The Japan Economic Scope - April 20, 2007

UNCLAS SECTION 01 OF 06 TOKYO 001800 SIPDIS PARIS PLEASE PASS TO USOECD STATE PLEASE PASS TO USTR SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ETRD ECON JA ZO EAGR SUBJECT: The Japan Economic Scope - April 20, 2007 Sensitive but unclassified. Please protect accordingly. ¶1. (U) This cable contains the Japan Economic Scope from April 20, ¶2007. 2.(SBU) Table of Contents ¶3. Japan joins China/IPR WTO case as third party ¶4. ANRE's Mochizuki Discusses East China Sea, G8 Summit, IEA ¶5. Japan Issues Annual Report on Trade Compliance, U.S. Remains Top of List with China Second ¶6. Hokkaido's Largest Supermarket Chain Resumes U.S. Beef Sales ¶7. Japan Agriculture Gets Hit by JFTC Guidelines ¶8. Muted Reaction in Japan to U.S. Court Ruling on BSE Testing ¶9. Keep Up the Pressure - More Views on Regulatory Reform ¶10. Kyushu Welcoming Foreign Trainees to Offset Shrinking Workforce ¶11. Japan Post to Outsource Mgmt of Customer Data to Salesforce.com ¶12. UA to Suspend KIX -- Honolulu Route in October 2007 ¶13. ANA and Kitakyushu's Star Flyer to code-share Kitakyushu - Tokyo flights ¶14. Hyogo No. 1 In New Plants; Kobe No. 1 In Foreign Business Growth (U) ¶15. Former Wakayama Governor Kimura To Admit Bid-Rigging (SBU) ¶16. Colony Capital Sells Fukuoka's Hawks Town to Singapore Govt. Firm ¶3. (SBU) Japan joins China/IPR WTO case as third party -------------- Trade Minister Amari announced on April 20 that Japan will join the United States as a third party in a WTO complaint against China on IPR prosecutions. The GOJ is worried about the Chinese reaction and will be monitoring it closely. Chinese customs and copyright officials warned Japanese Trade Ministry officials visiting China the week of April 9-13 that there might be a severe reaction if Japan were to join the U.S. complaint. Japanese press commentary acknowledges that Japan must keep up the pressure on China to improve IPR protection, but urges the GOJ to be cautious and not upset the dialogue and cooperation it has been able to forge with Chinese officials. Japan's decision to join the WTO complaint as a third party appears to be an attempt to demonstrate to both China and the United States that it is serious about the IPR problem in China, while hoping not to damage relations with either government. (ECON: Marilyn Ereshefsky) ¶4. (SBU) ANRE's Mochizuki Discusses East China Sea, G8 Summit, IEA --- Although PM Abe and Chinese Premier Wen were all smiles last week when discussing energy issues, working level discussions on the East China Sea dispute over joint development of oil and gas reserves remain contentious, METI's Agency for Natural Resources and Energy Director General Toshifumi Mochizuki told EMIN during a meeting on April 16. Talks will continue, however, he said, and the next round is expected to take place in Beijing in May. Mochizuki noted that the Japanese government had already begun to focus on the 2008 G-8 Summit to be held in Japan, that energy and the environment are likely to be priority issues, and the meetings likely would be held in Hokkaido. Given that energy is expected to be a main topic at next year's Summit, he divulged that there was a desire to avoid hosting them in Kyoto because of the city's connection to the climate change protocol. Mochizuki also indicated that METI Minister Amari would attend next month's International Energy Agency (IEA) board meeting in Paris following stops in Tashkent and Riyadh, and that the Japanese government hoped Energy Secretary Bodman would also attend and be available for a bilateral session. (ECON: Joan Siegel) ¶5. (U) Japan Issues Annual Report on Trade Compliance, U.S. Remains Top of List with China Second -------------- Japan's Ministry of Economy, Trade and Industry released its TOKYO 00001800 002 OF 006 annual Report on Compliance by Major Partners this week. The United States leads the way in the report, with METI citing it for 35 problematic trade practices of 112 overall. Some 12 of the total compliance issues the report cites are classified as "high priority," including four related to the United States, one more than last year. All target U.S. anti- dumping practices, including the Byrd Amendment. The amendment was repealed, but METI remains concerned that distribution of duties is scheduled to continue through October 2007. The Compliance report directs considerable attention at China's trade practices, including over its lack of IPR enforcement, its inadequate transparency measures, and over-generous subsidies. For the English announcement and summary, please click here. (ECON: Ryoko Nakano) ¶6. (SBU) Hokkaido's Largest Supermarket Chain Resumes U.S. Beef Sales -------------- Arks Group, the Sapporo-based supermarket conglomerate that operates Hokkaido's largest and fast-growing supermarket chain Ralse, announced that it will resume sales of U.S. beef on April 19 at all 167 of its stores. In addition, Arks Group president, Kiyoshi Yokoyama, explained that the company will gradually switch from selling all Australian beef to selling all American because "U.S. beef is more agreeable with the Japanese palate." Other Hokkaido supermarket chains also decided to resume U.S. beef sales this month. The Lucky supermarket chain will begin selling U.S. beef on April 28 at its 30 stores. Hokuno Supermarket already began sales of U.S. beef on April 13 at its seven stores. The announcements collectively represent a significant change in attitude among local suppliers toward U.S. beef. Until now, the discount store Cowboy was the only supermarket willing to sell American beef in Hokkaido since the importation ban was lifted in September 2006. (Sapporo: Ian Hillman/Yumi Baba) ¶7. Japan Agriculture Gets Hit by JFTC Guidelines -------------- Under a cabinet order issued last year, the Japan Fair Trade Commission (JFTC) publicly announced guidelines April 18 on activities carried out by Japan Agricultural Cooperatives (JA) that could possibly be regarded as violations to the Anti- Monopoly Act. JA is known to have violated the Act a couple of times since 1999, in which they are said to have forced farmers to purchase farming material or to sell their livestock / commodities through the organization in exchange for financial or other services. As a result, for example, a large portion of fertilizers, pesticides and farming machinery are still distributed through the organization. The Prime Minister's advisory council - the Council for the Promotion or Regulatory Reform - had been instrumental in paving the way for this guideline. In relation to this move, a report issued by the Agriculture Ministry this April on measures to reduce distribution costs for food, has also urged food related organizations to refrain from activities that would distort free and fair competition. (ECON: Ryoko Nakano) ¶8. (U) Muted Reaction in Japan to U.S. Court Ruling on BSE Testing -------------- On April 18, the Japan Agriculture News reported on a U.S. federal district court ruling that allows the U.S. meat packer Creekstone to test for BSE. USDA currently controls the use of BSE test kits and has until the end of June to appeal. The article noted that while the ruling could be "devastating" for USDA it probably would not have much impact on trade because, under the current beef trade agreement, blanket testing is not a requirement for exports to Japan. The danger is that, if individual U.S. suppliers are allowed to blanket test for BSE, this could be adopted by Japanese importers as a de facto import standard, further limiting the available volume of U.S. beef that is eligible for export to the Japanese TOKYO 00001800 003 OF 006 market. Adding to the problem is that some U.S. exporters may not be in a position like Creekstone to conduct blanket testing. So far the Embassy has not received inquiries from Japanese authorities on the Creekstone ruling. (ECON: Nicholas Hill) ¶9. (SBU) Keep Up the Pressure - More Views on Regulatory Reform -------------- Outside pressure (gaiatsu),particularly from the United States, is vital for continued progress in regulatory reform, said Council for the Promotion of Regulatory Reform (CPRR) member Professor Hideo Fukui during an April 10 meeting with EMIN. As the CPRR's lead on the council's labor task force, Fukui believes the Labor Contract Law recently adopted by the Cabinet does not go far enough to introduce flexibility into the labor market. Specifically, labor contracts should be based on company need and not governed by sweeping regulations, he said. The limits placed on companies' ability to fire ineffective employees, which has been reinforced by several Supreme Court cases, has a cascade effect in that companies only want to hire graduates from "brand name" schools. This, in turn, fuels the income gap, Fukui hypothesized. Fukui stated he is wary of overarching regulations that may have unintended consequences on the very population they are meant to protect. For example, if the Government legislates mandatory childcare leave for women, companies may refrain from hiring women all together. So while measures must be taken to bring women back into the workforce to address the falling birth rate, the Government must be careful not to take short-term measures that would have a long-term, negative impact, he said. Fukui echoed the opinion that there will be great resistance to reform efforts ahead of the July Upper House elections. He speculated that the white collar labor law that would exempt white collar workers from overtime pay may be taken up again after those elections. In addition to labor reform, Fukui lamented that changes were also needed in the education, medical and social services sectors. He highlighted the medical sector in particular saying that Japanese patients have little choice in their medical care and suffered from low quality at a high cost. Bio Note: Professor Fukui currently teaches at the National Graduate Institute for Policy Studies. He previously taught political science for one year at the University of Minnesota and as St. Olaf College. In the CPRR, he leads two task forces -- Education and Research and Labor -- and one working group on Innovation and Productivity. See attached memcon for more information. (ECON: Sally Behrhorst and Masumi Ono) ¶10. (SBU) Kyushu Welcoming Foreign Trainees to Offset Shrinking Workforce -------------- Over the past five years, the number of participants in Japan's Industrial Training and Technical Internship Programs has more than doubled in the Kyushu/Yamaguchi area. Although these programs were set up to provide opportunities for foreign trainees to acquire skills they could use to promote local industries in their home countries, they are often used as a source of menial labor, especially in rural areas with shrinking workforces. With Kyushu's population decline expected to be more severe than the national average in the future, local business leaders are seeking to expand both programs to offset the looming labor crisis. For more details see Fukuoka 0021. (Fukuoka: Yuriko Funakoshi/James Crow) ¶11. (U) Japan Post to Outsource Mgmt of Customer Data to Salesforce.com -------------- Press reports state that Japan Post has decided to hire Salesforce.com to manage customer data for the planned subsidiary TOKYO 00001800 004 OF 006 entrusted with post offices' storefront operations -- a move that will drastically reduce the unit's system costs. As part of the privatization process, set to begin in October, Japan Post will become a holding company overseeing four separate business units, including the post office unit. In addition to handling over-the-counter post office operations, the unit will sell products on behalf of the banking and insurance businesses. Unlike major banks, Japan Post does not own an advanced system capable of handling a vast amount of data on customers' assets, family structures and investment histories -- information that is vital to effective marketing. Developing its own system would require an upfront investment of about 2.5 billion yen and a running cost of 500 million yen every 18 months. By outsourcing customer data management to California- based firm Salesforce.com, system costs will be reduced to only 250 million yen for an 18 month-period. Initially, about 4,200 post offices will manage data for 20 million customers via Salesforce.com's three data centers. Contacts at Salesforce.com stated the deal has been in negotiations for over ten months. (ECON: Sally Behrhorst) ¶12. (U) UA to Suspend KIX -- Honolulu Route in October 2007 -------------- United Airlines (UA) will suspend its KIX -- Honolulu route starting October 1. According to an official at United in Osaka, despite the decent load factor, it was hard to make a profit due to the low airfares in the Kansai market. After UA's suspension, Northwest and JAL will be the only airlines servicing the KIX - Honolulu route. The company official told us that UA had a harder time competing with Asian discount carriers on the Honolulu route due to falling prices. UA has some high demand flights serving Narita, but KIX is left with only one UA route to San Francisco. The KIX -- San Francisco route continues to be profitable. The official also said that code sharing with ANA has not worked well on the KIX - Honolulu route. UA provides the aircraft and staff. ANA sells most of the seats and UA compensates ANA. But cheap Honolulu fares have made it difficult for UA to make a profit, given the razor-sharp margins, and aircraft costs borne by UA are the costliest part of the equation. A senior official at ANA Osaka told us that ANA would not pick up the Honolulu route. Both ANA and UA said that airlines have begun to concentrate on Narita for U.S. routes and KIX for Asian routes. The airlines operating at KIX expected business executives in western Japan to use more first class and business class seats from KIX to the U.S. But too often, the UA official said, business people use Narita instead of KIX. He complained that local executives tend to talk up KIX while using Narita and Itami Airports for their business trips. KIX officials have made the same complaint to us. (Osaka-Kobe POL/ECON: Phil Cummings / Naomi Shibui) ¶13. (SBU) ANA and Kitakyushu's Star Flyer to code-share Kitakyushu -Tokyo flights -------------- On April 12, Kitakyushu-based startup carrier Star Flyer (SF) and ANA announced plans to begin code-sharing on flights between Haneda (Tokyo) and Kitakyushu starting June 1. Under the agreement ANA will put its flight code (NH) on 10 out of 11 daily SF-operated round trip flights and purchase up to 25 percent of the round trip seats. SF President Takaaki Hori told the media that he anticipates the ANA tie-up to help SF boost its load factor to 69 percent in fiscal year 2007. SF's lack of name recognition in the Tokyo area had made it difficult for the newcomer airline to go beyond a load factor of 58.5 percent in JFY06. According to Kitakyushu Airport contacts, SF had been seeking a code-sharing agreement with ANA since its March 2006 inauguration. TOKYO 00001800 005 OF 006 In fact, as early as February 2006, the two airlines had been sharing the same reservation system and training facilities. Airport officials added that ANA agreed to the code-share arrangement as a result of SF's better-than-expected first year performance and ANA's own interest in further expanding its domestic flight network. ANA has a strong track record of turning around other struggling regional airlines (e.g., Miyazaki-based Skynet Airways and Hokkaido International Airlines) through business alliances. Post's contacts expect the area's travelers to benefit from the fierce competition anticipated between SF-ANA and JAL (4 round trips a day) on Kitakyushu-Haneda flights. (Fukuoka: Yuko Nagatomo/James Crow) ¶14. (U) Hyogo No. 1 In New Plants; Kobe No. 1 In Foreign Business Growth -------------- According to METI Kansai, Hyogo Prefecture was the top prefecture nationwide in new plant starts in JFY 2006 (April 2005 -- March 2006) for the first time in 21 years. Hyogo had 115 new cases, up 35 cases, a growth of 43.8 percent from the previous year, when Hyogo was ranked number four. New plant starts in the six prefectures of the Kansai region also increased 16.3 percent. A Hyogo prefecture official gave as reasons 1) more -- and cheaper -- land in private hands; and 2) cheap industrialized zones like Amagasaki and Himeji with good water and port access, which are useful for new plants. Kobe City, the capital of Hyogo, also had the highest rate of growth in foreign business starts from 2000 to 2005, tied with Yokohama and beating large foreign commercial concentrations such as Tokyo's Minato or Shibuya wards. (Osaka-Kobe POL/ECON: Phil Cummings/Naomi Shibui) ¶15. (SBU) Former Wakayama Governor Kimura To Admit Bid-Rigging -------------- Former Wakayama Governor Yoshiki Kimura pleaded guilty to charges of bid-rigging and accepting bribes of 10 million yen (830,000 USD). Current Governor Yoshinobu Nisaka commented that the prefecture would sue Kimura and other defendants for damages. A prefectural official added that Wakayama is launching new measures to prevent bid-rigging, including a new bid system. The official said he is not sure how well the measures will deter future malfeasance. She also mentioned that bid-rigging reform did not emerge as a major election issue in prefectural assembly races. (Osaka-Kobe POL/ECON: Phil Cummings / Naomi Shibui) ¶16. (SBU) Colony Capital Sells Fukuoka's Hawks Town to Singapore Govt. Firm -------------- On April 12, L.A.-based equity firm Colony Capital officially announced its March 8 sale of the commercial complex, Hawks Town, to the Government of Singapore Investment Corp (GIC). While the sales price has not been made public, it is estimated at around Yen 100 billion ($840 million). Colony acquired the Fukuoka hotel/baseball stadium/shopping mall complex from the bankrupt Daiei Corp. in March 2004 at Yen 65 billion ($546 million). Over the past three years, Colony invested another Yen 15-20 billion ($126-$168 million) to upgrade the complex's facilities. A Colony official told post that the firm had done business with GIC on many occasions. As a result, even though there were more attractive offers from other companies, Colony considered GIC the best choice due to its financial stability and long-term interest in owning the complex. GIC has announced no immediate plans to restructure Hawks Town's operations, and the head of Colony's Japan operations will continue to serve as the president of Hawks Town. In line with its reputation for maintaining good community relations, GIC has invited three local business leaders to serve as outside directors. (Fukuoka: Yuko Nagatomo/James Crow) TOKYO 00001800 006 OF 006 SCHIEFFER