JAPAN RECONSIDERS U.S. ROLE IN REGIONAL

C O N F I D E N T I A L SECTION 01 OF 05 TOKYO 002715

SIPDIS

SIPDIS

STATE PASS USTR FOR AUSTR CUTLER
USTR ALSO FOR BEEMAN/MEYERS, NEUFFER
PARIS FOR USOECD
TREASURY FOR OFFICE OF EAST ASIAN NATIONS
COMMERCE FOR OFFICE OF JAPAN - NMELCHER
BERLIN FOR EMIN CEKUTA

E.O. 12958: DECL: 06/15/2027
TAGS: ECON ECIN ETRD PREL APECO JA
SUBJECT: JAPAN RECONSIDERS U.S. ROLE IN REGIONAL
INTEGRATION; BILATERAL FTA

REF: TOKYO 2481

Classified By: Ambassador J. Thomas Schieffer. Reason: 1.4 (b,d).


1. (C) Summary: In contrast to a year ago, Japanese
officials see the United States as a much more active and
influential player in the discussion on regional economic
integration. A senior official of the Ministry of Foreign
Affairs (MOFA) indicated that Japan's participation in
various regional integration schemes is largely a "facade,"
with the main focus really on more substantive bilateral
economic agreements. Japanese support for ASEAN-driven
regional proposals aims at buying time during which Japan can
avoid having to choose among regional architectures dominated
by other players. The Ministry of Economy, Trade, and
Industry (METI) takes a more positive view of economic
integration, particularly the once-taboo idea of free trade
agreements with the United States and other developed
countries, but is balking at the idea of a Japan-China FTA.
Private experts confirm that the economic impact of Japan's
current set of agreements is limited and argue that it should
start negotiations with China on an FTA soon while its
negotiating leverage remains relatively strong. End summary.

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The Context: FTAAP and KORUS FTA Put U.S. Back in the Game
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2. (C) As part of the regular consultations of the three
Northeast Asia Chiefs of Mission, the economic
minister-counselors of Embassies Tokyo, Seoul, and Beijing
met June 7 in Tokyo with a series of interlocutors from MOFA,
METI, the private sector, and academia on the topic of
regional economic integration. This year's consultations
took place in a substantially changed policy environment. In
April 2006, the Japanese government, anxious to offer an
alternative to the Chinese-sponsored study on a regional
economic agreement centered on ASEAN Plus 3, endorsed the
concept of the "Comprehensive Economic Partnership with East
Asia" (CEPEA) formulated at METI under the direction of then
METI Minister Toshihiro Nikai, which would include the 10
countries of the ASEAN Plus 3 group along with Australia, New
Zealand, and India (the so-called "ASEAN Plus 6"). At that
point in time, the Japanese had determined that U.S interest
and involvement in East Asian economic integration was
waning.


3. (C) Times have changed. The U.S. proposal that APEC
take on the long-term goal of establishing a Free Trade Area
of the Asia-Pacific and, most importantly, the successful
negotiation of a draft KORUS FTA has forced the Japanese to
recognize the United States as once again an active player in
process of economic integration in East Asia. In particular,
the Japanese government, under pressure from Japanese
business groups worried by strengthened Korean competition in
the U.S. arising from the KORUS FTA, has moved incrementally
toward the previously taboo idea of launching a formal study
of a U.S.-Japan free trade agreement. In recent private
meetings with a number of METI and MOFA officials, including
those cited in this cable, a bilateral FTA is now typically
discussed as an inevitability, not a possibility, while
hinging in the short term on the outcome of the July Upper
House elections.

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MOFA: Regional Initiatives Simply a "Facade"
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4. (C) In his June 7 meeting with the three
minister-counselors, MOFA Economic Affairs Deputy Director
General Sumio Kusaka noted that Japan had traditionally seen
its relations with the United States and the other rich OECD
countries and its ties to the less developed states in Asia
as two separate "pillars" of its external economic policy.
Although this concept remained the basis of Japanese policy,
Kusaka said, this distinction, in practice, had become

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blurred over time as Japan's "indirect" economic relationship
with the developed world through the fragmented regional
production chains of Japanese firms had become increasingly
important. In addition, efforts toward greater cooperation
between Japan and its neighbors had been "eroded" by the poor
political relationship particularly with China and South
Korea during the tenure of former Prime Minister Koizumi.
The United States and Japan shared the goal of a more stable,
prosperous, and democratic East Asia, Kusaka asserted, but
also hinted that U.S. and Japanese approaches to the region
might necessarily differ.


5. (C) In particular, Japan's thinking with respect to
regional economic integration, according to Kusaka, was to
let ASEAN take the lead. Japan, he stressed, could not
ignore movement toward a regional economic agreement led by
China, but the U.S. proposal for an FTAAP was simply too
distant a prospect to address Japan's near-term concerns.
Consequently, Japan sought to strengthen links with ASEAN as
a way of counterbalancing China's growing influence in the
region. That said, Kusaka added, it would be a mistake to
think that the Japanese government was inextricably wedded to
the CEPEA ("ASEAN Plus 6") proposal. "Maybe the ministry
across the road (i.e. METI) said that," Kusaka observed, but
such an arrangement, he noted, could be even more difficult
to realize than the FTAAP or any of the other proposals
currently in circulation.


6. (C) According to Kusaka, the appeal of the ASEAN Plus 3
or ASEAN Plus 6 proposals lies in their possible contribution
toward realizing the political goal of an eventual "East
Asian Community." In terms of actual economic benefit to
Japan, however, they would likely yield little, he
acknowledged. Even the Japan-ASEAN economic agreement
currently under negotiation, which Japan hoped to conclude by
December, would have no value added to trade liberalization,
he said. In fact, these regional efforts, Kusaka said, were
really only a "facade." Japan's bilateral "economic
partnership agreements" were all much deeper and more
economically beneficial to Japanese interests, Kusaka
stressed.


7. (C) Kusaka indicated that what Japan gained through its
support for ASEAN-centered regional initiatives, however, was
time -- time during which it will not be forced to choose a
model of regional integration determined by others. At
present, he noted, the Japanese government itself lacked a
clear consensus of what the next steps toward regional
integration should be. He cited as an example the Ministry
of Finance (MOF) which had been enraged by the METI-driven
CEPEA proposal because it undermined MOF's support for the
Chiang Mai and Asian Bond Market Initiatives, both of which
centered on the ASEAN Plus Three countries.

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U.S.-Japan Integration Inevitably but Slow
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8. (C) Second North American Affairs Division Director
Koichi Mizushima reinforced Kusaka's points by emphasizing
that Japan did not want to be bound to any particular model
of economic integration. Mizushima recounted a meeting he
had had with representatives of the Japan Business Federation
(Keidanren) who had asked whether the Japanese government
believed a regional economic framework excluding the United
States was possible. Mizushima asserted that Japan's
participation in the discussions of regional integration
proposals that exclude the United States were primarily a way
to keep good relations with its neighbors by expressing
support for the Asian community concept. The economic basis
for an effective Asia-only agreement does not exist.


9. (C) At the same time, however, Mizushima believed
progress toward greater integration between Japan and the
United States would inevitably be slow because of the need to
address complex structural "behind the border" issues rather

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than the simpler task of just cutting tariffs. Although
acknowledging the pressure from business to shore up the
relationship with the United States in light of the KORUS
agreement, Mizushima said that the "sandwich argument" of
being caught between two larger economies, which had led to
support in Korea for the FTA with the United States, would
obviously not work in Japan. That said, Kusaka noted the
"positive" discussion of a bilateral U.S.- Japan FTA during
the Prime Minister's April 2007 meeting with the President.
Separately, as reported reftel, VFM Yachi repeatedly has
suggested the two countries consider launching a study of a
bilateral FTA.

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METI: Integration Should Include Large Economies
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10. (C) The KORUS FTA has freed up discussion of the
possibility of Japan beginning talks with other large
developed economies, including the United States, according
to Trade Policy Director General Masakazu Toyoda. Also
meeting with the economic minister-counselors on June 7,
Toyoda said METI appreciated the "stimulation" provided by
KORUS to the debate in Japan on a possible U.S.-Japan FTA,
but he acknowledged that other agencies, notably the Ministry
of Agriculture, Forestry, and Fisheries (MAFF),did not share
METI's perspective. The reason that most of Japan's existing
"economic partnership agreements" have been concluded with
developing Asian countries is because, even though Japan
could expect relatively little from these countries in terms
of concessions on services, investment, and intellectual
property protection, they also did not make too many demands
on Japan to liberalize agricultural trade. From the METI
perspective, however, Japan now needed to reach out to more
developed economies both to ensure its access into major
markets and, especially in the case of the Japan-Australia
agreement under negotiation, to shore up Japan's supplies of
essential commodities like coal and iron ore.


11. (C) A broad regional agreement like the METI-sponsored
CEPEA in combination with an eventual bilateral FTA with the
U.S. would contribute to the eventual realization of the
FTAAP proposed by the United States, Toyoda argued. In
contrast, an ASEAN Plus 3-based arrangement dominated by
China and centered on tariff reductions only would probably
not generate the degree of liberalization needed to allow for
eventual U.S. participation. The addition of Australia, New
Zealand, and India -- all three of which are already engaged
in bilateral negotiations with ASEAN -- will strengthen
movement toward more a more meaningful agreement. Even
India, although difficult on trade, would bring to the
discussions a relatively strong regime with respect to
intellectual property protection and services, Toyoda noted,
and effectively raise the level of ambition of the ASEAN Plus
6 undertaking vis-a-vis the ASEAN Plus 3 version.


12. (C) Within Northeast Asia, however, although the
Chinese, Japanese, and Korean leaders had endorsed both the
launching of negotiations on a three-way investment agreement
and a study on a possible free trade agreement during their
meeting in January, Toyoda indicated that greater integration
among the three major economies of the region remains
problematic. China, he said, was reluctant to accept the
terms of the "almost perfect" Japan-Korea investment
agreement that would form the basis of the three-way pact.
In addition, the Japanese themselves were unenthusiastic
about the idea of a free trade agreement with China.
According to Toyoda, not only was MAFF worried about the
prospect of increased Chinese agricultural imports, but METI
itself had concerns about the extent to which hidden
subsidies might give Chinese manufactured products an
advantage in the Japanese market. As for the stalled
Japan-Korea bilateral free trade agreement negotiations,
Toyoda voiced the opinion that, while most observers had
focused on Japanese unwillingness to meet the Koreans' demand
that Japan liberalize 90 percent of its agricultural trade,

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the Koreans, in the METI view, harbored concerns over
competition from Japanese manufacturers as well that had led
to the impasse in the talks.


13. (C) As for the United States, Toyoda asked that the USG
continue to advocate for the Free Trade Area of the
Asia-Pacific while at the same time pursuing its bilateral
negotiations with other Asian countries such as Malaysia. He
hoped for quick congressional approval of KORUS as a boost
for trade liberalizers in Japan. Toyoda also suggested the
United States should consider arranging for private experts
to study the feasibility of a U.S.-Japan free trade agreement.

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Private Analysts: Japan Needs Agreement with China
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14. (SBU) According to Keio University Professor Fukunari
Kimura, an expert on regional integration, the reason for the
difficulty in achieving greater integration among the three
Northeast Asian economies lies mostly with Japan, which is
hesitant to negotiate an economic agreement with China. He
cited three types of Japanese interests that would resist
free trade agreement negotiations with China: farmers who
hope to maintain their sheltered markets, manufacturers that
want to gain greater investment protections from China before
liberalizing trade, and individuals worried about adding to
China's growing geo-strategic influence. As a result, even
the three-way investment agreement will take 2-3 years to
negotiate, Kimura estimated. Nevertheless, Nomura Securities
economist C.H. Kwan noted that several studies had shown that
the economic benefits of a China-Japan free trade agreement
outweighed those of any other possible arrangement because of
the large size of the two economies, their complementarity,
and the high tariffs maintained by China on a number of
goods. Both Kimura and Kwan believed that the sooner Japan
began negotiations on an free trade agreement with China the
better as Japanese leverage would decline as China's rapid
economic growth continued.


15. (SBU) As for Japan's other "economic partnership
agreements," Kimura indicated that his research had shown
them to be of little significance. Because Japan had chosen
the trade volume rather than tariff line modality, the
agreements generally covered less than 90 percent of tariff
lines. Even the agreement with Australia currently under
negotiation will have a relatively small economic impact. In
Kimura's view, agreements that improve the investment climate
in the region hold more potential for stimulating economic
growth in the region than measures aimed at liberalizing
trade in goods.

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Comment: Now That We Have Their Attention....
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16. (C) Although China's growing regional influence remains
foremost in the minds of our Japanese interlocutors, it is
clear that events over the past year have reaffirmed to them
U.S. determination to have a role in whatever regional
economic architecture emerges in East Asia. For their part,
however, the Japanese have yet to achieve a consensus among
themselves on what the architecture should look like and want
to keep their options open. Although the Japanese will
continue to make positive noises regarding the Asians-only
models for regional architecture to show solidarity with
their neighbors, the KORUS agreement in particular has raised
the question of whether an agreement, either regional or
bilateral, that includes the United States is not only
possible but perhaps even necessary for Japan.


17. (C) In recent private discussions with MOFA and METI
officials, including some of those cited above, the ease with
which a possible FTA with the U.S. is discussed has become
astounding. A year ago the topic was taboo; even six months
ago the most favorably inclined raised the notion only with

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great caution. Now it is casually bandied about in private
conversation as an inevitability. Publicly, however, the
topic is still handled with great care due to political
sensitivities especially in the agricultural community. If
the Upper House elections reaffirm an Abe administration, we
expect the GOJ will approach us on an FTA, perhaps as VFM
Yachi did to propose a joint study.
SCHIEFFER