The Japan Economic Scope--July 5, 2007 Part 1

UNCLAS SECTION 01 OF 06 TOKYO 003125 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--July 5, 2007 Part 1 Sensitive but unclassified. Please protect accordingly. ¶1. (U) This cable contains part ONE of the Japan Economic Scope from July 5, 2007. 2.(SBU) Table of Contents ¶3. G-10 Agriculture Ministers Issue Another Statement on Doha ¶4. An Early Glimpse at G-8 Planning ¶5. Advisory Councils-- Recommendations - Few Details for Concrete Action ¶6. Time Approaching for Australia and Japan to Resume FTA Talks? ¶7. Beef Talks Conclude ¶8. Second Big Retailer to Sell U.S. Beef ¶9. Hokkaido Meat Processing Scandal Shakes Consumer Confidence ¶10. US Grain Council President Visits Hokkaido Farms ¶11. Economic Organization Gives Abe High Marks ¶12. METI Gets a New Vice Minister ¶13. Koezuka to Replace JPO Commissioner Nakajima ¶14. METI Requests Public Comments on Revised FDI Regulations ¶15. Defensive Bull-Dog Is Not Alone ¶16. BOJ "Tankan" Survey: No Change in Firm Business Sentiment ¶17. Japan's "Core" Consumer Prices Down 0.1% in May, Fourth Consecutive Monthly Drop ¶3. (SBU) G-10 Agriculture Ministers Issue Another Statement on Doha -------------- The so-called G-10 agriculture ministers issued a communiqu on July 2 calling for the "multilateral process in Geneva" to be intensified to bring about a successful conclusion to the Doha Round. The document was released after a teleconference among the ministers, including Agriculture Minister Akagi. The communiqu includes a reference to another G-10 statement issued on June 17, in which the participants reaffirmed the G- 10's main priorities, including "no tariff capping," only limited or "acceptable tariff cuts in the top band with flexibilities," and "reasonable treatment and appropriate numbers on sensitive products." A MOFA official told us on July 3 that Japan wanted to see the communiqu issued before WTO Agriculture Negotiating Chair Falconer tables his draft text on modalities. The MOFA official said the statement contained "nothing new," but its value was that it reaffirmed what the G-10 had called for last month. The official said he was increasingly uncertain about what to expect from Falconer. Meanwhile, according to press reports, Agriculture Minister Akagi plans to travel to Europe to meet with Falconer and WTO Director General Pascal Lamy. The MOFA official told us that timing of the visit was still undecided, but it would probably be sometime next week. Separately, the press is reporting that Japan Agriculture Cooperative Chairman Miyata has already departed for Europe and hopes to meet with Falconer and possibly Lamy. For the G-10 statements, see the links to Japan's Agriculture Ministry website: July 2 G10 statement; June 17, 2007 Proposals; June 17, 2007 Statement. (ECON: Nicholas Hill) ¶4. (SBU) An Early Glimpse at G-8 Planning -------------- Prime Minister Abe is very fond of his slogan "Beautiful Country" and will likely use some version of it as the overall theme for the 2008 G-8 summit to be held in Lake Toya Hokkaido our sources tell us. MOFA will announce the formation of a new division in early July that will be responsible for the overall planning of the summit and which will be headed by an Ambassador-level official. In the run-up to the actual summit, a foreign ministerial will be held June 26-27 in Kyoto, a finance ministerial on June 13-14 in Osaka, a meeting of interior and justice ministers on June 11-13 in Tokyo, a labor ministerial on May 11-13 in Niigata, an environmental meeting on May 25-27 in Kobe, and a climate change meeting on March 14-16 in Chiba. TOKYO 00003125 002 OF 006 The Embassy is proactively planning for the Hokkaido summit. The DCM and a management team have already visited the region to see the facilities first hand. In addition, the Ambassador, the DCM and many members of the Embassy, who will be involved in planning for the summit and the ministerials, held a DVC with Embassy Berlin to hear about lessons learned from the 2007 G-8 meetings in Germany. Several members of the staff have established contacts with MOFA officials that will be handling logistical issues for the Summit. See Tokyo 3052 for more information. (ECON: Sally Behrhorst) ¶5. (SBU) Advisory Councils-- Recommendations - Few Details for Concrete Action -------------- The Council for Economic and Fiscal Policy (CEFP),the Council for the Promotion of Regulatory Reform (CPRR),the Asia Gateway Strategy Panel and the Innovation 25 Strategy Council all issued reports over the past several weeks recommending structural and administrative reform of various aspects of the Japanese government and society. While reform-minded members of each Council had proposed fairly forward-leaning recommendations, fierce ministerial resistance resulted in final reports that have been described are long on rhetoric and short on details. While this could reflect the Abe administration's caution in the run-up to the July Upper House elections, it is unclear to us if this will change after the votes are cast. See Tokyo 02964 for a more detailed discussion. (ECON: Sally Behrhorst) ¶6. (SBU) Time Approaching for Australia and Japan to Resume FTA Talks? -------------- The Australian Ambassador to Japan, Murray McLean, in an interview in the Japan Agricultural News this week, underscored Australia's desire to see dairy products included in any Free Trade Agreement the two countries work out in coming months. He said that increased dairy trade would be largely "complementary," enabling Japanese producers to concentrate on high end drinking milk. Although there has been speculation that the next round of talks with the Australians scheduled for late July will be postponed until after the July 29 Upper House elections, there has been no announcement yet. A MOFA official told us on July 5 there would be no "postponement," but acknowledged there may be some "adjustment" in the schedule. A non-GOJ source familiar with the negotiations told us that the Japanese government is keen to postpone the next round of negotiations with Australia until August so that talks do not cloud the Upper House elections. With talks looming, the Japan Agricultural Cooperative (JA),the country's main farm protectionist lobby, organized a protest at Tokyo's Yoyogi Park on July 1. Mostly dairy farmers turned up to underscore their opposition to the Doha talks and to a free trade agreement with Australia that included substantial concessions on agriculture. (ECON: Nicholas Hill) ¶7. (SBU) Beef Talks Conclude -------------- The first round of expert level BSE talks -- which the U.S. side hopes will lead to a further market opening for U.S. beef -- ended June 29 in Tokyo. John Clifford, the Chief Veterinary Officer of USDA's Animal and Plant HEALTH Inspection Service led an interagency delegation from Washington to discuss the BSE situation in the United States and the dossier that was behind the World Animal HEALTH Organization's easing of restrictions on U.S. beef. Meeting at a MAFF conference center near Yasukuni Shrine, the two sides held all day sessions on June 27-28, before convening a smaller group at MOFA on June 29. TOKYO 00003125 003 OF 006 The discussions focused on the U.S. submission to the OIE, the feed ban, ongoing BSE surveillance, the failed Japanese mouse assay tests and the Harvard Risk Assessment. The next round of talks is likely to take place in early August. The United States has made it clear that it would like to see the Japanese government recommend to its Food Safety Commission that beef trade with the United States be further eased in accordance with international standards. TV cameras and reporters were on hand for the first round at the opening, but then left the proceeding for experts to deliver detailed presentations. Overall, coverage was fairly muted, with little of the bombast that has, at times, characterized the press reporting on BSE-related issues in the past. For more details on the visit, see Tokyo 3036. (ECON: Nicholas Hill) ¶8. (SBU) Second Big Retailer to Sell U.S. Beef -------------- U.S. beef is gaining acceptance in the Japanese market. A senior official at Wal-Mart Japan, which owns a majority stake in the Seiyu Retail Store chain in Japan, told us on July 4 that sales of U.S. beef are doing better than expected since the company began marketing the beef in the spring. Meanwhile, on June 30 another large retail chain, Ito Yokado, began selling U.S. beef at 20 outlets in the Tokyo area. A sales promotion featuring U.S. beef samples and cooking demonstrations is helping market two featured cuts, chuck eye roll and chuck ribs. Depending on consumer reaction, the store plans to sell U.S. beef at more of its 180 stores nationwide before long. The U.S. Meat Export Federation (USMEF) is supporting the promotion, reaching out to Japanese consumers to provide information on U.S. beef. USMEF expects Ito Yokado's decision to ease concerns among consumers and open the way for other retail chains to begin marketing U.S. beef. Ito Yokado's move back into the business of selling U.S. beef was delayed initially by fears in its corporate leadership that U.S. beef would alarm Japanese consumers. In addition, problems its main supplier, Cargill, was having regaining approval to sell U.S. beef in the Japanese market had to be overcome. The Embassy's Agricultural Trade Office and Foreign Agriculture Service have worked with importers and U.S. exporters to promote U.S. beef sales in Japan, including providing funds for ads in the local media. (ECON: Nicholas Hill) ¶9. (U) Hokkaido Meat Processing Scandal Shakes Consumer Confidence -------------- Sales of ground meat have plummeted across Hokkaido following the June 20 revelations that the president of Meat Hope, a Tomakomai, Hokkaido-based meat processing plant, approved the sale of tons of ground pork as ground beef to cut costs. The mislabeled ground meat was then sold directly or used to make other food products distributed to supermarkets throughout Japan. Subsequent police and Ministry of Agriculture, Forestry and Fisheries (MAFF) investigations continue to discover additional abuses at Meat Hope, including the mixing of expired meat with fresh meat and the addition of pig and lamb hearts to ground pork to make it look like ground beef. Meat Hope shut down operations and laid-off its 71 employees last week. However, the whole incident has forced Hokkaido officials to review meat processing operations prefecture-wide. The Hokkaido government plans to send inspectors to approximately 700 meat-processing facilities across the island to conduct DNA testing in cases where factory meat supplies are found to be questionable The meat processing scandal first broke after an ex-employee of Meat Hope provided details of meat processing operations to the Asahi newspaper. According to media accounts, an ex-employee first reported abuses to MAFF more than a year ago, but went to the press after no action was taken. (Sapporo: Ian Hillman/Yumi Baba) TOKYO 00003125 004 OF 006 ¶10. (U) US Grain Council President Visits Hokkaido Farms -------------- On June 29, Vic Miller, an Iowa farmer who is president of the U.S. Grain Council, visited the town of Naganuma, Hokkaido, to discuss biotech grain usage and related grain supply issues with local farmers. A pro-biotech Hokkaido farmer hosted a barbeque lunch for Miller, which also included neighboring farmers, reporters, a local politician, university students, and a former Hokkaido University professor who now works for a local bio- venture company. Afterwards, Miller visited a local dairy farm to see how a local customer is using U.S. corn as a feed source in his automated, robotic milking operation. Prior to visiting Naganuma, Miller in a press interview assured Hokkaido residents that there will be a steady supply of U.S. corn available to Hokkaido farmers but also pointed out that an ever-growing majority of this corn will be biotech. Concerns about biotech crops in Hokkaido remains high following a series of consensus meetings held earlier this year on Hokkaido's strict local regulations governing the open-air biotech cultivation. For more details, see the attached translated article. (Sapporo: Ian Hillman/Yumi Baba) ¶11. (U) Economic Organization Gives Abe High Marks -------------- Newspapers report that nine private-sector organizations weighed in with their assessments of how well the Abe administration has done in implementing pledges made during the House of Representative elections in September 2005. The Japan Association of Corporate Executives (Keizai Doyukai) gave the Administration the top score of 65 out of a possible 100 for its efforts in revamping the bureaucracy and in decentralizing the government. Team Policy Watch, a group of economic experts led by former PM Koizumi's economic policy advisor Heizo Takenaka, gave Team Abe a score of 60. The lowest rating of 27 was given by the Japan Initiative, a private think-tank. The group stated that the "actions" taken on 45 of the 120 items listed in the campaign manifesto were "simple plans and expressions of intentions to make efforts." (ECON: Sally Behrhorst) ¶12. (SBU) METI Gets a New Vice Minister -------------- In a move that a Ministry of Economy, Trade and Industry (METI) official told us came as a surprise, the press reported on July 5 that Toshiaki Kitamura is stepping down as Vice Trade Minister after only a year. He will be replaced on July 10 by Masakazu Toyoda, METI Director General for Trade Policy. Hiroyuki Ishige, the former head of the Small Medium Enterprise Agency, will replace Toyoda. Other changes at METI have Kenyu Adachi, the former Assistant Vice-Minister, becoming the New Director General for Trade and Economic Cooperation. Also, Tsuneyoshi Tatsuoka, the former Director General in the Economic and Industrial Policy Bureau, will become the new Director General in the Trade Control Department. Nobuhiku Sasaki, a key trade negotiator, will become the Deputy Director General for Trade and Economic Affairs. (ECON: Ryoko Nakano/Nicholas Hill) ¶13. (SBU) Koezuka to Replace JPO Commissioner Nakajima -------------- Masahiko Koezuka, currently Director-General (DG) of the Commerce and Information Policy Bureau of METI, will be the new Commissioner of Japan's Patent Office, replacing Makoto Nakajima on July 10. TOKYO 00003125 005 OF 006 As DG for the Commerce and Information Policy Bureau of METI, Koezuka was responsible for designing a wide range of measures to promote and develop IT services, distribution industries, and to protect consumers. Koezuka began at METI in 1974 and since then has served in many different bureaus. A list of the various positions he has held in METI is attached. Nakajima's next position has not yet been announced. (ECON: Kaoru Nakata) ¶14. (SBU) METI Requests Public Comments on Revised FDI Regulations -------------- As expected, on June 29 METI released for public comment its draft revisions to the regulations governing inward direct investment with national security implications. The Ministry is proposing changes to the Cabinet Order, Ministerial Ordinances and the Export Control Order of the Foreign Exchange and Foreign Trade Control Law in line with the proposals made by its "Study Group on the International Investment Environment in the Global Economy" (see Scope Item in February 9 issue and cables Tokyo 454 and 2688). The public comment period closes on July 29. Click here for public comment information. The Study Group proposed changes to the existing legal framework to control appropriately inward investment from emerging economies, and make regulations consistent with international criteria. From the Embassy's review of the proposals, we do not believe the proposed revisions will impede legitimate U.S. direct investment into Japan. On the same day as METI's announcement, the Liberal Democratic Party (LDP)'s Research Commission on International Market Competitiveness called for revision of the inward investment regulations in order to appropriately prevent the outflow of technologies important for national security. According to METI Trade Finance and Economic Cooperation Deputy Director Tomoshige Nambu, the Commission advised the government to conduct a review of whether the revised regulations are effective, and if need be, in the future establish a "Exon- Florio-style" process that would allow government ex-post intervention in transactions of concern. The LDP Commission also proposed strengthening regulations on foreign investment funds, addressing the growing concerns that short-term investments by foreign funds could undermine corporate value. The Commission will compile its final recommendations sometime in autumn. Lower House member and chairman of the LDP Commercial Law Subcommittee, Yasufumi Tanahashi is chairing the Research Commission. (ECON: Satoshi Hattori) ¶15. (U) Defensive Bull-Dog Is Not Alone -------------- Japan's annual general shareholder meeting (AGM) season has just ended and the big story of the year was corporate efforts to strengthen takeover defenses. With tender offers up 60 percent in the first half of 2007 and concerns that the newly implemented triangular merger rules will lead to what has been described as a "wave of cross-border M&A," some 222 firms -- or eight percent of companies holding AGMs this month -- put forward proposals on new defensive measures for shareholder approval. Of those 222 companies, 47 were in the electronics, food, or steelmaking sectors, which analysts have noted are particularly vulnerable to takeover bids (TOBs). ONE major change this year was management's seeking shareholder approval for implementation of corporate defenses. Courts in the past have struck down some defensive measures which had only received board approval. U.S.-based investment fund Steel Partners, which has invested some $4 billion dollars in Japanese firms in recent years, was in TOKYO 00003125 006 OF 006 the spotlight this season. The fund was on the losing side of shareholder votes in almost a dozen tender and dividend increase proposals as company managements were able to characterize the fund as a "green mailer" not acting in the long term interest of shareholders. Steel Partners' appeal to the courts regarding Japanese Bull-Dog Sauce Company's poison-pill plan has also been making the headlines; the plan will dilute Steel Partners' stake in the company and foil its $260 million bid. With more than 80 percent of shareholders already voting in favor of the poison-pill proposal, Steel Partners' pending TOB is almost certain to fail. Analysts expect the high court to uphold the lower court ruling because the poison-pill will not cause Steel Partners to take a financial loss and it will still be able to pursue a future takeover bid, albeit more expensively. (ECON: Antonio Gonzalez) ¶16. (U) BOJ "Tankan" Survey: No Change in Firm Business Sentiment -------------- The Bank of Japan's quarterly "tankan" survey of business sentiment, a closely watched business cycle indicator and a principal input in central bank's monetary policy deliberations, revealed no change in firm business sentiment among large firms. The survey's "headline" business sentiment indexes (DI) for both large manufacturers and non-manufacturers were in line with market expectations. The June survey also revealed that all enterprises on average modestly revised upward their FY07 projections for business investment from the March survey. These solid "tankan" survey results are likely to support the BOJ's policy decision to raise interest rates in the near future. The BOJ Policy Board is scheduled to hold its first post-"tankan" meeting on July 11-12. Many market participants are expecting that the BOJ will not raise interest rates next week, but will hold until the August 22-23 Board meeting. (FINATT: Shuya Sakurai) ¶17. (U) Japan's "Core" Consumer Prices Down 0.1% in May, Fourth Consecutive Monthly Drop -------------- Japan's nationwide "core" CPI, which excludes perishable food items, fell 0.1 percent in May from the year before, the same rate of decline as in April and the fourth consecutive monthly decline, the Ministry of Internal Affairs and Communications (MIC) announced June 29. This result was in line with the market consensus forecast. Overall CPI was unchanged in May from a year earlier. SCHIEFFER