The Japan Economic Scope - May 31, 2007

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SUBJECT: The Japan Economic Scope - May 31, 2007

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1. (U) This cable contains the Japan Economic Scope from May 31,

2007.

2.(SBU) Table of Contents


3. CPRR Issues Interim Report

4. Upper House Member Shares Views on Reform

5. METI to Sell Share of Japex

6. Japan and India to Cooperate on IPR

7. Decentralization Minister Pledges Support at Hokkaido
Symposium

8. No Obvious Successor for Ag Minister

9. Matsuoka's Role in Doha Was Mixed

10. EC Ambassador to Japan on Auto Regulation Standardization
and the Weak Yen

11. METI Releases Report on Next Generation Automobile

12. METI Auto Official on U.S.-Japan Auto Relations, Yen, US FDI,
EPA

13. Next-Generation Shinkansen to Start Operation

14. LDP's Sugawara Talks about Healthcare Reform

15. More Hospitals to Offer Fixed-Rate Services

16. U.S. and Japan Set to Talk About Beef

17. Beef Trade: Moving to OIE Standards

18. Japan's "Core" Consumer Prices Down 0.1% in April, 3rd
Consecutive Monthly Decline

19. Evansville Mayor Leads Indiana Delegation

20. Hakuho Promoted to Yokozuna

21. Japanese Baseball Imports


3. (U) CPRR Issues Interim Report
--------------

The Council for the Promotion of Regulatory Reform (CPRR) issued
its midterm report May 31, calling for liberalization of
international airfares, the lowering of firewalls between banks
and brokerages, streamlining the Japan External Trade
Organization (JETRO),and the abolishment of the beleaguered
Green Resource Agency.

The Council will seek Cabinet approval for its recommendations
later this month and will use the report as the basis of the
government's new three-year reform plan.

Regarding airfares, under current regulations, carriers can
discount up to 70 percent of those fares approved by the
International Air Transport Association (IATA). The CPRR has
proposed eliminating that limit to give airlines more freedom in
setting fares and allowing for more competition in the sector.
The Council has also recommended that Japan's fixed landing fees
be allowed to vary according to the time of day and the level of
airport congestion. Both proposals are likely to be met with
fierce resistance from the Ministry of Land, Industry and
Transportation.

Additionally, the Council has called for the reduction of
firewalls that currently exist between banks and security firms
to allow for cross-marketing of financial products. (Stay tuned
for more reporting on this issue.) The Council will issue
specific measures later this year after it studies foreign models
and determines how best to maintain consumer protections.
Perhaps anticipating the Ministry of Economic, Trade and
Industry's loud outcry, the report contains muted language to
suggest streamlining or downsizing JETRO's operations. No
further details are available at this time.

Finally, the Council has recommended abolishing the Green
Resource Agency (GRA) that has been embroiled in a bid-rigging
scandal that may have been a factor in the recent suicides of
Agricultural Minister Toshikatsu Matsuoka and former GRA official
Shinichi Yamazaki. (ECON: Sally Behrhorst/Masumi Ono)


4. (U) Upper House Member Shares Views on Reform
--------------

House of Councillors member and Vice Minister for Regulatory
Reform, Administrative Reform, Civil Service Reform and Regional
Revitalization, Yoshimasa Hayashi, shared his views on reform
under the Abe Administration during a May 18 meeting with Deputy
Assistant U.S. Trade Representative Michael Beeman.

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Please see Tokyo 2410 for his opinions on the July elections, the
future of agricultural reform and Japan's efforts to introduce
sunset clauses on all new regulations. (ECON: Sally Behrhorst)


5. (U) METI to Sell Share of Japex
--------------

On May 29 the Ministry of Economy, Trade and Industry (METI)
announced the sale of some of its shares in Japan Petroleum
Exploration Co. (JAPEX),an oil production and exploration firm.
METI will sell a total of 9.11 million shares, equivalent to 16
percent of JAPEX's shares, according to a Nikkei report. This
will reduce METI's stake in JAPEX from just under half to about
one third.

METI selected Daiwa Securities SMBC Co. and Nomura Securitas Co.
to underwrite the sale in February. The sales schedule is as
follows: JAPEX submitted a security notice to Kanto Local Finance
Bureau on May 29. Beginning June 5, Daiwa and Nomura will
contact prospective buyers to establish interest and determine
the offer price, which will be fixed some time between June 8 and
June 13. The public share offering will take place over two
business days beginning the day after the offer price has been
decided; the shares will be delivered four business days from the
day the offer price is set.

According to Nikkei, the sale should net around 80 billion yen
($658,000) for the GOJ based on JAPEX's current share price. The
proceeds will be allocated to METI's Energy Policy Special
Account. (ECON: Eriko Marks)


6. (U) Japan and India to Cooperate on IPR
--------------

On May 24, Trade Minister, Akira Amari, and the Minister of
Commerce and Industry of India, Kamal Nath, signed a Memorandum
of Understanding (MOU) to enhance bilateral cooperation in the
field of intellectual property, in terms of capacity building,
human resources and public awareness programs.

This MOU is part of the follow-up to the joint statement on the
Japan-India Strategic and Global Partnership that Japanese Prime
Minister Shinzo Abe and Indian Prime Minister Monmohan Singh
announced on December 15, 2006, in Tokyo.

In this MOU, both Ministers agreed that the Japan Patent Office
and India's Office of the Controller General of Patent Designs
and Trademarks will develop and implement a basic framework and
concrete measures of co-operation.

To this end, the respective agencies will develop an action plan
and revisit it annually in order to achieve their common targets:
improving their intellectual property protection system,
establishing transparent and streamlined procedures concerning
intellectual property, and promoting public awareness of
protection of intellectual property. (ECON: Eriko Marks)


7. (U) Decentralization Minister Pledges Support at Hokkaido
Symposium
--------------

On May 26, the Doshusei Hokkaido Block Council, a gathering of
Hokkaido-based economic entities, hosted a symposium in Sapporo
to discuss proposals for local decentralization initiatives.
Over 300 participants, the majority of whom were local government
employees, and a large local media contingent attended the event.
Yoshimi Watanabe, Japan's Minister of State for Regulatory Reform,
Administrative Reform, Regional Revitalization and Regional
Government (Doshusei),opened the symposium praising Hokkaido for
taking the lead as Japan's first Doshusei Tokku (deregulation
special zone).

He challenged Hokkaido residents to come up with bold
deregulatory initiatives even if the national governmental
ministries appear reluctant to relinquish their authority.
Minister Watanabe also offered his services as a go-between with
the ministries to help ensure Hokkaido's Doshusei movement is
beneficial to locals.

Aside from this offer of support, few concrete proposals for

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decentralization came out of the symposium. Hokkaido Governor
Harumi Takahashi discussed a plan to introduce daylight savings
time in Hokkaido. Other speakers debated what should occur under
decentralization to reduce the disparity in economic growth
between Tokyo and other regions. (Sapporo: Ian Hillman/Yumi
Baba)


8. (SBU) No Obvious Successor for Ag Minister
--------------

The suicide of Agriculture Minister Toshikatsu Matsuoka on May 28
came as a shock in Japan and the government has no obvious
successor. It was the first suicide of a presiding cabinet
minister since World War II. A series of corruption scandals had
clouded Matsuoka's tenure since he became Agriculture minister
last September.

Facing pressure from the press and opposition Democratic Party of
Japan (DPJ),the minister's position looked increasingly
untenable. Since his death, press reports that the LDP had
instructed Matsuoka to keep silent about his financial scandals
have surfaced. Another report indicated that Matsuoka, feeling
heat from a DPJ corruption probe, had sought to resign but Abe
told him to remain as minister.

It is unclear what the political fallout will be from the suicide
coming so soon before Upper House elections in July. Matsuoka
was popular among rural voters and, given the way voter clout is
skewed in favor of rural areas, he figured to be a prominent part
of the campaign.

Current Environment Minister Wakabayashi is filling in as interim
Agriculture Minister, but the sense in Tokyo is that a successor
will be named in the next few days. Sources at the Agriculture
and Trade Ministries, and JETRO, have told us, however, that
there are no obvious candidates, and the decision will be a
difficult one for PM Abe to make. (ECON: Nicholas Hill)


9. (SBU) Matsuoka's Role in Doha Was Mixed
--------------

Most observers recognize that the Doha Trade negotiations have
entered a critical phase. The suicide of Agriculture Minister
Toshikatsu Matsuoka will loom large as the round draws to a
conclusion -- one way or the other -- by the end of the year.
Observers we talked to about Matsuoka's role in the trade round
before his suicide had widely different opinions about his
commitment to Doha. One point on which most agreed was that
Matsuoka had credibility with Japan's protectionist-minded
farmers.

If WTO members wrapped up a deal, Matsuoka would have been PM
Abe's point person in selling a deal to Japan's domestic interest
groups -- particularly to the farm lobby.

Matsuoka's suicide is a real blow to the Doha process, one
research official connected to the Trade Ministry told us. His
sources as of May 31 were indicating that the government was
having serious difficulties finding somebody of Matsuoka's
stature -- or, in the case of Doha, familiarity with the process.
(ECON: Nicholas Hill)


10. (SBU) EC Ambassador to Japan on Auto Regulation
Standardization and the Weak Yen
--------------

In the key note speech at the Japanese Automobile Importer
Association's annual general assembly reception in Tokyo on May
25, the European Commission Ambassador Hugh Richardson noted that
the EU has pressed Japan in the EU-Japan Regulatory Reform
Dialogue to apply and implement relevant UN/ECE regulations in
order to further unify international automobile regulations and
standards.

He also remarked that the EC has heard the concerns of the
European automakers about the weak yen.
The Ambassador's speech is attached below. For the EU Reform
Recommendations click here. (ECON: Josh Handler)


11. (SBU) METI Releases Report on Next Generation Automobile ---
--------------

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The report covers the need to improve engines, fuels, and traffic
flows, including incorporating IT into the "world's most
environmentally friendly automobile," and proposes development
strategies for batteries, hydrogen/fuel-cell, clean diesel, and
bio-fuels.)

Issued under the names of METI Minister Akira Amari; Chairman of
Japan Automobile Manufacturers Association (JAMA),Fujio Cho; and
President of the Petroleum Association of Japan (PAJ),Fumiaki
Watari, the report became available on May 28. (Click here for
Japanese version.)

A working-level official covering automobiles at the Ministry of
Economy, Trade and Industry (METI) told us the report was to
address new fuel efficiency technologies for automobiles to be
implemented within the next five to ten years.

On the topic of fuel economy, in contrast to the Ministry of
Agriculture, the official noted METI is studying a realistic
introduction of bio-ethanol. He confirmed the current limit of
three percent ethanol in gasoline is the result of an
administrative ruling, thus a law would not have to be redone to
change the level.

He said that since Tokyo Governor Ishihara banned diesels from
the metropolitan region five years ago, there has been much
progress on clean diesels, which has helped METI's agenda to
educate the public about new clean diesels' promise. (ECON: Josh
Handler/Junko Nagahama)


12. (SBU) METI Auto Official on U.S.-Japan Auto Relations, Yen,
US FDI, EPA
--------------

The same working-level METI auto official also gave us his views
on the U.S.-Japan auto relationship. He stated the overall
relationship is positive as it has changed from confrontation to
cooperation, particularly in the areas of investment and next-
generation automobile development.

The official was not too worried about the controversy over the
yen while the Bush Administration is in office since, he said,
there was "positive understanding," especially by the Treasury
Department, noting it was mainly a concern of the manufacturing
sector.

On the topic of Japanese automakers investment in the United
States, the official observed that the State of Michigan had a
good relationship with Japanese automakers. For example, he had
seen during a recent trip to Michigan a TV commercial in which
Michigan's governor appeared with a Toyota official.

Community acceptance of Japanese automakers, trainable employees,
and good logistical locations for manufacturing as well as some
political factors affect the decision of Japanese automakers to
invest in certain regions, he said. The main concern of Japanese
automakers regarding investment in the United States is the
rising costs of manufacturing, particularly wages.

The official said much of his work involves automobile issues in
the various EPA and FTAs being considered by Japan. He said that
METI is very positive on the idea of U.S-Japan EPA. He mentioned,
however, that the concept of EPA introduced by former USTR
Zoellick which described EPA/FTAs to be a tool to strengthen the
strategic partnership of two countries with similar values
created some confusion. The prevailing industry view of EPAs is
that they are tools to simply lower tariffs. (ECON: Josh
Handler/Junko Nagahama)


13. (U) Next-Generation Shinkansen to Start Operation
--------------

On May 25, Nagoya-based JR Central had a ceremonial first run of
its next-generation shinkansen bullet train, the Series N700,
the first few of which are set to begin operation in early July.
The N700, which was jointly developed with JR West, will cut
about five minutes off the travel time from Osaka to Tokyo, no
small amount for a line that carries about 400,000 passengers on
an average day. The N700 also consumes 19 percent less power
than the current top of the line Series 700, largely due to its

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lighter weight and better aerodynamics.

Although the N700's maximum operation speed is 300 km/h, it will
top out at 275 km/h on the Osaka-Tokyo route, the same as the 700.

The N700 raises its average speed, though, through faster
acceleration and a body inclining system that allows it to
maintain higher speeds through curves.

From a passenger standpoint, the N700 is the first all smoke-free
seating shinkansen and adds electrical outlets at window seats
for computers. JR Central plans to add wireless internet
connectivity to the trains in spring 2009. (Nagoya: Dan
Rochman)


14. (SBU) LDP's Sugawara Talks about Healthcare Reform
--------------

On May 28, LDP Representative and Parliamentary Secretary for the
Ministry of Health, Labor and Welfare Isshu Sugawara spoke at an
ACCJ-sponsored lunch on Japanese healthcare reform.

Readily acknowledging the challenge Japan faces from its rapidly
aging population, Sugawara demonstrated savings expected from
reforms enacted in May 2006 for the period 2006-2025, projecting
cuts of up to 30 percent on pension payouts, healthcare costs and
welfare expenditures. Sugawara reported that a Japanese
patient's financial responsibility for his or her medical care
has gone from zero in 1973 to 30 percent by October 2006.

He noted that reforms slated for 2008 target so-called lifestyle-
caused diseases (for example, diabetes and some cancers) with the
goal of reducing them to 25 percent by 2015. During the same
period the government hopes to reduce hospital stays by half;
currently they average 36 days. This compares to an average stay
in the United States of 6.5 days.

Sugawara also noted that beginning in April 2008 the government
will establish a medical care system specifically for patients
aged 75 or older and a separate financial adjustment system for
those between 65 and 74. (Note: A recent Nikkei editorial argues
that reducing healthcare costs by increasing patients' burden is
reaching its limit and calls for increased efficiency in the
healthcare system.)

Sugawara argued in favor of prohibiting the so-called mixed
payment system (kongo shinryo) that would allow patients to
receive medical care not covered by Japan's National Health
Insurance (NHI) at the same time as care covered by NHI but pay
out-of-pocket only for the non-covered portion. Currently, a
patient receiving mixed care is responsible for the entire amount,
including the portion normally covered by NHI. Sugawara argued
that this system protects patients from the burden of excessive
medical expenses and prevents special treatment in medical
coverage.

Sugawara also argued that Japanese longevity is thanks to its
universal healthcare coverage although other experts contend that
diet is more likely the reason. (ECON: Joan Siegel)


15. (U) More Hospitals to Offer Fixed-Rate Services
--------------

The Health Ministry has announced it will triple the number of
hospitals that use a fixed-rate fee system by 2012. This would
allow about 1,000 or 10 percent of Japanese hospitals to charge
patients a fixed daily amount for the treatment of certain
diseases. The current system tempts hospitals to prescribe
unnecessary tests or drugs in order to increase income, whereas a
flat-rate system sets a single treatment fee according to ailment.

One of the goals of the program is to reduce state health care
costs and it should also curb patient out-of-pocket spending.
An Embassy contact argued that the system remains flawed, however,
because the flat rate will be charged on a per day basis rather
than for the entire course of treatment or hospital stay as is
the norm overseas. (ECON: Joan Siegel)


16. (SBU) U.S. and Japan Set to Talk About Beef
--------------


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The inspection of U.S. beef slaughter houses approved for export
to Japan wrapped up on May 26 with exit meetings in Omaha.

The Japanese inspectors uncovered no major problems that would
make it difficult to complete the "verification" process for the
deal worked out last summer to resume on a limited basis beef
exports to Japan.

The Japanese auditors will prepare a report that should be ready
by the end of next week. Japan and the United States are
currently discussing a draft "joint statement" that would end the
verification period and the current restrictive policy of
inspecting each and every box of imported U.S. beef. (ECON:
Nicholas Hill)


17. (SBU) Beef Trade: Moving to OIE Standards
--------------

The United States has continued to make clear that it would like
to see Japan's import procedures fall in line with international
standards after the Animal Health Organization (OIE) declared U.S.
beef safe earlier this month.

Before his May 28 suicide, Agriculture Minister Matsuoka told
reporters that the recent OIE decision "will not lead directly to
easing of import regulations." He indicated Japan's willingness
to review the OIE decision and pass it on to the Food Safety
Commission for a decision.

The Embassy has now passed the complete OIE dossier on U.S. beef
to Japan's Health and Agriculture Ministries for review. We
expect a series of experts' meetings to begin around mid-June.
Any decision on easing existing restrictions on U.S. beef would
have to be made by Japan's Food Safety Commission. (ECON:
Nicholas Hill)


18. (U) Japan's "Core" Consumer Prices Down 0.1% in April, 3rd
Consecutive Monthly Decline
--------------

Japan's nationwide "core" CPI, which excludes perishable food
items, fell 0.1 percent in April from the year before, marking
the third consecutive monthly decline, the Ministry of Internal
Affairs and Communications (MIC) announced May 25.

This result was in line with the market consensus forecast.
Overall CPI was unchanged in April from a year earlier. Also,
MIC provides an alternative "core" index for nationwide consumer
prices that excludes volatile items -- i.e. energy and all food
prices (except alcoholic beverages),a measure that is closer to
more commonly used international measures of underlying inflation.
This index remained in persistent decline, as the April year on
year decline was 0.2 percent. The alternative core CPI has
fluctuated in the -0.2 percent to -0.8 percent range since
November 2003. (FINATT: Shuya Sakurai)


19. (U) Evansville Mayor Leads Indiana Delegation
--------------

The Mayor of Evansville, Indiana, Jonathan Weinzapfel, led a 15-
member delegation in Japan May 25-31, on a tour to promote
economic ties.

The Evansville area in the southwestern part of the state already
has substantial Japanese investment, including a $2.8 billion
Toyota plant with over 4,700 employees.

During the visit, the delegation stopped in Tochigi, just north
of Tokyo, where Evansville has a sister city relationship. The
delegation included two U.S. companies interested in doing more
business in Japan, and working with FCS. (ECON: Nicholas
Hill/FCS: John Fleming)


20. (U) Hakuho Promoted to Yokozuna
--------------

Twenty-two year old Hakuho was promoted to the rank of Yokozuna
on May 30, marking the first time since 2003 that sumo has had
two grand champions. The Mongolian native officially became the
69th Yokozuna after the Japan Sumo Association's unanimous vote
to promote the winner of the last two Emperor's Cups. Hakuho

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resoundingly won the Tokyo bashyo with a stunning 15-0 record.
This contrasts with fellow Yokozuna Asashoryu's humiliating 11-4
performance. An Embassy observer on hand for part of the
tournament felt both awed by the youngster's performance and
pained by a great champion's downfall.

In his victory speech, Hakuho promised to "concentrate my spirit
and make every effort to pursue the way of sumo." (ECON: Sally
Behrhorst)


21. (U) Japanese Baseball Imports
--------------

Daisuke Matsuzaka's record surged to 7-2 as a starter for the
Boston Red Sox and Hideki Okajima's ERA plunged to 1.05 as the
team's top left-handed reliever.

Okajima recorded his fourth save on May 29 as Boston won its
fifth straight game to surge 14 + games up on the Yankees, with a
league-best record of 36-15.

Meanwhile, Seattle Mariners' center fielder, Ichiro Suzuki,
extended his hitting streak to 22 games, pushing his average to

333.

Kei Igawa surfaced in Scranton of the International League. The
Yankees' $46 million pick up has an 0-1 record at Scranton, with
a 7.20 earned run average. (ECON: Nicholas Hill)
SCHIEFFER