The Japan Economic Scope - May 18, 2007

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SUBJECT: The Japan Economic Scope - May 18, 2007

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1. (U) This cable contains the Japan Economic Scope from May 18,

2007.

2.(SBU) Table of Contents


3. LDP and DPJ Staff Members Discuss Upper House election

4. Keidanren Joins G-8 Business Declaration (SBU)

5. KORUS Creates Some Pressure for Japan-U.S. FTA (SBU)

6. FTA/EPA Debate Continues in Japan (SBU)

7. LDP Ag Caucus: PM Advisory Subcommittee Shoots Japan in the
Back (U)

8. Beef: the Road Map Ahead (SBU)

9. GOJ Unhappy with U.S. National Trade Estimate Report (SBU)

10. JFTC Chairman to Be Reappointed (SBU)

11. Consulate Fukuoka Resumes Visa Services (U)

12. Fidelity to Sell Investment Trusts at Post Offices (SBU)

13. Keidanren Urges Japan to Stop Cutting Aid (U)

14. GOJ-Funded Tuna Institute's Kick-Off Conference Packed to

15. Sarkozy Win Spurs Interest in French Economic and Family
Policies (SBU)

16. New Center Established to Boost Service Sector Productivity

17. Government Split Over Foreign Trainee Labor (SBU)

18. Central Japan's Latin American Workforce Swells (SBU)

19. KIAC Seeks Restoration of U.S. Routes and Increased Cargo
Capacity (SBU)

20. 787 Production Enters New Phase (U)

21. New Train-Bus Hybrids for JR Hokkaido (U)

22. Toyota Hybrid and U.S. Sales Plans (SBU)

23. Yamazaki Mazak Machine Tools: Export Controls and Japan's
Demographic Crisis (SBU)

24. U.S. and Japanese IT Firms Consortium to sell Linux Systems
in Japan (U)

25. Japanese MLB Update (U)


3. (SBU) LDP and DPJ Staff Members Discuss Upper House election
--------------

A Democratic Party of Japan (DPJ) Policy Research Council staff
member revealed to the Embassy that the party was having
difficulty finding a strong argument against the Liberal
Democratic Party (LDP) in the Upper House election, as the debate
on social disparity is losing its initial steam. He noted the
defeat in the Tokyo gubernatorial race in April had been
devastating.

Although it depends on party leader Ichiro Ozawa, who is known to
take a top-down approach, the staff member revealed that pensions
and agriculture may be raised and environmental issues could also
be a future topic although probably not this election.

The DPJ staff member added that the party, in an effort to
collect votes from Japan Agricultural Cooperatives (JA) members,
has been sending questionnaires to local JAs, traditionally
supporters for the ruling LDP, in hopes of attracting their
attention.

In a separate meeting, an LDP staff member admitted he had
detected some change in the relationship between Upper House
candidates and the interest groups that traditionally support
them. For example, JA has ceased to support Keishiro Fukushima,
a former Agriculture Ministry official and former Parliamentary
Secretary for the Foreign Ministry, because he at times does not

SIPDIS
represent the organization's views. JA has now decided to back
one of its own, former JA executive director Toshio Yamada, as
its LDP candidate.

The staff member also indicated that Keizo Takemi, who used to
enjoy strong support from the Japan Medical Association, seems to
have had difficulty securing its support this time. (ECON:
Ryoko Nakano)


4. (SBU) Keidanren Joins G-8 Business Declaration
--------------

The Japan Business Federation (Keidanren) joined other business
groups from G-8 countries in calling on their governments to push
for a successful conclusion to the Doha Trade Round.

Noting that Doha talks have "dragged on for five years without

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any tangible results," the joint declaration calls on G-8
governments to break the impasse, particularly over agricultural
trade, and make a successful conclusion of the round a "matter of
urgency and top priority."

The joint declaration also calls for more coordination on IPR
enforcement and facilitation of foreign investment. G-8
governments should avoid what the business groups call
"investment protectionism," while at the same time do more on
transparency and "predictability" in government investment
decisions.

The following organizations signed the document: Confederation of
British Industry; Confederation of Italian Industry; Federation
of German Industries; Japan Business Federation; French Business
Confederation; Russian Union of Industrialists and Entrepreneurs;
the Canadian Chamber of Commerce; and the United States Council
for International Business.

Click here to view the joint declaration. (ECON: Nicholas Hill)


5. (SBU) KORUS Creates Some Pressure for Japan-U.S. FTA
--------------

The immediate economic implications for Japan of the U.S. - Korea
Free Trade Agreement (KORUS) could be much smaller than the long-
term trade policy implications, according to two economists we
have met.

If KORUS leads to sweeping changes in Japan's trade policies,
pushing the country to open up more aggressively, a senior
economist at Mizuho Bank told us last week, KORUS could prove to
be "an historical agreement," not only in terms of its impact on
Japan's trade policy, but on its impact on the global trade
regime.

He added that Japan needs to reevaluate its stand on a wider East
Asia FTA framework and its position on where the United States
belongs in the regional architecture. Clearly KORUS has served
to raise the profile of Japan's FTA policies.

The economist noted that South Korea continued to hold Japan and
China at arms' length while it pursued a deal with the United
States and now is putting its sights on a deal with the European
Union.

An economics professor from Tokyo University echoed these views.
He told us separately on May 17 that KORUS will not have a
substantial direct economic impact on Japanese business because
tariff rates in United States are already very low.

He said he has been advising the Trade Ministry (METI),which was
taking a similar position. METI has noted on its website that
the economic implications of a deal between Korea and the EU
would be far greater for Japan than KORUS because tariff rates in
Europe at present are significantly higher than in the United
States. (Click here to read in Japanese.)
(ECON: Nicholas Hill/Ryoko Nakano)


6. (SBU) FTA/EPA Debate Continues in Japan
--------------

Last week the Foreign Ministry's latest Economic Partnership
Agreement roadmap was put on the internet. (Click here to read in
Japanese.) For the first time, MOFA refers to a need to consider
in the future working on free trade deals with the United States
and European Union.

The FTA debate continues to figure prominently in the press.
Chief Cabinet Secretary Shiozaki was quoted in the International
Herald Tribune: "it is not simply a matter of Japan making an
issue just because South Korea did it," he said. "It is
important to study this matter with the aim of developing a
forward-looking, win-win relationship.

His comments came after Japanese newspapers conveyed the
impression of Japan as an FTA laggard. "FTA, Japan is Left
Behind," read one headline in Nikkei. "U.S. Japan FTA a Topic -
Government to Revamp Trade Policies," the Yomiuri wrote. (ECON:
Nicholas Hill/Ryoko Nakano)


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7. (U) LDP Ag Caucus: PM Advisory Subcommittee Shoots Japan in
the Back
--------------

We have seen mixed reactions to a report of the Subcommittee for
the Council on Economic and Fiscal Policy (CEFP) since its
release last week. The advisory body calls for the government to
accelerate FTA negotiations and agriculture reform. (See last
week's Scope for details.)

Japan's Mainichi said the report's proposals were "innovative."
LDP Policy Research Council Chair and former Trade Minister,
Shoichi Nakagawa, echoed Agriculture Minister Matsuoka's views
that the proposals were detrimental to Japan in its ongoing trade
talks, akin to "being shot in the back when the WTO talks are at
a sensitive stage." Nakagawa was likely alluding to the
Subcommittee's call for Japan to slash its "excessive" tariff
rates.

According to press reports, during a May 15 meeting of the LDP
agriculture caucus, some members criticized the CEFP Subcommittee
report saying it needed "adjustments." They do not want to see
some of the report's proposals incorporated into the Government's
economic and fiscal guidelines, which are due out next month.
The ruling party's agriculture caucus is particularly unhappy
about calls for tariff reductions and reforms to the gate price
system for pork. (ECON: Ryoko Nakano)


8. (SBU) Beef: the Road Map Ahead
--------------

According to Japanese press reports, Agriculture Minister
Matsuoka was "circumspect" when pressed by Agriculture Secretary
Johanns to review Japan's age limit on U.S. beef imports.
The two met in Paris where the OIE this week will pronounce beef
in the United States to be in a "controlled risk" -- or in effect,
safe -- category, no longer necessitating special restrictions on
trade.

In Tokyo, Deputy Assistant U.S. Trade Representative Cathy
Enright and Embassy officials met with Health and Agriculture
Ministry officials to discuss the way forward after the new OIE
risk classification for the United States is announced.
The two sides are set to begin a dialogue in coming weeks and the
Japanese officials indicated they plan to review very carefully
the data supporting the OIE decision. For more details on the
meeting, please see Tokyo 2193. (ECON: Nicholas Hill)


9. (SBU) GOJ Unhappy with U.S. National Trade Estimate Report
--------------

The Japanese government delivered its reply this week to the U.S.
2007 National Trade Estimate Report, which USTR issued in April.
In the reply, which is on the Foreign Ministry website, the GOJ
continues to be unhappy about the criticisms leveled at it across
a range of sectors, citing "inappropriate or inaccurate
descriptions..."

Written in unusually unvarnished prose, the 11-page report
rejects point-by-point the concerns raised in the NTE, stating
that some statements in the NTE do not "reflect the facts"
The GOJ document specifically states that, where concerns raised
in the NTE are not addressed, this does not imply that the GOJ
shares an "understanding" with the U.S. government on them.
According to separate sources at MOFA, the GOJ is considering not
replying to the NTE Report in the future, although no final
decision on that is expected anytime soon.
Click here to see MOFA's reply. (ECON: Nicholas Hill)


10. (SBU) JFTC Chairman to Be Reappointed
--------------

According to press reports, Kasuhiko Takeshima will be
reappointed as chairman of the Japan Fair Trade Commission (JFTC),
once the government has obtained agreement from the Diet for the
move.

Takeshima's five-year term expires in September, and any
successor would have needed approval from the Diet before the
regular session closes in June. Takeshima, age 64, entered the
Ministry of Finance in 1965. After having served in such posts

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as director-general of the National Tax Agency, director of the
Cabinet Councillors' Office on Internal Affairs, and assistant
deputy chief cabinet secretary, he was named head of the JFTC in
July 2002.

During Takeshima's tenure, the JFTC, characterized in the past as
a "watchdog that never barked," has become a substantially more
robust and aggressive competition regulator, actively
investigating and prosecuting a series of high-profile bid-
rigging cases. Most significantly, Takeshima successfully
advocated for the passage in 2005 of a set of amendments to
Japan's Antimonopoly Act that strengthened the investigatory and
punitive powers of the JFTC. (ECON: Chris Wurzel)


11. (U) Consulate Fukuoka Resumes Visa Services
--------------

On May 9, the U.S. Consulate in Fukuoka began accepting non-
immigrant visa applications for the first time since 1995.
The resumption of visa services in Fukuoka follows the decision
last year to begin processing visa applications in Sapporo, and
is a part of the USG's efforts to facilitate travel to the U.S.
Interviews will be conducted two to four days per month,
depending on demand, and post anticipates approximately 3,500
visa applicants annually.

The GOJ frequently urges the USG to expand its visa services in
Japan as part of the two countries' regulatory reform dialogue.
In addition, local leaders and organizations in the Kyushu-
Yamaguchi region have long been interested in reducing the amount
of time and expense which the area's applicants have had to incur
in order to apply for visas at other Japan posts.

Local media coverage of the resumption of services has been
extensive and highly favorable, and post's contacts are extremely
pleased that the USG is now offering more convenient services to
visa applicants in Kyushu and Western Honshu. (Fukuoka: Jim
Crow)


12. (SBU) Fidelity to Sell Investment Trusts at Post Offices
--------------

Starting on June 11, Fidelity International will begin selling
investment trusts at post office branches throughout Japan.
Fidelity will thus become the second U.S. company to have such a
tie up with Japan Post.

A contact at Fidelity told us that Japan Post had selected their
investment trust because of its strong track record and its
expected appeal for Japan Post's banking customers, who are known
for their conservatism.

The product Fidelity will sell through the post offices will
offer both income through distributions and long-term growth.
(ECON: Marc Dillard)


13. (U) Keidanren Urges Japan to Stop Cutting Aid
--------------

On May 15, the Japan Business Federation (Keidanren) urged the
Government of Japan to halt a multi-year trend of budget cuts for
official development assistance (ODA).

Keidanren argued that ODA should be more effectively used,
particularly in the areas of energy security, environmental
issues, assistance to African countries, and the promotion of
economic partnership agreements.

Noting its high expectations for reform of the Japan
International Cooperation Agency (JICA) and the Japan Bank for
International Cooperation (JBIC),which is slated for 2008,
Keidanren expressed regret that untied loans have become the norm
in Japanese concessional lending, a development which discourages
private sector involvement.

To make ODA programs more effective, Keidanren recommended making
the program more commercially attractive so that the private
sector's expertise could be brought to bear in developing
countries.

Keidanren also urged Japan to shorten the programs' decision

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making process, and to establish US dollar and local currency
loans. (ECON: Eriko Marks)


14. (SBU) GOJ-Funded Tuna Institute's Kick-Off Conference Packed
to the Gills
--------------

At a kick-off conference of a GOJ-funded Tuna Institute on April
26, Fisheries Agency of Japan (FAJ) officials and researchers
stressed Japan's determination to lead the world in tuna issues
from fishing techniques to stock management.

Attended by over 500 people from industry, government, academia
and the general public, the conference featured the latest
farming R&D projects and detailed the 14-fold increase in global
tuna consumption for the past century.

With an annual GOJ budget of 2.6 billion yen ($21 million) and
about 100 staff members, the Tuna Institute is a "virtual"
organization centered in the FAJ-sponsored Fisheries Research
Agency in Yokohama but drawing contributions from researchers all
over Japan.

Its current focus is Bluefin tuna, the most sought-after and
costly tuna species, in the Pacific as the fish spawn and grow up
mostly in Japan's EEZ. Research results will be reflected in
FAJ's tuna policy and international negotiations. (EST: Keiko
Kandachi/Bart Cobbs)


15. (SBU) Sarkozy Win Spurs Interest in French Economic and
Family Policies
--------------

Nicolas Sarkozy's victory over Socialist Segolene Royal in the
French presidential election has generated considerable interest
in the Japanese press over questions of economic policy.

Interest has run particularly strongly in France's relatively
high birth rate, which is at a 30-year high (just exceeding two
children per woman) versus Japan's fertility rate, which dropped
to 1.26 per woman in 2005.

Newspaper articles and television shows have highlighted aspects
of the French system, including support payments scaled to the
number of children a family has, flexible childcare arrangements,
and France's 35-hour workweek. (ECON: Marc Dillard)


16. (U) New Center Established to Boost Service Sector
Productivity
--------------

On May 10, the Services Industry Productivity Conference (SIPC)
was established to raise the productivity of the services sector
through collaboration between the government, industry and
academia, an idea promoted by METI's Commerce and Information
Policy Bureau.

The SIPC is a membership organization, headed by Ushio Inc.
Chairman and former CEFP member Jiro Ushio, who is also the
Chairman of the Japan Productivity Center for Socio-Economic
Development (JPC-SED).

The Conference's administrative work will be handled by the JPC-
SED, which is a non-profit and non-governmental organization. The
SIPC has 19 "founding promoters," including 14 businessmen and
five academics. It expects that service sector companies,
industry organizations, services divisions of manufacturing
companies, researchers, consultants, and individuals will be the
audience for its services. The SIPC plans to hold seminars and
issue bulletins and annual reports.

The SIPC plans to focus on four areas: (1) Encouraging services
innovation by using scientific and engineered approaches (e.g.,
collecting and analyzing best practices); (2) Improving the
quality of services and fostering human resources (e.g.,
introducing voluntary certification and third-party certification
schemes); (3) Improving infrastructure of the services sector
(e.g., improving government statistics on the services sector),
and (4) Conducting productivity improvement campaigns (e.g.,
creating awards and holding symposiums). (FINATT: Maureen
Grewe)

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17. (SBU) Government Split Over Foreign Trainee Labor
--------------

The Ministry of Health, Labor, and Welfare (MHLW),the Ministry
of Economy, Trade, and Industry (METI),and the Ministry of
Justice (MOJ) have offered competing proposals on revising rules
which allow overseas "trainees" to work in Japanese companies for
up to three years.

MHLW has formulated plans to protect those workers' rights, while
METI is urging that more trainees be allowed entry into Japan to
address labor shortages.

Meanwhile, Minister of Justice Nagase has weighed in with a
proposal to develop a short-term working visa.

The current system, under which foreigners train for a year and
then work for up to two more years to gain practical experience,
is widely seen as a temporary laborer program, and there have
been complaints that trainees are treated unfairly.

Under the current legislation, trainees are not recognized
legally as workers, thus exempting them from some regulations
under Japanese labor law, such as the minimum wage. (ECON: Marc
Dillard)


18. (SBU) Central Japan's Latin American Workforce Swells
--------------

METI estimates that Brazilian and Peruvian nationals now account
for up to 3.8% of the total manufacturing workforce in Central
Japan.

In a report issued this week, the Chubu (Central Japan) METI
Bureau noted that since the wage gap between Japanese and Latin
American workers has decreased significantly in recent years, the
regional labor shortage in the booming manufacturing sector,
rather than cost savings, is driving the increasing demand for
foreign labor.

Anecdotally, industry contacts continue to tell us that beyond
the South Americans mentioned in the study, area manufacturers
are also relying more and more on gray market Chinese citizens in
Japan on technical intern visas but used as ordinary factory
labor. Thus the total foreign percentage of the workforce is
actually higher than reckoned by METI.

The METI report stressed the social issues, particularly for
workers' children, that have arisen as a result of the 159,000
Brazilians (over half of all Brazilians in Japan) and 18,000
Peruvians concentrated in the four Central Japan prefectures
centered on Nagoya.

The report noted that employers, local governments, and NPOs are
becoming more engaged in the issue. Local government officials
we've spoken with throughout the region have told us of their
increasing efforts and resources to deal with these issues.
(Nagoya: Tamiki Mizuno)


19. (SBU) KIAC Seeks Restoration of U.S. Routes and Increased
Cargo Capacity
--------------

Kansai International Airport Co. (KIAC) President Atsushi
Murayama announced in late April that the airport would seek to
restore the U.S. routes it has recently lost and make a major
capital investment in the KIX cargo zone in order to meet its
revenue goal for 2007.

In 2006, KIAC turned a profit due to cost-cutting measures, but
was unable to reach its target of 119,000 annual flights.
Murayama blamed a decrease in large aircraft business due to
higher fuel costs and the decision of several carriers to cease
operating flights to the United States from the Kansai. KIAC's
flight target is 129,000. Murayama has stated publicly that if
the airport misses this target, he will step down from the helm.
In 2007, KIAC will make a 65.5 billion yen ($546 million) capital
investment to expand the number of plane parking spots in KIX's
air cargo zone. Officials were mum on their forecast of
potential demand for increased cargo service at KIX, however.

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(Osaka-Kobe: Phil Cummings/Naomi Shibui)


20. (U) 787 Production Enters New Phase
--------------

Boeing's 787 Dreamliner project reached a significant milestone
with the May 16 delivery of the final major structure for the
first assembly of the aircraft in Everett, Washington.
The integrated mid-body fuselage consists of a forward fuselage
section made by Kawasaki Heavy Industries in Nagoya; the center
wheel well and center wing tank, made by KHI and Fuji Heavy
Industries in Nagoya; and center fuselage sections made by Alenia
Aeronautica in Italy -- all of which were flown to Charleston,
South Caroline, where they were joined by Global Aeronautica.
The 84 ft. long, 19 ft. diameter fuselage was then flown to
Everett, where it arrived one day after a pair of composite wings
built by Mitsubishi Heavy Industries in Nagoya.

Final assembly of the first 787 is to begin shortly, with roll-
out reportedly scheduled for early July and delivery to ANA of
the first 787 for passenger use slated for May 2008. In recent
days, top Boeing and ANA executives have repeatedly stressed to
the media that the 787 remains on schedule.
The Boeing photo shows the 787 wings being unloaded May 15 in
Everett. (Nagoya: Dan Rochman)


21. (U) New Train-Bus Hybrids for JR Hokkaido
--------------

Hokkaido's rural railroads have become increasingly unprofitable
as their passenger levels fall because of population decline.
Japan Railways Hokkaido (JR Hokkaido) has developed the world's
first operational train-bus hybrid called the Dual Mode Vehicle
(DMV) in an ambitious attempt to create a new cost-effective
means of rural transportation. The DMV is generating a great deal
of interest both inside and outside of Hokkaido. Whether it will
be a commercial success, however, remains to be seen. For more
information, see Sapporo 0024. (Sapporo: Ian Hillman/Yumi
Baba)


22. (SBU) Toyota Hybrid and U.S. Sales Plans
--------------

On May 9, we toured the Toyota Motomachi automobile manufacturing
plant near Nagoya with a group of Industrial College of the Armed
Forces students. In operation since 1959, the plant produces
12,000 vehicles a month of eight models for the Japanese market
on one production line. We were treated to a view of the famous
welding robots performing their mechanical dance; 95 percent of
all the body welds are automated, according to the plant
representative.

Hybrid production is very much on Toyota's mind for the United
States. A plant official said Toyota sold 240,000 hybrids in the
United States in 2006. Toyota hopes hybrids will be 10 percent
of their U.S. sales in the next few years. Although the
official's remarks suggested the going might be getting tougher
for hybrids. He noted that it is not clear that customers will
continue to pay the premium for the more costly hybrid power
train and that strong sales would most likely depend on gas
prices.

Toyota has introduced hybrids in Japan, but they are not selling
comparably as well as in the United States. Some 72,000 hybrid
vehicles were sold in Japan in 2006. Toyota's representative
noted that mini-cars in Japan compete with hybrids for sales as
their fuel efficiency is just as good.

Toyota plans to increase the percentage of U.S. built vehicles in
their sales in the United States. It used to be 65 percent, but
has now slipped to 55 percent and Toyota would like to increase
it back to 60-65 percent. The Toyota representative anticipates
this will be achieved around 2010 when Toyota's new Texas plant
is fully operating and the plant being built in Mississippi comes
on line.

Toyota coincidently released its year-end financial results on
May 9, which reported record high revenues and profits. Globally,
vehicle sales reached 8.52 million units, an increase of 550,000
units over the last fiscal year. For more information, click
here. (ECON: Josh Handler)

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23. (SBU) Yamazaki Mazak Machine Tools: Export Controls and
Japan's Demographic Crisis
--------------

A company spokesman for world leader in machine tools production
Yamazaki Mazak Corp. told us that the company is concerned about
unauthorized re-exports of its precision machine tools during a
tour of a Mazak machine tool plant near Nagoya last week.
Mazak is also working hard to invent new procedures and machines,
including the award winning e-Bot Cell 720 shown below, to
counter the shortages of skilled labor in the area.

Mazak's efforts give insights into how Japan's manufacturing
sector is addressing Japan's demographic challenge. A cable on
the visit is to follow shortly. (ECON: Josh Handler)


24. (U) U.S. and Japanese IT Firms Consortium to sell Linux
Systems in Japan
--------------

In response to recently adopted GOJ government procurement
guidelines which give preference to open source systems, a group
of major U.S. and Japanese IT firms have formed a consortium to
produce servers and software running an identical form of Linux
operating system. The consortium includes Oracle, IBM, Hewlett-
Packard, Dell, NEC, Hitachi, and NTT Data. Oracle will manage
the maintenance of the operating system thus lowering costs for
those are considering switching to Linux.

The Communications Ministry is concerned about over-reliance on
Microsoft Windows systems and claims that the fact that the
Windows' source code is not open might limit freedom in
developing new systems. According to Nikkei, currently, 78
percent of the servers in Japan run Microsoft Windows, compared
to 14 percent that run Linux. (ECON: Marilyn Ereshefsky)


25. (U) Japanese MLB Update
--------------

Right-handed starter Daisuke Matsuzaka pitched the first complete
game for the Boston Red Sox all season, a dominating 7-1 six-
hitter against the Detroit Tigers on May 15. Left-handed
reliever Hideki Okajima extended his streak of scoreless
appearances to 17 games, as his earned run average plunged to
0.48.

Left-handed starter, Kei Igawa, demoted by the New York Yankees
last week, showed up on the roster of the Tampa Yankees of the
Florida State League, but has so far not made an appearance. We
have no indication if NHK will begin to broadcast his Single A
league games in Japan. (ECON: Nicholas Hill)
SCHIEFFER