The Japan Economic Scope - June 7, 2007 - Part 1

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SUBJECT: The Japan Economic Scope - June 7, 2007 - Part 1

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1. (U) This cable contains part one of Japan Economic Scope from
June 7,

2007.

2.(SBU) Table of Contents


3. VFM Yachi on FTA, WTO, Agriculture

4. Bilateral Investment Working Group Business Outreach; FTA,
Transparency, DHS

5. Asia Pacific Business Leaders Discussed Regional Economic
Issues

6. Reappointment of JFTC Chairman Moves to Diet

7. Regulatory Reform Report to Leaders Released

8. Release of 2007 Investment Report to Leaders

9. The "Labor Big Bang," Reform, and the CEFP

10. New IPR Promotion Strategy Eases Rules in Some Areas, Beefs-
up Enforcement in Others

11. Conference on Coordinated Energy Security Measures (U)

12. Official Development Assistance (ODA) and Emission Trading

13. Mishandling of JPEX Trade Information Raises Concerns

14. Akagi Named Agriculture Minister after Predecessor's Suicide

15. New Agriculture Minister Wants Active Role for Japan in Doha
Talks

16. New Ag Minister Echoes Predecessor's Cautious U.S. Beef
Position

17. CPRR Committee Report Has Little to Say about Agricultural
Reform

18. LDP Ag Caucus Not Enthusiastic about Calls for Reform,
Accelerated Trade Liberalization

19. U.S. -- Japan FTA Discussed at Tokyo American Center Event


3. (SBU) VFM Yachi on FTA, WTO, Agriculture
--------------

On June 1, Ambassador Schieffer and Vice Foreign Minister Yachi
discussed a range of bilateral issues, including thoughts about a
possible bilateral FTA, the WTO, and agricultural trade. See
Tokyo 2481 for details. (ECON: Marc Dillard)


4. (SBU) Bilateral Investment Working Group Business Outreach;
FTA, Transparency, DHS
--------------

The Investment Working Group (IWG) of the U.S.-Japan Investment
Initiative met on May 28 in back-to-back sessions with
representatives of the American Chamber of Commerce in Japan
(ACCJ),Nippon Keidanren and the U.S.-Japan Business Council
(USJBC) to hear business views on the overall investment climate
in each country and the adequacy of existing provisions in each
country's bilateral investment agreements. The IWG hopes this
will be the first in a series of meetings with the private sector
that can identify future areas of work.

Although not every issue that the private sector raised falls
within the scope of the Initiative's work, much of the discussion
in all three sessions focused on issues already taken up by the
IWG or in other bilateral talks.

ACCJ members emphasized the importance of transparency in
regulatory rule-making, characterizing Japan's current system as
one of "strict enforcement of vague regulations." They
recommended the transparency chapter of the recent KORUS
agreement as a model for a future U.S.-Japan FTA.

ACCJ also pushed for expanded mutual recognition agreements,
particularly in the areas of medical devices and renewable energy
and urged the IWG to look at expanding the types of M&A
transactions available in Japan. In addition to encouraging more
FDI, an expanded merger regime could provide a solution to the
problem of Article 821.

Keidanren staff explained the Federation's formal position in
favor of a bilateral study of a U.S.-Japan FTA. Member companies
urged the two governments to ensure that a future FTA had
workable rules of origin. Several speakers commended the NAFTA
agreement as a model in this area.

Keidanren members expressed deep concerns about DHS's "24-hour
rule," which they claimed added two days to average shipping

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times. Many Japanese companies, they noted, worked almost 10
years to improve their logistics systems to reduce shipping times
by that same amount and those efforts were now all but wasted.
USJBC echoed Keidanren's concerns about the 24-hour rule. In
formulating new cargo security rules, they urged governments to
take a broad perspective, seek greater harmonization of IT
systems and build a common platform for collection and analysis
of critical customs information.

The Council also encouraged the IWG to look for ways to improve
Japan's slow and cumbersome process for regulatory approval of
drugs and medical devices, an area in which U.S. and Japanese
firms have similar views.

Council members noted the need for greater flexibility in labor
markets as a way to increase productivity and enhance business
competitiveness. They expressed disappointment that the Japanese
cabinet's recent proposal to expand the white-collar exemption
had been postponed "for political reasons" and urged both
governments to keep working in this area. (ECON: David
DiGiovanna)


5. (U) Asia Pacific Business Leaders Discussed Regional Economic
Issues
--------------

The APEC Business Advisory Council (ABAC),the permanent senior
business sector advisory council for APEC member economies, held
its second meeting for 2007 in Tokyo between May 30 and June 1.
ABAC discussions focused on further advancement of regional
economic integration, businesses' response to climate change and
enhanced energy security, including conservation and efficiency
measures. ABAC members also noted that they still viewed
successful conclusion of the Doha Development Agenda as critical
for global growth and expressed concern over the delay in the
negotiation.

ABAC will finalize its Report to APEC Economic Leaders by the end
of July, and present it to the leaders in August. For the SOM
III and Trade Ministerial (MRT) Meeting, an abridged version of
the Report will be submitted.

In the meantime, ABAC Japan informally decided to appoint
Yoshihiro Watanabe, Senior Managing Director of the Mitsubishi
UFJ Financial Group, as a new member. Watanabe will succeed
Yasuo Kanzaki, Special Advisor of Nikko Citigroup, who will end
his three-year term after the APEC Finance Ministers' Meeting in
early August. (ECON: Satoshi Hattori)


6. (SBU) Reappointment of JFTC Chairman Moves to Diet
--------------

The LDP has approved the Prime Minister's decision to reappoint
Japan Fair Trade Commission Kazuhiko Takeshima for another five-
year term, according to press reports.

Action on Takeshima's reappointment now moves to the Diet, where
he will need approval from both houses before the end of the
regular session this month. During his tenure, Takeshima
shepherded the 2005 amendments to the Antimonopoly Act that
substantially strengthened the powers of the JFTC by increasing
the rate of punitive surcharges that the Commission could apply
to cartel members, instituting a leniency system that encouraged
companies to bring forward evidence of bid-rigging activities,
and allowing the JFTC itself to receive and execute search
warrants.

His reappointment signals Abe Administration determination to
support the JFTC's role as a robust competition authority.
Takeshima will also now be available to advocate for even great
powers for the JFTC during the legislatively mandated review of
the 2005 Antimonopoly Act amendments by the Diet in the regular
session that begins in January 2008. (ECON: Chris Wurzel)


7. (SBU) Regulatory Reform Report to Leaders Released (
--------------

Long negotiations concluded with Japan and the United States
issuing a 76-page Report to the Leaders June 6 before the meeting
of President Bush and Prime Minister Abe at the G-8 Summit in
Germany. It is the sixth annual report the two countries have

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completed since launching their Regulatory Reform and Competition
Policy Initiative in 2001.

Highlights of steps that have been taken or commitments for
future steps made by Japan include:

Implementing plans to speed introduction of new drugs through
measures such as more than doubling the number of drug reviewers;
Opening new investment opportunities by permitting triangular
mergers using foreign shares and monitoring the effectiveness of
related tax deferral conditions;

Ensuring that Japan Post's new financial entities meet the same
obligations and standards as those of private financial
institutions when they sell new or altered financial products;
For more information, click to see the Sixth Report to the
Leaders and supporting fact sheets. (ECON: Nicholas Hill based
on the USTR fact sheets)


8. (U) Release of 2007 Investment Report to Leaders
--------------

The 2007 Report to Leaders of the Bilateral Investment Initiative
was released on June 6.

In addition to updates on discussions of U.S. and Japanese
investment concerns, this year's report also summarizes the
results of the February meeting of experts on investment
agreements at which the two sides exchanged their views and
experiences on their respective investment agreements. Please
click here to view the whole report. (ECON: David DiGiovanna)


9. (SBU) The "Labor Big Bang," Reform, and the CEFP
--------------

Council on Economic and Fiscal Policy (CEFP) private sector
member Naohiro Yashiro recently shared with us his outlook on
major labor reform proposals, the six labor bills submitted to
the current Diet session, reform plans after the Upper House
elections, and the inner workings of the CEFP. See Tokyo 2464
for details. (ECON: Marc Dillard)


10. (U) New IPR Promotion Strategy Eases Rules in Some Areas,
Beefs-up Enforcement in Others
--------------

The IPR Promotion Program for 2007 adopted by the Cabinet on June
1 stresses a new focus on four priority areas: the environment,
medical services, IT/telecommunications, and nanotechnology. The
Intellectual Property Strategy Headquarters' will develop
specific strategies for each of these areas in the next year.

The new program highlights the importance of nurturing and
promoting Japanese content abroad, from anime to food.

The program recommends easing copyright laws to promote internet
TV programming and to enable Japanese companies to develop search
engines.

The program envisions a comprehensive international standards
strategy so that Japanese industrial products become global
standards.

On the enforcement side, the program endorses speedy adoption of
the Anti-Counterfeiting Trade Agreement (ACTA),measures to
prevent online piracy of movies and music and a ban on
advertisement for pirated products. (ECON: Marilyn Eresefsky)


11. (U) Conference on Coordinated Energy Security Measures
--------------

On April 17-19 the Asia-Pacific Center for Security Studies
(APCSS) and the Japan Institute of International Affairs (a
think-tank affiliated with the Japanese Ministry of Foreign
Affairs) co-hosted the "Energy Security Cooperation in the Asia-
Pacific Conference," which was attended by 41
participants/observers from Australia, China, Japan, Kazakhstan,
Lithuania, Panama, ROK, Russia, and the United States.
The conference was conducted at the initiative of U.S.
Ambassador Thomas Schieffer to improve cooperation on energy
security issues in the Asia-Pacific region and establish a forum

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where collective measures can be taken to promote energy security.


Specific objectives included:

Develop a framework for characterizing dimensions of Asia-Pacific
energy security; geological, technological, political, economic
and environmental;

Identify areas for coordinated institutional and policy action;

Re-examine existing, and formulate fresh, regional approaches to
energy management for better multilateral governance; and
Articulate effective strategies and instruments for
concerted and sustained cooperative action.

In his keynote address, Ambassador Schieffer underscored that no
issue was as important to Asia as the development of coordinated
policies on energy and the environment. Further, that this forum
recognized that energy -- its security, stability and
deliverability -- drives much of our respective foreign policies,
thus it was vital that we explore new ways to look beyond our
differences toward solutions.

Working groups in the conference produced a set of policy
recommendations on energy transportation, nuclear energy
management, and investment and conservation, as well as voicing
support for a strategic energy dialogue and the use of regional
forums/organizations to promote energy cooperation. A copy of
the executive summary can be obtained from Ayanna Hobbs. (EST:
Ayanna Hobbs)


12. (SBU) Official Development Assistance (ODA) and Emission
Trading
--------------

A wind-powered electric generation plant, currently under
construction in Egypt's Red Sea region through a 13.5 billion yen
JBIC loan, will likely be approved as an ODA-supported Clean
Development Mechanism (CDM) project to help reduce greenhouse gas
emissions, according to a MOFA contact.

As part of its national strategy to cope with global warming,
Japan is seeking new long-term financial mechanisms to combat
global warming in developing countries, and the OECD approved in
2004 the use of ODA in the transfer of emission trading rights
under the condition that the country that offers ODA will not
directly acquire the rights. (A private company from that
country, however, can be the purchaser.)

Our MOFA contact verified that the Japan Bank for International
Cooperation (JBIC) has submitted an application to the CDM
Executive Board under the United Nations Framework Convention on
Climate Change (UNFCCC),and he believes the application is very
likely to be officially approved at the CDM Executive Board
meeting on June 20. (ECON: Eriko Marks)


13. (SBU) Mishandling of JPEX Trade Information Raises Concerns
--------------

A June 1 press report claiming that the Japan Electric Power
Exchange (JEPX),which was established in 2005 to facilitate
competition in the electricity market, inappropriately leaked
trade information is misleading, according to a contact in the
Electricity Market Division at the Agency for Natural Resources
and Energy (ANRE).

The article claimed that data on wholesale trading, including how
much, when and from whom firms bought electricity, was sent to
businesses uninvolved in the transaction and could give an
advantage to major electricity companies while hindering new
market entrants, and that METI will issue a written warning to
JEPX and major power companies in connection with a violation of
the Electricity Enterprises Law.

Our ANRE source explained that, under the new electricity regime,
if electricity in the Kansai region is sold to the Kanto region,
it is transmitted through power cables owned by Kansai Electric
Power, Chubu Electric Power and Tokyo Electric Power and each
company receives relevant trading information from JEPX. The
incident described in the press involved JEPX sending the

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information to additional companies uninvolved in the transaction.


The ANRE official declared that this was not a violation of the
Electricity Enterprises Law. He said, however, that ANRE has
asked JEPX to improve its control of information and has also
notified companies participating in the exchange of this request.
JEPX has promised to update its computer system by the end of
June.

On a related note, the press article speculated that the Japanese
practice of managing power generation, transmission and retail
within one company -- which differs from the United States and
Europe -- could come under fire again, but our ANRE source
disagreed. After the blackout in California in 2001, he said,
the argument for separating the three divisions disappeared out
of concern for ensuring a stable supply of electricity. (ECON:
Eriko Marks)


14. (SBU) Akagi Named Agriculture Minister after Predecessor's
Suicide
--------------

After a difficult search, Norihiko Akagi was named Japan's new
Agriculture Minister on June 1. The 48 year-old, six-term Diet
member from Ibaraki Prefecture replaces Toshikatsu Matsuoka, who
committed suicide days earlier in the face of growing corruption
allegations.

Young by the standards of Japanese cabinet ministers, Akagi is
not well known to the public. In explaining the appointment on
June 1, Chief Cabinet Secretary Shiozaki told reporters that PM
Abe selected Akagi in part because "he understands Japan's
agricultural policies and Japan's place in the world," and would
be effective in representing Japan's national interests.
Speaking to the press after his appointment, Akagi acknowledged
that he was arriving in office at a critical moment. He told
reporters he would basically follow the "footsteps" of his
predecessor, Matsuoka, and do his best to develop a strong
farming sector.

The new minister added that he also wanted to follow climate
change issues closely. (ECON: Nicholas Hill)


15. (SBU) New Agriculture Minister Wants Active Role for Japan
in Doha Talks
--------------

New Agriculture Minister Akagi said he was prepared to play a
role in WTO talks, and offered to fly to Europe where key WTO
member states -- the United States, EU, India, and Brazil -- are
set to meet on June 19.

Echoing a theme we have heard frequently from other GOJ officials,
Akagi told reporters on June 5 that "Negotiations without Japan,
the world's largest food importer, are by no means acceptable."
Akagi likened his participation in Doha negotiations at this
stage to jumping on an express train charging along at full speed
just before the final corner. Akagi told reporters that WTO
talks and FTA talks should play a complementary role in Japan's
trade policy.

Akagi is known to be wary about offering substantial
liberalization in Japan's current economic partnership (EPA)
talks with Australia.

In his first days in office, Akagi spoke with Agriculture
Secretary Johanns and U.S. Trade Representative Schwab.

SIPDIS
For more on Akagi, including his most recent meeting with an
Embassy official, please see Tokyo 2463. (ECON: Nicholas Hill)


16. (SBU) New Ag Minister Echoes Predecessor's Cautious U.S.
Beef Position
--------------

The United States and Japan continue to work through some
difficult issues before Japan will be in a position to open its
market further to U.S. beef, but there is no reason to expect a
big push from incoming Agriculture Minister Akagi.

Moments after he got off the phone with Agriculture Secretary

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Johanns on June 5, the Agriculture Ministry released a press
statement about their discussion of the beef issue. Akagi told
Johanns that Japan was "in no hurry" to ease restrictions on U.S.
beef to make them consistent with those recommended by the World
Animal Health Organization last month.

Meanwhile, at the working level, the two sides continue to follow
up on the audits that Japanese inspectors conducted at U.S.
slaughter facilities in late May, with a joint statement expected
to be issued around June 15.

Separately, the Japanese press has reported the story out of
Seoul that the Korean government has shut down beef trade with
the United States over some violations detected in the bilateral
export agreement. So far, the Embassy has not been contacted yet
by GOJ officials seeking more information about the incident.
(ECON: Nicholas Hill)


17. (SBU) CPRR Committee Report Has Little to Say about
Agricultural Reform
--------------

The Prime Minister's Council for the Promotion of Regulatory
Reform had relatively little to say about agricultural reform.
Released on May 30, the Council's report indicates that a number
of agriculture-related issues will be taken up in the future.

This is consistent with what a CPRR member told us on May 25,
when he indicated that a number of difficult agricultural issues
would be revisited after Upper House elections in July.

The CPRR Report indicated that the Council intends to take up "in
the future" farmland reform and other policies designed to boost
productivity in the farm sector.

These include the operations of Japan Agriculture (JA),the large
institution that serves as the lobbying arm of Japan's small
farmers. JA has been accused of wielding too much market power
over key aspects of farmers' operations. (ECON: Nicholas
Hill/Ryoko Nakano)


18. (SBU) LDP Ag Caucus Not Enthusiastic about Calls for Reform,
Accelerated Trade Liberalization
--------------

Japan should not "succumb to this overzealousness by academics
gripped with liberalization fever." According to the Japan
Agricultural News, that is how LDP agriculture Diet members
reacted to the recommendations of the CEFP working group looking
at Japan's agriculture and FTA policies.

When the LDP Policy Research Council convened on June 5th to
discuss the draft Basic Policies Report of the Council on
Economic and Fiscal Policy, a representative for the agriculture
Diet members reportedly expressed concern about draft language on
joint FTA studies between U.S. and Japan, as well as those in
favor of starting preparations for an EU-Japan FTA.

The members were wary about across-the-board cuts in tariff rates
ranging from five to ten percent and the abolishment of the gate
price system (e.g. currently used for pork),in which importers
must pay the difference between the shipment's value and the
minimum price set by the government

A broader group of Diet members, coming from three different
agriculture-related committees, also expressed concerns when they
met on June 6 to discuss the CEFP working group recommendations
(covered in earlier editions of the Scope).

Absent stronger political backing, the draft Basic Policies
Report under consideration does not cover especially sensitive
proposals -- including allowing stock for land swaps to encourage
land consolidation; reviewing farmland tax policies; and
facilitating more foreign guest workers for the farm sector.

Moreover, Agriculture Minister Akagi said in the Diet on June 6
that the CEFP Basic Policies Report should not include any text
that offered any "prejudgments" on WTO and EPA negotiations. The
decision on the final Basic Policies Report is expected to be
made by June 19.


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The Agriculture Ministry (MAFF) is expected to issue its own
report on agricultural reform in the fall. (ECON: Nicholas
Hill/Ryoko Nakano)



19. (U) U.S. -- Japan FTA Discussed at Tokyo American Center
Event
--------------

A free trade agreement between the United States and Japan would
boost combined GDP by about $125 billion a year and create
momentum to a broader APEC-wide free trade framework. That is
what Scott Bradford, Associate Economics Professor at Brigham
Young University, said at an event organized at the Tokyo
American Center on June 6.

The prospect that the two countries would launch talks, Bradford
said, hinged on a number of factors, including whether Congress
passes the U.S. -- Korea FTA and whether Japan and Australia can
conclude their own ambitious deal.

Another factor that will affect the debate is whether Korea and
the European Union make headway on their own talks. Because
trade barriers are higher in the EU than in the United States,
Bradford said, a Korea -- EU deal would be an even bigger concern
for Japan's business community.

Bradford acknowledged that a bilateral deal could hurt some
developing countries. At the moment, Japan's trade patterns are
more reliant on developing countries than are those of most other
rich countries.

Responding to a question from a Keidanren official, Bradford said
that while there is interest in the U.S. business community for
an FTA with Japan, interest in Congress was lukewarm,
particularly among the Democrats, who are more protectionist in
orientation.

The same Keidanren official asked what affect a U.S. -- Japan FTA
would have on the broader goal of an APEC-wide FTA. Bradford
said that it could serve as a stepping stone for some sort of
regional framework.

Bradford emphasized that a successful Doha deal should remain the
number one trade priority for the United States. (ECON: Ryoko
Nakano)
SCHIEFFER