JAPAN ECONOMIC SCOPE - APRIL 13, 2007

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SUBJECT: JAPAN ECONOMIC SCOPE - APRIL 13, 2007


1. (U) This cable contains the Japan Economic Scope for April 13,

2007.


2. (U) Table of Contents
--------------


3. GOJ for Joint Study for a U.S.-Japan Free Trade Agreement?

4. U.S. Chamber Chief Cites FTA and Autos as Key Issues

5. Has Reg Reform "Peaked Out?"

6. Government Advisor Speaks on Broad Economic Reforms

7. Amakudari Reform Proposals Watered Down

8. Investment Working Group DVC

9. Japanese Labor Productivity Lagging

10. Japan's Cyber University Becomes A (Virtual) Reality

11. Toyota Officials' Concerns and on U.S. Production Plants

12. Lessons for Reg Reform? EPA Auto Visit Exemplar of
Transparency

13. Honda Saitama Production Plant Visit

14. Meeting with MLIT Policy Official on Asia Gateway Initiative

15. Asia Gateway Panel Member on the Asia Gateway Initiative

16. Sendai Airport Hub for China Flights

17. Japan Foreign Steamship Association and Japanese Port
Operations

18. Summary of Selected GOJ Documents Released for Public Comment
through April 6, 2007


3. (SBU) GOJ for Joint Study for a U.S.-Japan Free Trade
Agreement?
-------------- --------------

As we have reported previously, a subcommittee of the Council on
Economic and Fiscal Policy (CEFP) studying Japan's strategies for
bilateral / regional trade agreements and agricultural reform will
issue an interim report on its discussions later this April.

On April 11, the subcommittee posted on the CEFP's website a
reference document reflecting on-going discussions among its members
that will be used as the basis for the interim report. On free
trade agreements, the discussion covered a range of topics,
including the now traditional argument that Japan should first sign
a pact with the Association of Southeast Asian Nations (ASEAN).

It shows that Japan should set out to pursue regional trade
agreements, naming as examples ASEAN plus 3, ASEAN plus 6 and
APEC-wide FTAs, while noting Japan will host APEC in 2010.

In addition it recommends a joint study on a U.S. - Japan Free Trade
Agreement that would cover not only trade, but also investment and
services. Several Japanese business leaders have 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 (Keizai Doyukai).

However, according to a subcommittee member, the Ministry of Foreign
Affairs and the Ministry of Agriculture are still cautious about a
possible FTA with the United States.

On agriculture, the document suggested creating a five year road map
on enhancing productivity.

The subcommittee leader, Professor Urata of Waseda University,
revealed to the press his views that "gaiatsu, i.e., foreign
pressure" would be needed to leverage agriculture reform. He
mentioned politicians who prefer the current situation are the
reason why agricultural reform does not proceed, and requested Prime
Minister Abe to show the same attitude toward agricultural reform as
former Prime Minister Koizumi showed for Postal Privatization.

According to the Cabinet Office, the final version of the report
should come out by June and be incorporated into the CEFP's "Basic
Policies 2007", after being taken up and discussed by the full CEFP.
Our contact also revealed that whether the joint study on
U.S.-Japan FTA will be reflected in the "Basic Policy 2007" is still
subject to discussion within the CEFP.


4. (SBU) U.S. Chamber Chief Cites FTA and Autos as Key Issues
-------------- --------------

The U.S. Chamber of Commerce currently does not support a U.S. -
Japan FTA, its president Tom Donahue told the Ambassador April 2.

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Instead, the Chamber wants both governments to focus on completing
the Doha Round negotiations first. Donahue said he now gives Doha a
60 percent chance of success, up from just 20 percent in January.

The Ambassador expressed hope that Donahue's optimism would be
fulfilled, but cautioned against linking Doha to a possible
bilateral FTA negotiation. This argument is being used in Japan by
those seeking a narrow agreement containing items of interest to
Japanese industry while dodging a comprehensive undertaking
including agriculture.

On autos, Donahue said U.S. labor and the big three manufacturers
believe they can apply their China currency argument to Japan and
has launched a campaign in Congress along these lines. The evidence
of yen/dollar manipulation is nil, however, and Donahue quoted the
Tokyo GM representative as denying that the yen is to blame for the
U.S. industry's difficulties.


5. (SBU) Has Reg Reform "Peaked Out?"
--------------

PM Abe's lack of interest in economic policy and a mistaken notion
that regulatory reform has led to income disparity has dampened
enthusiasm for continued reform efforts said a member of the Council
for the Promotion of Regulatory Reform (CPRR) during an April 11
meeting with EMIN.

As a result, stodgy bureaucrats are regaining confidence and putting
up more resistance to change than in the Koizumi era. CPRR's only
allies are the U.S. Embassy and the Japanese Business Federation
(Keidanren),and indeed CPRR members are viewed as USG "spies," the
member joked. It is unlikely that the situation will improve after
the July elections as the LDP probably will not win big and the DPJ
and Komeito parties are not pro-reform.

The Council member stated he is not overly optimistic that the
Japan-Australia FTA negotiations will have a large impact on the
agricultural sector as the farm lobby is exceedingly strong.
Without a change in the tax code that would levy a tax on
uncultivated land, there is no incentive for farmers to sell or rent
their small plots and therefore no way to increase efficiency
through consolidation. Agricultural reform may be achieved in
fifteen or twenty years, however, as elderly farmers become unable
to work the fields and slowly leave the scene, he predicted.

Perhaps a more fruitful area of U.S. focus is the medical services
sector, he suggested. The Japanese public is dissatisfied with the
level of medical care available and also with the long wait times to
get an appointment. The excitement over the recent opening of the
Johns Hopkins Medical Clinic could be evidence of the public's
willingness to have high-quality, U.S. medical service providers in
Japan. The Council member added, however, that the medical lobby is
also quite strong.

For more information, please contact Sally Behrhorst.


6. (SBU) Government Advisor Speaks on Broad Economic Reforms
-------------- --------------

Naoki Tanaka, Chairman of the Postal Services Privatization
Committee, advisor to PM Abe, and head of the newly established
Center for International Public Policy Studies, gave a policy speech
April 11 on broad reforms necessary for the Japanese economy.

Given the challenges of a rapidly aging society, a declining number
of workers, international financial imbalances, and global warming,
Tanaka identified fiscal consolidation, increased productivity,
health care reform, governmental decentralization, and pension fund
reform as key goals for the Japanese government. He singled out
increased openness to trade and foreign direct investment as tactics
through which to foster development in his target areas.

Asked about postal privatization after his presentation, Tanaka
stated that some Diet members were saying Japan should retreat from
that reform, but that "we will not permit that." He then connected
the re-routing of funds from postal savings away from government
bonds (and, thereby, a source of cheap funds for municipalities) as
a step that would increase Japanese receptivity to foreign direct
investment over the next seven to eight years.


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7. (SBU) Amakudari Reform Proposals Watered Down
-------------- --------------

Reform proposals for the amakudari ("descent from heaven")
retirement system, whereby senior bureaucrats are placed in plum
private sector jobs, continue to be watered down as they move
forward. The government and ruling coalition came to internal
agreement April 12 to establish a government-wide job bank for
bureaucrats that was initially proposed as an effort to remove line
ministries from the outplacement of its own bureaucrats. Official
acceptance of the policy is expected April 13.

The agreed plan, according to newspaper reports, will create the job
bank and prohibit ministries from making direct outplacements, but
will allow those line ministries' human resources departments to
cooperate with the central job bank in the outplacement process.
The agreement delays full implementation until 2011, weakens the
role of an outside advisory body, and proposes the repeal of
regulations that currently prohibit (for two years) officials from
taking employment with certain companies their ministries regulate.

Noting that the highest and most powerful bureaucrats face the
biggest potential losses from meaningful reform, an embassy contact
doubted the long-term significance of the proposed job bank. He
speculated that, while reform of the amakudari system is popular,
making the reform effective would require a political effort on the
scale of former PM Koizumi's push to realize postal privatization.


8. (SBU) Investment Working Group DVC
--------------

The second session of the bilateral Investment Working Group for the
current fiscal year took place April 13 via digital videoconference.
The Working Group reviewed progress on all agenda items in advance
of the annual report to leaders in June.

The two sides expressed satisfaction with the results of the
February information exchange on BIT's and FTA's and agreed both
countries took similar approaches to negotiating investment
chapters. We agreed to begin reaching out to the private sector for
its views on the investment climate, possibly as early as May.

On educational services, the Ministry of Education, Culture, Sports,
Science and Technology announced, as of April 1, it had expanded
nationwide, existing regulations limited to special zones for
structural reform that allow universities to lease, not own, their
physical facilities. This should facilitate market entry of new
foreign universities by reducing start-up costs.

On merger and acquisitions, the Ministry of Economy, Trade and
Industry (METI) announced the promulgation of final rules on tax
deferral for triangular merges on April 13. (The rules closely
follow the draft that the Embassy shared with Washington last
month.) Both sides agreed the market would be the final judge of
whether triangular mergers become an effective tool for increasing
investment flows.
METI resisted U.S. calls to conduct a formal study of the impact of
the tax deferral rules sometime before the end of 2008 but said it
would constantly "monitor" the merger and acquisitions situation
going forward and emphasized there had been no change to the GOJ's
policy of actively encouraging inward FDI.


9. (SBU) Japanese Labor Productivity Lagging
--------------

Japan's labor productivity is just 71 percent that of the United
States, according to a recently released Cabinet Office report. It
is also lower than Europe's (87 percent),Britain's (83 percent),
and the OECD average (75 percent). Moreover, the gap in
productivity between the United States and Japan, which had narrowed
in the 1970s and 1980s, held steady in the late 1990s, and has
slightly widened since.

The report dings Japan's service sector for the country's lagging
performance, noting that productivity in the transport sector, which
was about half of the United States' in 1980, fell to less than 35
percent by 2005. Relative retail sector productivity is also low
and declining, at less than 60 percent.

The Council on Economic and Fiscal Policy is expected to take up the

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topics of productivity and deregulation as it charts a new national
economic strategy. Likely in preparation for that discussion, the
Cabinet Office report highlights how productivity increases in the
distribution, financial services, transport, and business services
sectors have driven U.S. growth since 2000.


10. (U) Japan's Cyber University Becomes A (Virtual) Reality
-------------- --------------

On April 1, Japan's first online university, Cyber University, held
its inaugural ceremony in Fukuoka's Yahoo Dome, with students
attending both in person and via computer.

Operated by Japan Cyber Education Institute in Fukuoka, Cyber
University was approved in November 2006 as part of the GOJ's
deregulation program to revitalize economic and business
activities.

The university currently has two departments, information technology
and world heritage, and offers non-traditional students the
opportunity to earn a four year bachelor's degree online. Among
other options, students can "attend" classes by using a personal
computer connected to a broadband communication network.

A total of 516 students are already enrolled at the university and
each department hopes to eventually have 600 students each.

The tuition for a four-year online education is 2.7 million yen (USD
23,000).

Internet and telecom conglomerate Softbank Corp owns a 71 percent
stake in the university, with the remainder held by Kyushu Electric
Power Co. and RKB Mainichi Broadcasting Corp.


11. (SBU) Toyota Officials' Concerns and on U.S. Production Plants
-------------- --------------

We met with two executives from Toyota's Global External Affairs
division to discuss general issues and Toyota's U.S. operations on
April 9.

The Toyota officials were concerned about possible U.S.-Japan auto
frictions; the change in power in the Congress; the comfort women
issue clouding the Abe-Bush summit; and the impact of the Korea -
U.S. FTA agreement on Japanese automakers, particularly in regards
to trucks. They predicted that the KORUS FTA would give impetus to
Japanese thinking about a U.S.-Japan FTA.

We also discussed the pros and cons of putting an auto plant in
Michigan, but they emphasized Toyota made decisions on locations
based on production needs not politics. For more information on the
meeting please contact Josh Handler.


12. (SBU) Lessons for Reg Reform? EPA Auto Visit Exemplar of
Transparency
-------------- --------------

EPA Assistant Administrator for Enforcement and Compliance Assurance
Granta Nakayama and EPA Director of Air Enforcement Division Adam
Kushner came to Tokyo on April 9-11 for meetings with Ministry of
Environment officials and the automobile industry to explain EPA's
enforcement and compliance work.

Under the rubric of an "ounce of prevention is worth a pound of
cure," Nakayama invited Japanese automakers in meetings with the
Japanese Automobile Manufactures Association and at an all day visit
to Honda's Saitama production plant to have more contact with
Nakayama's office so any questions with compliance could be
addressed early on in their design and production process, thus
heading off potential enforcement problems.

Nakayama said that his office hears frequently from U.S. industries
of all sorts including the U.S. automakers, but rarely from the
Japanese automakers despite their significant presence in the United
States.

Nakayama and Kushner also met with the Japanese Automobile Importers
Association to learn about enforcement and compliance issues in
Japan.


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Initial suspicions on the part of JAMA and Honda gave way to relief
and then appreciation for the high-level EPA delegation for making
the trip and effort to reach out. Both promised future cooperation
and follow-up. The EPA delegation was encouraged by the positive
response. EPA will be following up in Washington, DC, with the auto
industry and tentatively plans to return to Japan in a year.

Econoff who attended the meetings with the auto industry was struck
by the contrast between the EPA approach to transparency and some of
the GOJ ministries we deal with here regularly. It would be a
red-letter day if Ministry of Land, Infrastructure and Transport
officials flew to the United States to ask U.S. airlines to have
more of a dialogue about Japanese aviation policy.


13. (SBU) Honda Saitama Production Plant Visit
-------------- -

Econoff toured Honda's Saitama plant along with the EPA officials on
April 11 and participated in an afternoon long meeting on compliance
issues.

Located about an hour north of Tokyo, Honda's Saitama plant,
although only one football field by three in area, is the largest of
three Honda car plants in Japan, producing some 540,000 vehicles a
year, a substantial portion of Honda's 3,630,000 worldwide vehicle
production.

The plant operates two lines, one for CRV production for export to
the United States, which produces 1,120 cars a day, and a second
which produces 1,050 vehicles of several different models for the
U.S. and Japanese markets. Seventy-two percent of the production is
for export. Thirty-three percent of the vehicles are sedans, 41
percent are SUVs and 26 percent are MPVs.

The line operates at a fast clip and, from start to finish, it takes
about three hours to produce a vehicle. The vehicles only sit on
the limited sized parking lot for a few hours before being whisked
off by truck to Narashino Port in Chiba prefecture for shipment.

The plant employs 6,856 associates of which 1,412 are temporary
staff. Plant managers say the plant's strong points are a highly
efficient manufacturing process in a limited space and highly
motivated workforce which utilizes good communications to achieve
its high production targets.
Notable are the energy efficiency improvements the plant has made
since 1992 when Honda adopted a declaration on the environment which
called for saving energy and reducing toxic emissions. In the early
1990s, 172 liters of crude oil equivalent were needed to produce a
vehicle. In 2006, it was 129 liters, a reduction of 25 percent.
The Honda officials did not know if this energy saving was
representative of Japanese industry as a whole, but they felt their
plant was better than those of Toyota or Nissan.


14. (SBU) Meeting with MLIT Policy Official on Asia Gateway
Initiative
-------------- --------------

We met with an official of the Ministry of Land, Infrastructure and
Transport's (MLIT) Policy Division on March 30, who is the point of
contact with the Cabinet for issues related to PM Abe's Asia Gateway
Initiative at MLIT and will be coordinating MLIT's response to the
Asia Gateway Panel's interim report.

The official said MLIT is critical of the open skies proposals in
the Asia Gateway Panel's interim report and those made by
non-governmental members of the Council for Economic and Fiscal
Policy's. MLIT is wary of the term open skies as it is associated
with U.S. policy initiatives to open the aviation market in Japan,
while what is under discussion is not liberalization of air traffic
with Japan, but deregulation of regional airports. For more
information on the meeting please contact Josh Handler.


15. (SBU) Asia Gateway Panel Member on the Asia Gateway Initiative
-------------- --------------

We met with a member of PM Abe's Asia Gateway Council on March 29 to
discuss the Gateway Initiative. The panel member is a specialist on
relations with Asia and had had conversations with former PM
Koizumi, PM Abe and former Chief Cabinet Secretary Yasuo Fukuda
about Japan-Asia relations, before being selected to serve on the

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council.

The panel member discussed Abe's attitudes towards Asia, the
political future of the Asia Gateway initiative, Open Skies, and the
debate over Haneda Airport's internationalization. He said that,
although the Asia Gateway and Opens Skies initiative is usually
talked about in the context of Asia only, he is hopeful that the
Asia Gateway initiative will expand to the rest of the world. For
more information on the meeting please contact Josh Handler.


16. (U) Sendai Airport Hub for China Flights
--------------

On March 18, rail service opened between Sendai International
Airport and Japan Railway's Sendai Station. Previously, travelers
from downtown Sendai could only reach the airport by a 40-minute bus
or car ride. Now, they can arrive in less than 20 minutes for a
reduced fare using the government-funded Sendai Airport Access Line.
In addition, the rail line provides a convenient means of transfer
for Shinkansen passengers from outside of Sendai who use the
region's largest airport.

The new rail service is part of a larger strategy by Miyagi
Prefecture to encourage increased use of Sendai Airport as a hub for
travel to northern Japan's Tohoku region. Other plans include
expanding the number of international direct flights between Sendai
and China as well as developing the area surrounding the airport
into a new business and entertainment district.

In February, the Diamond City Airy, Tohoku's largest shopping mall,
opened just two rail stations away from Sendai airport.


17. (SBU) Japan Foreign Steamship Association and Japanese Port
Operations
-------------- --------------

We met with representatives of the Japan Foreign Steamship
Association (JFSA) on March 20 to discuss port operations in Japan
and their views on recent changes in Japanese law governing port
operations. The JFSA has 28 member companies and is a voluntary
nonprofit organization that seeks to help its members do business in
Japan.

The JFSA representatives described their concerns with Japanese port
operations - primarily the lack of competition for stevedoring
operations for international shippers and high costs. They
acknowledged they are reluctant to press their concerns for fear of
jeopardizing business. They supported the EU and U.S. regulatory
reform positions, but were unsure of what additional steps foreign
governments could take. For more information on the meeting please
contact Josh Handler.