ¶11. (SBU) KIX Welcomes Asia Gateway Strategy Panel Interim Report -------------- Kansai International Airport Co., Ltd. (KIAC) welcomed the Asia Gateway Strategy Panel's release of their interim report (also see: JES, March 23, 2007). The panel says that GOJ should allocate more international flights slots to foreign airlines, and to the other airports in Japan outside Haneda and Narita. According to a KIAC official, Narita already uses all of its slots and 40 airlines are on the waiting list to get in, but KIAC is still eager for more airlines to use KIX. He praised the report for putting pressure on Japanese carriers, especially Japan Airlines (JAL),to give up their underused slots at airports like Narita. Once airlines get slots at busy airports such as Narita, they are loath to release them when demand falls, since it is difficult to recover the slots when business picks up. In the face of declining demand, JAL is substituting smaller aircraft for jumbo jets in order to boost its total flights without reducing the load factor. Some of JAL's slots at Narita should be allocated to needy foreign airlines, he said. If GOJ protects JAL at the expense of other carriers, the government will interfere with the economic potential offered by regional airports like KIX or Centrair. (Osaka-Kobe: Phil Cummings/Naomi Shibui) ¶12. (SBU) Central Japan International Airport Has New Leadership -------------- Local press has reported that Central Japan International Airport Company (CJIAC) President Hirano will retire this June. He is to be replaced by Mr. Yoshimi Inaba, Vice President of Toyota Motor Corporation. In 1999, Inaba served as president of Toyota Motor Sales USA, Inc. CJIAC has been plagued by stagnant growth in both passengers and cargo. A major priority for Inaba will be gaining approval from the GOJ to build a second runway, which the airport needs to stay competitive. The initial phase of CJIAC's construction was viewed as a government procurement success. Under the U.S.-Japan Major Projects Arrangements (MPA),U.S. firms were awarded 17 of 22 contracts on which they bid for the construction of CJIAC. Since the airport opened in 2005, however, CJIAC claims it no longer needs to use MPA procedures even though procurements of about $600 million are planned, including the construction of the new runway. Under the MPA, Japan agreed to follow transparent and nondiscriminatory procedures in the procurement of goods and of construction, design and consulting services for certain designated, large-scale construction projects. The USG continues to pressure the Japanese Government to ensure TOKYO 00001541 005 OF 007 that MPA procedures are used for all procurements related to the project. (FCS: Dean Matlack) ¶13. (U) Major Oil Distributor Withdraws from Electric Power Retail Market -------------- On April 2 Idemitsu Kosan requested that the Ministry of Economy, Trade and Industry (METI) remove it from the registry of Electric Power Retailers. After only slightly more than two years in the business, the company decided to pull out due to rising fuel costs. The oligopolistic power retail market was liberated in 2000 to invite new entrants. Since then, about 10 companies have entered the market, forcing major utility companies to cut the price of electricity by about 20 percent. The new entrants are struggling to stay in the market, however. The problem is not only that these new business operations have failed, but also that the market environment is inferior. On April 13 METI's Advisory Council will begin discussions on the complete liberalization of the retail market and a review of the current system. Talks will focus on the revitalization of the Japan Electric Power Exchange (JEPX) to boost trade volume and on a price reduction for back-up electricity to handle supply-demand imbalances. (ECON: Eriko Marks) ¶14. (SBU) Hokuriku Electric Power Hid Past Problem at its Nuclear Plant -------------- The press reported a reactor at Hokuriku Electric's Shiga nuclear power plant, located in Shiga-cho, Ishikawa Prefecture, went critical and was shut down temporarily in 1999, but the incident was concealed by Hokuriku Electric officials. There were no casualties. Upon hearing of the deception, METI ordered the reactor shut down immediately and launched an inspection. Hokuriku Electric Power operates in Fukui, Ishikawa, and Toyama Prefectures and supplies electricity not only these prefectures but also other prefectures in central and western Japan. An official at Kansai Electric Power Company in Osaka was critical of Hokuriku 's deception, opining that it presented a major obstacle to reversing the public's negative views on the safety of nuclear power plants. (Osaka-Kobe POL/ECON: Phil Cummings/Naomi Shibui) ¶15. (SBU) California Looks to Japan for How to Bring Broadband to the Masses -------------- Looking to find out how California can bring the fastest broadband to the most Californians, a delegation of California State officials met with Communications Ministry (MIC) officials, NTT, DoCoMo, Softbank and others on a study tour organized by the California Foundation for Economy and the Environment (CFEE). Their mission was to learn directly from telecommunications companies in Japan, as well as government officials how Japan is able to accomplish a large scale rollout of broadband and advanced technologies to a wide diversity of communities; including rural, disadvantaged, or otherwise difficult markets to reach. They learned that Japan is on track to bring broadband to 100% of all households by 2010 and that NTT has already laid optical fiber that can reach 80% of Japanese households. The delegation came away amazed at the progress Japan has made and will make in the next few years, but they also realized that the Japanese market, with major distortions created by close collaboration between MIC and NTT, the dominant carrier it still partly owns, is not a model that California could easily copy. The delegation included three State Senators, one Assemblyman, two Public Utilities Commissioners and representatives from telecoms industry and consumers groups. (ECON: Marilyn Ereshefsky) TOKYO 00001541 006 OF 007 ¶16. (SBU) Sharp's New LCD Plant in Hyogo -------------- Sharp has decided to build new liquid crystal display (LCD) panel plant in Himeji City, Hyogo Prefecture to enhance its manufacturing efficiency. The total amount for the new investment will be 350 - 400 billion yen ($300 - $342 million dollars),the largest amount of investment for a LCD panel plant in the world. It aims to start operation in 2009. Sharp already operates two large scale plants in Kameyama, Mie Prefecture, but the Himeji plant will be larger than either of the existing facilities. The plant will be built on the site of a 1.3 million square meter oil factory near the Port of Himeji. A manager of Sharp's Overseas Business Strategy Group said that the company decided on Himeji because it had convenient distribution links to the port and it is not far from its Osaka headquarters and the Kameyama plants. The competition in the flat TV market is heating up between Japanese and Korean manufacturers, and prices are tumbling, compelling Sharp to try to stabilize its strong global share of the technology through increased cost efficiency. Sharp's rival, Matsushita Electric Industries, is also building a new plasma display plant in Amagasaki City, Hyogo, to open in ¶2009. Hyogo Prefecture will soon be home to the world's top two flat TV manufacturing facilities. (Osaka-Kobe POL/ECON: Phil Cummings/Naomi Shibui) ¶17. (SBU) Part-Timer Pension Coverage To Be Expanded, Slightly -------------- The government and ruling party came to agreement March 27 on a bill to expand the number of part-time employees eligible for corporate pension plans, according to news reports. If enacted, the Unified Pension Bill would make part-timers working more than twenty hours a week, rather than the current thirty, eligible. Caveats to the bill, however, will substantially limit its impact, as student workers and employees of small and mid-size companies will be exempt. A union contact lamented to us that fewer than 200,000 people are expected to be affected when the regulations come into force in 2011. By our estimate, that is less than 1.6% of part-timers, or 0.31% of the labor force. (ECON: Marc Dillard) ¶18. (SBU) Unemployment Steady; Wages Remain Flat -------------- Against the backdrop of over 850,000 new graduates entering the workforce this week, newly released labor survey data indicate unemployment held steady in February at 4.0 percent. The job offers-to-applicants ratio, however, continued its gradual decline from a peak of 1.09 in July 2006, reaching 1.05 in February, and nominal wages remained flat. Nonetheless, given the number of baby boomers coming due for retirement, an industry observer predicts a continued corporate interest in hiring over the next three years. (ECON: Marc Dillard) ¶19. (SBU) Overall Economic Assessments -------------- The Cabinet Office left its assessment unchanged for the fourth consecutive month, noting that the economy is recovering, despite lingering weakness in personal consumption. The monthly economic report, submitted to the Cabinet on March 15, confirmed that Japan's economy has expanded 62 straight months, an ongoing postwar record. The report said that capital investment is increasing against the background of high corporate profit, but private consumption is largely flat, and that personal consumption has been firm, TOKYO 00001541 007 OF 007 reflecting a moderate increase in household income. The BOJ report, released on March 20, also left unchanged its core economic assessment, indicating that the economy is "expanding moderately," and projected that the economy would continue to do so. Refer to attached document for more information. (FINATT: Shuya Sakurai) ¶20. (U) BOJ Tankan Survey Reveals Slight Deterioration in Business Sentiment -------------- The Bank of Japan's quarterly Tankan survey of business sentiment, a closely watched business cycle indicator and a principal input in the central bank's monetary policy deliberations, revealed a slight deterioration in business sentiment among almost all categories: large, mid-sized and small firms, primarily reflecting concerns about recent financial market volatility and the effects of a likely slowdown in the U.S. economy. The survey found no change in business sentiment among large non- manufacturing firms. The survey's "headline" business sentiment diffusion index (DI) for large manufacturers was a bit weaker than expected. The March survey also offered the Tankan's first FY07 projections, and revealed expectations of continued profit growth for all categories of firms in the new fiscal year, which began April 1. Please see attached document for more details. (FINATT: Shuya Sakurai) SCHIEFFER