The Japan Economic Scope Part 1 - June 21, 2007

UNCLAS SECTION 01 OF 06 TOKYO 002831

SIPDIS

PARIS PLEASE PASS TO USOECD
STATE PLEASE PASS TO USTR

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope Part 1 - June 21, 2007

Sensitive but unclassified. Please protect accordingly.


1. (U) This cable contains part one of the Japan Economic Scope
from June 21, 2007. See septel for part two.

2.(SBU) Table of Contents


3. Ambassador Schieffer on U.S.-Japan Economic Relations

4. JUSBC Chair Called for Enhanced Cooperation for US-Japan FTA

5. Japan and Doha Talks

6. Japan Signs "Economic Partnership Agreement" with Brunei

7. Japan's Views on U.S. Role in Regional Integration and
Bilateral FTAs

8. Japan Still Dragging Feet on Ag Tariff Caps?

9. Beef Talks Start June 27

10. Beef Risk Communication Meeting in Tokyo a Yawner

11. GOJ Urged to Increase ODA Budget to Strengthen Diplomacy

12. Speedy Yen Loan Process

13. Cabinet Approves CEFP Basic Policies for Economic and Fiscal
Management

14. Japan Post, Sale of the Century

15. Rise in Part-time Workers Despite Falling Unemployment Rate

16. Stormy Shareholder Meeting Season Raises Renewed Concerns
Over Foreign Funds

17. Recent Major Economic Indicators


3. (U) Ambassador Schieffer on U.S.-Japan Economic Relations
--------------

Ambassador Schieffer's address to the Yomiuri International
Economic Society on June 15 covered the U.S.-Japan economic
relationship. See the Embassy's website for the text of the
speech.


4. (SBU) JUSBC Chair Called for Enhanced Cooperation for US-
Japan FTA
--------------

On June 15, EMIN Hans Klemm met Junichi Ujiie, Chairman of the
Japan-U.S. Business Council (JUSBC)/Chairman of Nomura Holdings.
Concerning positive changes in public opinion on the prospects of
a U.S.-Japan FTA during the past year, Ujiie said "we were
lucky." There were no significant economic/trade problems
between the two countries. He realized the objective of an FTA
will require tremendous energy and commitment. Ujiie encouraged
the Embassy and JUSBC to maintain good relations and assist each
other in their consideration of an FTA.

Ujiie said that, not withstanding what officials at the Trade
(METI) and Foreign (MOFA) Ministries may be saying about a
possible FTA with the United States, there are still big
obstacles posed by the agricultural sector and the support
network LDP politicians provide.

Ujiie also addressed the two governments' rising interest in
climate change and said that Japanese businesses are very happy
about this direction. (ECON: Satoshi Hattori)


5. (SBU) Japan and Doha Talks
--------------

Japan has made no secret of its desire to be included in the
small group of key countries trying to iron out a deal to bring
the Doha Trade Round to a successful conclusion. Trade Minister
Amari and newly minted Agriculture Minister Akagi had been scheduled

to participate in G-6 talks on June 23 after a critical set of G-
4 meetings conclude.

However, A MOFA contact told us that the political situation in the

Diet forced Akagi to cut short his European trip, where he had been

in Geneva, and return to Tokyo on June 21, and cancelled plans to
return after the G4 outcome.

For more on Japan's posture with respect to the G-4 process,
including what LDP Agriculture Policy Chairman Tadamori Oshima
had to say on the subject during a June 15 meeting with the
Ambassador, see Tokyo 2717. Also, EMIN Hans Klemm discussed Doha
with MOFA DG for Economic Affairs, Yoichi Otabe, on June 18. See

TOKYO 00002831 002 OF 006


Tokyo 2742. (ECON: Nicholas Hill)


6. (U) Japan Signs "Economic Partnership Agreement" with Brunei
--------------

Japanese Prime Minister Shinzo Abe and Brunei's Sultan Hassanal
Bolkiah signed an "economic partnership agreement" (EPA) --
essentially a free trade agreement -- between their countries in
Tokyo on June 18, the first such agreement in which Japan
successfully included provisions on energy, according to press
reports.

Oil and gas account for nearly all of Japan's imports from Brunei,
while about 70 percent of Japan's exports to Brunei consist of
cars and auto parts.

The relative simplicity of the trading relationship between Japan
and Brunei meant that the EPA negotiations proceeded rapidly,
concluding successfully after only one year. For Japan, the
Brunei EPA establishes a precedent where by one of its trading
partners has agreed to consultations in the event of "any new
energy regulatory measure that substantially affects the
transportation, transmission or distribution, purchase or sale of
energy good" and "sympathetic consideration to views presented by
the other Party in the course of such consultation."

The Japanese will likely push for similar commitments from
Australia and the Gulf Cooperation Council, two other major
energy suppliers currently negotiating EPAs with Japan. (ECON:
Chris Wurzel)


7. (SBU) Japan's Views on U.S. Role in Regional Integration and
Bilateral FTAs
--------------

Tokyo 2715 provides an insightful overview of this topic.


8. (SBU) Japan Still Dragging Feet on Ag Tariff Caps?
--------------

Japan joined the Group of 10 food importing countries in issuing
a statement in Geneva on June 17 expressing opposition to
substantial cuts in the tariff cap level as part of the Doha
Round.

Nikkei reported that Agriculture Minister Akagi also stated
Japan's opposition to large overall tariff reductions.
Discussions in the Doha negotiations for agricultural tariff
reductions had ranged in the 60-85 percent range, but Japan
according to Nikkei, would like more modest reductions. Japan
also wants to retain more sensitive tariff lines.

Meanwhile, in advance of critical G-4 meetings this week, the
Agriculture Ministry (MAFF) released a paper on its web site
evaluating WTO Agriculture Negotiation Chair Falconer's initial
challenge paper issued in April. MAFF understands that
Falconer's paper is intended to vitalize negotiations on a
multilateral basis, but it is particularly concerned that the New
Zealander is too ambitious on sensitive products and not
ambitious enough on domestic supports.

MAFF argues that the text is unbalanced. As proposed by Falconer,
the United States would be allowed to maintain current support
levels, which in 2005 was about $19 billion overall. At the same
time, the paper, according to MAFF, calls for too much of a
reduction in the number of sensitive items.

The MAFF document points out that Falconer's proposals on tariff
reduction rates and special products would disadvantage the
European Union and developing countries.

For the MAFF paper in Japanese, see the following link: MAFF's
Evaluation of Agriculture Negotiation Chair Ambassador Falconer's
Initial Challenge Paper Issued on April 30. (ECON: Nicholas
Hill/Ryoko Nakano)


9. (SBU) Beef Talks Start June 27
--------------

Bilateral talks at the experts level are set to begin June 27 in
Tokyo. The United States would like to see emerge out of these

TOKYO 00002831 003 OF 006


meetings an agreement on language for a GOJ recommendation to
Japan's independent Food Safety Commission (FSC) that Japan adopt
the standards of the International Animal Health Organization
(OIE) concerning trade of beef.

The OIE pronounced last month that U.S. beef is in effect safe --
or in a "controlled risk" category -- from BSE and should not be
subject to the sort of onerous trade restrictions that Japan
currently applies. The U.S. delegation will seek to answer any
questions from the GOJ about the data that OIE members used in
its evaluation.

The inter-agency delegation from Washington will include
officials from USDA, APHIS, FSIS, FDA, and USTR, in addition to
representatives from the Embassy. The Agriculture Ministry
(MAFF) and Health Ministry (MHLW) will provide experts on the
Japanese side and will be joined by representatives from MOFA
where the meetings are set to take place. Japanese officials
have informed us that the discussions could take 2-3 rounds.
(ECON: Nicholas Hill)


10. (U) Beef Risk Communication Meeting in Tokyo a Yawner
--------------

The Japanese government is holding two risk communication
meetings to explain to the public the results of its audits of
U.S. slaughter facilities last month, in Tokyo on June 21 and
Osaka on June 22.

The first meeting in Tokyo attracted some 120 people, including
about 20 from the press. NHK and a couple of other TV networks
were on hand. We have not seen the media coverage yet, but
according to an ECON FSN on hand, the event was not energy-filled.
The audience came primarily from industry groups, including
restaurant chains, but consumer groups and private individuals
asked most of the questions. Among subjects raised, concern was
expressed about the fact that the United States has not
implemented a total ban on bone-in-meal feed. One consumer asked
about the violations of the current export agreement that have
been widely reported in recent months.

The GOJ officials from the Health (MHLW) and Agriculture (MAFF)
Ministries were generally careful and balanced in their
presentations.

The audience was largely relaxed, with some individuals dozing
off during the afternoon meeting. (ECON: Nicholas Hill/Ryoko
Nakano)


11. (U) GOJ Urged to Increase ODA Budget to Strengthen Diplomacy
--------------

On June 14, the Liberal Democratic Party (LDP) Policy Research
Council (PARC) and the Special Committee on External Economic
Cooperation chaired by Tatsuya Ito, member of the House of
Representatives, released a report to be incorporated in the
LDP's "Action Plan 10" recommending steps to strengthen Japan's
diplomatic power by increasing the Official Development
Assistance (ODA) budget.

According to the report, diplomacy has now entered an era of
"mega competition" that requires the Government of Japan (GOJ) to
change the current trend of shrinking ODA levels.

The report recommends that the ODA budget should stress: building
a leadership role for Japan in environmental issues; achieving
the Millennium Development Goals and Human Security Projects;
establishing Japanese-style infrastructure in Asian economies;
securing energy resources; and creating an "Arc of Freedom and
Prosperity" in Eurasia. The recommendation further notes that in
the future the activity of the Self Defense Forces and ODA should
be linked in peace keeping operations.

To achieve these goals, the report calls on the GOJ to achieve
the target that Japan already pledged of increasing ODA by $10
billion between 2005 and 2009 and recommends that the government
set a further target of increasing the ratio of ODA to GNP to 0.5
percent.(ECON: Eriko Marks)


12. (U) Speedy Yen Loan Process
--------------

TOKYO 00002831 004 OF 006



On June 18, at the request of domestic business interests and the
ruling LDP, MOFA along with MOF and METI announced that the GOJ
will strive to shorten each phase of the yen loan process.
Specifically, three main measures regarding yen loans will be
considered, including shortening the time frame by half for those
projects where the Japan International Cooperation Agency (JICA)
is involved in the formulation.

According to a press report, there are about 30 to 40 new
projects a year. The total loan amount for JFY 2006 was more
than 800 billion yen. (ECON: Eriko Marks)


13. (U) Cabinet Approves CEFP Basic Policies for Economic and
Fiscal Management
--------------

The Cabinet officially approved the Council for Economic and
Fiscal Policy (CEFP)-drafted honebuto (Basic Policies for
Economic and Fiscal Management) this week. Prime Minister Abe's
first "big-boned" economic policy document will serve as the
blueprint for Japan's macroeconomic policy over the next year.
Amounting to 55 pages, nearly twice the size of its Koizumi-era
predecessors, the document covers five chapters and enunciates
six priorities designed to "create the foundations in which
people can live without anxiety."

The priorities range from enhancing Japan's growth potential by
boosting labor productivity; plans for strengthening Japan's
financial and capital markets by the end of CY 2007; reaffirming
a commitment to a full-fledged discussion of Japan's tax system
in the fall; a pledge to review the Defined Contribution pension
system; a call for a correction of economic and fiscal
disparities among local governments; and a pledge to maintain a
conservative fiscal spending stance.

Media reactions to the honebuto have been critical, ranging from
assessments that it is a de facto campaign platform for next
month's Upper House elections, that it is vague, that it refers
to a potential EPA with the United States only as "a future
challenge," and that it is a "laundry list of half-baked
policies." A cable with Embassy analysis will follow shortly.
(FINATT: Mateo Ayala)


14. (SBU) Japan Post, Sale of the Century
--------------

Japan Post -- a public corporation with assets the size of China's
GDP -- begins a ten-year privatization process beginning October 1.

Tokyo 2716 provides a primer on the privatization process, the
stake holders, the issues and the politics involved. (ECON: Marc
Dillard)


15. (U) Rise in Part-time Workers Despite Falling Unemployment
Rate
--------------

In April 2007, the unemployment rate fell from 4.0 to 3.8 percent,
marking the first time in nine years that the rate had fallen
below four percent, according to reports from the Ministry of
Internal Affairs and Communications (MIC). As of 2007, the
number of employed persons was 64.44 million, an increase of 760
thousand people. Conversely the number of unemployed persons was
2.68 million, a decrease of 160 thousand from the previous year.

At the same time, the number of non-regular workers including
part-time and temporary workers is also increasing. Over the past
five years, the proportion of non-regular employees has increased
by more than 33 percent. Additionally, compared to full-time
workers, wages, and benefits are not as competitive and are
preceived
to beunfairly low.

In response to international competition and cost cutting
measures, more firms are hiring part-time workers to take over
the responsibilities of full-time workers. By doing so, firms
are not required to provide allowances, leave and other benefits
that come with regular employment.

According to sources at the Council for the Promotion of

TOKYO 00002831 005 OF 006


Regulatory Reform (CPRR),rigidity in the labor market fuels the
increase in part-time labor. Since Japanese law restricts a
company's ability to fire a full-time employee, companies use
temporary part-time workers on a contractual basis, thereby
minimizing the risk of hiring someone they cannot then terminate
(See Tokyo 02443 for more details).

The increase in non-regular employment greatly contributes to
income disparities within urban cities, especially among women,
who make up the bulk of non-regular employment. Our CPRR contact
told us that, as a result of limitations in firing practices,
firms tend to hire applicants from "brand name" schools, further
widening the income gap. (ECON: Virsa Hurt)


16. (SBU) Stormy Shareholder Meeting Season Raises Renewed
Concerns Over Foreign Funds
--------------

Late June is the season when most listed companies in Japan hold
their annual general meetings. This year, an unusual number of
contentious sessions are expected as more than 200 companies seek
approval for pre-emptive anti-takeover measures in the wake of
the May 1 introduction of triangular mergers. Some companies are
also seeking shareholder approval to implement previously adopted
defensive measures against unsolicited takeover bids.

This latter category includes Osaka-based Bull-Dog Sauce, which
is fighting an unsolicited 1700 yen per share bid from U.S.
investment fund Steel Partners. Bull-Dog's stock has risen 18
percent since the bid was announced May 16. This is the third
time this year Steel Partners has sought control of a Japanese
company it claims is undervalued. Previous attempts have failed.

At its June 24 AGM, Bull-Dog will ask shareholders to approve a
controversial share warrant plan under which current shareholders
would receive three new shares for every share held. However,
the warrants issued to Steel Partners will not be converted into
common stock but payable in cash, effectively diluting the fund's
holdings by three quarters.

Steel Partners filed suit in Tokyo District Court seeking to
block the company from introducing the shareholder's resolution
and, separately, to declare the warrant plan illegal. Courts
have previously struck down defensive measures considered
detrimental to shareholder interests. On June 19, Steel Partners
withdrew the first suit; the second will go forward.

Steel Partners' President and CEO Warren Lichtenstein addressed a
packed news conference in Tokyo on June 12 and blasted proposals
from Japanese corporate managements that require investors who
purchase a large amount of shares to disclose their objectives
and business plans as "the worst kind in the world." He charged
that such plans undermine corporate value and "violate the
principle of shareholder equality under corporate law." Steel
Partners, he insisted, "have never done greenmail and we never
will."

Lichtenstein's statements struck a raw nerve with some Japanese
officials. METI Administrative Vice Minister Takao Kitabata, at
a June 14 news conference, launched a 10-minute long attack on
Steel Partners, claiming the fund had misrepresented Bull-Dog's
positions and charged that its bid, if successful, would not
raise corporate value.

The following day, METI Minister Akira Amari delivered a shorter
but equally sharp attack against Steel Partners calling it
"exactly a greenmailer." "If one has no intention of
participating in the management but only wants to raise the share
price and sell at a profit, such activities do not increase
corporate value," he said.

Amari concluded with a sly pun implying the fund's name should
really be "Steal Partners." (ECON: David DiGiovanna)


17. (U) Recent Major Economic Indicators
--------------

The Cabinet Office left its overall assessment unchanged from the
previous month, noting that "the economy is recovering, despite
some weakness in industrial production."


TOKYO 00002831 006 OF 006


The monthly economic report, submitted to the Cabinet on June 18,
confirmed that Japan's economy has entered its 65th month of
expansion, an ongoing postwar economic expansion record, although
at relatively low rates.

The report said that private consumption is showing signs of a
pickup with improvements in the employment situation, while it
indicated the need to pay attention to the impact of oil prices.
The Bank of Japan (BOJ) report, released on June 15, also left
unchanged its core economic assessment, indicating that the
economy is "expanding moderately."
BOJ said that household income has continued to rise modestly,
and in this situation, personal consumption is firm. It notes
that exports have continued to increase, and business investment
has also continued to expand against the background of high
corporate profits. (FINATT: Shuya Sakurai)
DONOVAN