JAPAN'S REFORM AGENDA - PLENTY OF FOREST BUT FEW

C O N F I D E N T I A L SECTION 01 OF 06 TOKYO 002964

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E.O. 12958: DECL: 06/19/2017
TAGS: EAGR EAIR ECON EFIN EINV ETRD JA PGOV
SUBJECT: JAPAN'S REFORM AGENDA - PLENTY OF FOREST BUT FEW
TREES

REF: A. TOKYO 387

B. TOKYO 7064

C. TOKYO 2464

D. TOKYO 2180

Classified By: Ambassador Schieffer for reason 1.4 (b/d)


1. (C) Summary. The Council for Economic and Fiscal Policy
(CEFP),the Council for the Promotion of Regulatory Reform
(CPRR),the Asia Gateway Strategy Panel (Asia Gateway),and
the Innovation 25 Strategy Council (Innovation 25),all
advisory bodies to the Prime Minister's Cabinet office, each
issued reports over the past several weeks recommending
structural and administrative reform of various aspects of
Japanese government and society. While each of the Councils
initially seemed poised to make fairly forward-leaning
recommendations, fierce ministerial resistance resulted in
final reports that are long on rhetoric and short on details.
The CEFP, which serves as the Government's uber-Council and
bases its recommendations on inputs from the other bodies,
had previously served as a vehicle for then-Prime Minister
Koizumi to force such controversial issues as Japan Post
Privatization through the bureaucracy. The Abe
administration seems less willing to use the Council as a
means to overcome bureaucratic inaction. The CEFP's report,
which also serves as the foundation for the Government's
budgetary process, stresses that spending cut targets laid
out by the previous council will be adhered to but appears to
be the victim of bureaucratic piling-on to ensure that
pork-barrel projects receive funding. Most of the
recommendations of all the bodies were vague or cautious,
making the Abe administration appear tepid in support of
reform. It is unclear if this will change after the Upper
House elections in late July. End Summary.


2. (U) In the lead-up to the July Upper House elections, the
Council for Economic and Fiscal Policy (CEFP),the Council
for the Promotion of Regulatory Reform (CPRR),the Asia
Gateway Strategy Panel (Asia Gateway),and the Innovation 25
Strategy Council (Innovation 25),all advisory bodies to the
Cabinet office, issued reports recommending structural and
administrative reform of various aspects of the Japanese
government and society. This cable explores the role of
each of the advisory bodies and their respective influence on
policy makers, their initial proposals and final
recommendations and gives a "grade" to each of the sector
recommendations put forth that are of interest to American
industry and the U.S. government.

Economic Advisory Bodies: Who's Who

The Council for Economic and Fiscal Policy
--------------


3. (U) Established in 2001 under the "Act to Establish the
Cabinet Office" by then-Prime Minister Koizumi, the CEFP is
one of four "councils on important policies" that provide
advice to the Prime Minister and his cabinet. The remaining
three councils are: the Council for Science and Technology;
the Central Disaster Management Council and; the Council for
Gender Equality. The law stipulates that the CEFP consist of
no more than eleven members, that forty percent of those
members come from the private sector and that the Prime
Minister, the Chief Cabinet Secretary and the Minister of
State for Economic and Fiscal Policy all sit on the Council.
Currently, the CEFP's four private sector representatives
include Canon CEO and Japan Business Federation (Keidanren)
President Fujio Miterai and prominent academic, Tokyo
University Professor Takatoshi Ito. The six cabinet-level
advisors include Minister of Finance Koji Omi, Ministry of
Economy, Trade and Industry Akira Amari and Council Chair,
Minister of Economic and Fiscal Policy Hiroko Ota as well as
Bank of Japan President Toshihiko Fukui.


4. (U) Every year, the CEFP releases the "Basic Policy for
Economic and Fiscal Management and Structural Reform" report
which serves as the Government's macroeconomic and reform

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agenda for the ensuing year. The report is meant to be
comprehensive in nature and, as such, is based upon the
recommendations of other Cabinet advisory bodies. The agenda
is formally adopted by the Cabinet after which the Council
issues a series of budgetary recommendations and, ultimately,
the "Course and Strategy for the Japanese Economy" framework.
Importantly, if a particular issue is not/not discussed
within the CEFP's report, it is unlikely to receive funding
during the regular budgetary process.


5. (SBU) Koizumi originally established the CEFP with the
intention of wresting policy making from government
bureaucrats and forcing the budgetary process to be more open
and transparent. Under his leadership, such controversial
issues as Japan Post privatization were forced through the
bureaucracy despite fierce Ministerial opposition by using
the CEFP as the decision making body. The Abe
administration, however, appears less willing or able to use
the Council as a vehicle to overcome bureaucratic inaction.
The most recent report, issued June 4, is a whopping 51 pages
yet contains relatively vague recommendations addressing four
goals - increasing labor productivity, promoting the openness
of Japan's economy, reforming administrative and fiscal
systems and, "creating the foundations in which people can
live without anxiety." In fact, the Council notably dropped
"Structural Reform" from the document's title. Press reports
have been largely critical, stating the report touches on
many subjects but provides few details or numerical targets.
Others suggest that the length of the document reflects
bureaucratic piling-on to ensure that pork-barrel projects
receive funding.

The Council for the Promotion of Regulatory Reform
-------------- --------------


6. (U) The CPRR is one of eighteen advisory councils set up
under the Cabinet Office. Established under Koizumi in 2004,
the CPRR has tended to be more forward-leaning in its
positions than other advisory councils. It consists solely of
private sector members and is chaired by shipping company NYK
Line Corporation President Takao Kusakari (reftel A). The
Headquarters for the Promotion of Regulatory Reform, a
parallel body to CPRR, consists of the Prime Minister's
entire cabinet and the Prime Minister himself. Unlike in the
case of CEFP, however, the Prime Minister rarely attends
Council meetings.


7. (C) Typically, the Council issues an interim report in
June and final recommendations in December. All final
recommendations are laboriously negotiated with the
individual Ministries, however, so there has often been a
wide gap between what is put forth in the interim report and
what is actually in the final iteration. This year, as the
CEFP was working to develop its new reform strategy, the CPRR
issued a fully-negotiated interim report on May 30 with the
intent that it be incorporated into the longer-term plan. As
with the CEFP report, the CPRR proposals fall far short of
what several of the Council's members had told us they had
hoped to achieve. Kosuke Furutachi, Deputy Director at the
Cabinet Office for CPRR told us that the report was merely a
rehashed version of previous years' work and that the Council
had been tacitly instructed to refrain from addressing
controversial topics ahead of the July elections.

The Asia Gateway Strategy Panel
--------------


8. (U) In his maiden speech to the Diet in September 2006,
Prime Minister Abe called for rapidly strengthening "the
functions of international airports in Japan, including
efforts to enhance their usability," a stance that later
became a central part of his "Asia Gateway Vision." Abe
created the Asia Gateway Strategy Panel in October 2006 to
identify specific policies under the initiative. The panel
was composed of seven prominent academics and business people
and was led by Special Advisor to the Prime Minister on the
Economy, Takumi Nemoto. Its report, issued May 16, served as

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the basis for the aviation reforms recommended in the CEFP's
plan. The panel was subsequently disbanded.


9. (SBU) While disappointing to the Embassy and to American
industry, Tokyo University Professor and CEFP member
Takatoshi Ito told us he believes the Asia Gateway report
will result in greater liberalization of Japan's
international and regional airports and that the panel's work
was well-received by the larger Council.

The Innovation 25 Strategy Council
--------------


10. (U) In a separate speech at the beginning of his
administration, Abe also called for a strategy to foster more
innovation that would contribute to Japan's economic growth
through the year 2025. He established the Innovation 25
Strategy Council and gave Minister of State Sanae Takaichi
the additional portfolio of Minister in charge of Innovation.
Takaichi set-up the Innovation 25 Special Mission within the
cabinet office, supported by the Strategy Council comprised
of seven members from academia and industry. The Council
issued an interim report on February 26 and its strategic
policy roadmap on May 25. Innovation 25 sets five goals for
the year 2025 based on predictions that Japan will face, in
the next twenty years, a decreasing population, an aging
society, sustainability challenges and the continued rapid
development of an information society. Its recommendations
largely focused on science and research and development
issues, though there was some discussion of financial market
reform which fed in to the CEFP report.

The Score Card by Sector

Agriculture Reform: C
--------------


11. (SBU) The CEFP's Agriculture and EPA working group
produced some forward-leaning recommendations intended to
push Japan in the direction of more outward-oriented trade
policies. There is clear recognition among CEFP private
sector members that the country's inefficient farm sector is
an impediment to pursuing effective trade policies. The
final CEFP report proposes some farm sector reforms, but many
of the more far-reaching measures of the working group,
including proposals to make it easier for farm ownership to
change hands which could enable corporate ownership, were
muted by the full Council. Whereas the working group had
specific reform ideas, the final report calls on the
Agriculture Ministry to identify a reform agenda by fall
2007, something akin to putting the fox in charge of the hen
house.


12. (SBU) The working group had outlined an ambitious
program to promote Doha and a more open trade regime,
including eliminating some tariffs; reviewing other extremely
high tariffs, presumably including those on rice; abolishing
the gate pricing system for pork; and reviewing the minimum
access system for rice. By the time the full CEFP tabled its
report, bromides had replaced some of the proposals -- Japan
should be "proactive" in reducing tariffs and narrowing down
the extent of cross border measures, and the gate pricing
system should be "discussed." On EPA/FTA policy, the final
report also takes a step back from the Agriculture and EPA
working group's initial call that Japan launch joint studies
with the United States and the European Union as a
preliminary step down the road to negotiating EPA/FTAs.
Instead, it says only that FTAs with the United States and EU
should be "future topic."

Civil Aviation Reform: C-
--------------


13. (C) Japanese reformers' key goals in the civair sector
were to achieve greater and quicker internationalization of
Haneda Airport, currently primarily serving the domestic
market, and the further liberalization of other regional and

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international airports. While the CEFP did recommend some
small changes regarding Haneda such as permitting late
evening and early morning international charter flights and
charter flights to Beijing for the 2008 Olympics which could
set a precedent for further reforms in the future, the
Ministry of Land, Industry and Technology (MLIT) managed to
hold at bay more "radical" proposals and imposed its own
agenda on other changes. The Asia Gateway panel and the CEFP
had originally proposed: allowing international flights at
Haneda and increasing slots at Narita before 2010 as is
currently planned; deregulating Kansai and Centrair airports
without further negotiations; dropping the perimeter rule
which limits international flights to domestic airports and;
considering Japan-E.U. aviation liberalization. None of
these were accepted by MLIT. Instead, the CEFP report
recommends that China and other Asian countries be the focus
of aviation liberalization and that any new international
flights at Kansai and Centrair be negotiated bilaterally,
putting MLIT in control of the pace of change. The report
also adopted the Ministry's language critical of an
"American-style" open skies. U.S. industry reaction has been
pessimistic with some suggesting that many of the measures
MLIT did allow, and in particular the late evening/early
morning international charter flights, are patently designed
to disadvantage U.S. airlines.

Financial Market Reform: Mixed
--------------


14. (C) Defined Contribution Pensions: C-. The CEFP basic
policies framework only vaguely refers to the review of the
defined contribution pension system, presumably in deference
to the Ministry of Health, Labor and Welfare (MHLW) study
group considering the issue which has not yet issued its
final report. This is disappointing as it provides no
direction from the Cabinet to the MHLW group. A critical
issue to expanding the use of defined contribution pensions
is to increase the tax deductible contribution limits.
Though the Ministry of Finance (MOF) has not yet officially
weighed in on the topic, in the past they have expressed an
unwillingness to forgo tax revenue by increasing the limits
and skepticism at the need for tax-advantaged treatment of
the pensions, which they consider just another savings
vehicle.


15. (SBU) Financial Services - C . The Abe administration has
identified the internationalization of Japanese financial
markets and the development of Tokyo as an international
financial center as one of it key goals. As a result, this
topic has been addressed by no fewer than five different
governmental advisory groups. The CEFP report, which took
into account the deliberations of those five advisory groups,
calls on the Financial Services Agency (FSA) to formulate an
overall plan for strengthening Japan's financial and capital
markets by the end of FY2007. The plan is expected to focus
on four areas: (1) strengthening the competitiveness of
exchanges by considering measures enabling the listing on the
same exchange of a wide range of products including stocks,
bonds and financial and commodity futures; (2) reviewing
existing firewall regulations; (3) improving the market
surveillance system by strengthening the quasi-judicial
function of the Securities and Exchange Surveillance
Commission (SESC); and (4) undertaking comprehensive efforts
to increase competitiveness through such measures as
enhancing transparency and predictability of regulatory
supervision and improving urban infrastructure.


16. (C) Comment: Some of these areas have been discussed
under the U.S.-Japan Regulatory Reform Initiative and are of
great interest to U.S. financial firms. The FSA's plan and
the degree of support it receives in the post-election
administration will indicate whether meaningful progress in
the four identified areas can be expected, but the
identification of these issues as areas for reform is a
helpful step forward. Still, it is disappointing that more
of the 27 topics put forth in the CEFP's own working group on
financial services reform were not included in the final

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report. End Comment.

Fiscal Policy: B-
--------------

17. (SBU) While the CEFP report calls for "maximum" spending
cuts to be made in formulating the FY08 regular budget, it
fails to lay out concrete commitments to spending targets.
The Council's private sector members had initially proposed a
further three percent cut in public works spending for the
coming year, but specifying this just before the elections
was vetoed by the LDP. The framework did indicate, however,
that fiscal consolidation measures would be carried out in
line with the medium-term fiscal consolidation plan approved
by the Cabinet as part of last year's basic policies, which
specified spending cut targets for major budgetary categories
over a five-year period.


18. (SBU) On the tax side, the report states that a
full-fledged discussion of Japan's tax system will be
conducted commencing in the fall, and indicates that
"drastic" tax reforms, including the consumption tax, will be
addressed in FY2007. The report calls for a study of taxes
on financial instruments, a review by the central government
of local government taxes, and revenue sharing and subsidy
programs for local governments, including a scheme which
could allow taxpayers to pay a portion of their local
residential tax to the local government where they were born
and raised but are no longer living. (Note: No specific
mention was made of the Japan Business Council's request to
lower the effective corporate tax rate, though presumably
this too will be considered during the tax reform discussion.
End Note.)

Labor Market Reform: D
--------------


19. (C) What is most noticeable about the CEFP's labor
proposals is their relative absence from the agenda. In
December, CEFP private sector member and labor economist
Naohiro Yashiro described grand plans for a "labor big bang"
as a centerpiece of the Council's work in 2007 on the premise
that improving labor productivity is key to addressing
Japan's already-decreasing workforce and other longer-term
demographic challenges. Yashiro argued persuasively for a
deregulatory approach including creating a U.S-style "white
collar exemption" from mandatory overtime pay and loosening
the law governing temporary workers. Six months later, the
MHLW legislation on a "white collar exemption" has been
postponed, and the CEFP is no longer using the term "labor
big bang." Instead, Yashiro has told us, labor reforms are
on hold until after the Upper House elections. Several minor
labor bills were presented at the Diet session, he explained,
but political sensitivities prevented the CEFP from moving
forward with the labor reform agenda.

Medical Reform: C
--------------


20. (SBU) The CEFP report does not contain an extensive
discussion of medical devices, but it does call for the
steady implementation of the Five-Year Strategy for
Innovative Pharmaceutical and Medical Devices Development put
forth in 2006. That strategy includes some key issues that
were brought up in the U.S.-Japan Regulatory Reform
negotiations including shortening the time needed for
launching new drugs, fostering medical venture capital
companies and improving the environment for clinical trials,
all of which were well-received by U.S. industry. The report
also touches upon promoting the use of information technology
in healthcare through such things as allowing online medical
fee payments and receipts. However, CPRR's Furutachi told us
that the CPRR had wanted to include specific steps and
timelines in its report for medical sector reform in order to
wrest control from the National Health Insurance Organization
(NHIO) and the Social Insurance Medical Fee Payment Fund
(SIMF),two organizations that review all medical bills to
ensure consumers are not overcharged for their treatments.

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NHIO and SIMF are filled with former MHLW officials and, as
such, any change to the status quo faces stiff opposition.
Furutachi lamented that, even though the Ministry allowed
some recommendations calling for reform, the wording is so
ambiguous as to leave the Council's intent open to
interpretation. The wording in the CEFP report reflects this
ambiguity.

Comment
--------------

21. (C) In September 2005, former PM Koizumi based the Lower
House elections squarely on the issue of economic reform and
won an historic victory. Less that two years later, his
successor has apparently decided to downplay reform before
the Upper House election. The LDP is widely expected to lose
seats in the election but, if the loss is not considered too
high, Abe is expected to remain PM. Under that scenario, it
is unclear to us whether Abe will give decisive support to
his reformist advisors in the battle with the bureaucracy and
conservative LDP elements or continue to be unwilling or
unable to lead a strong charge for economic reform.
SCHIEFFER