The Japan Economic Scope--July 12, 2007 Part 1

UNCLAS SECTION 01 OF 07 TOKYO 003236 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 12, 2007 Part 1 Sensitive but unclassified. Please protect accordingly. ¶1. (U) This cable contains the part one of the Japan Economic Scope from July 12, 2007. 2.(SBU) Table of Contents ¶3. Informal Civ Air Talks in Tokyo (SBU) ¶4. Star Flyer to Open KIX -- HND Flight (U) ¶5. Centrair Strongly Supports USG Cargo Position (SBU) ¶6. Nuclear Fusion Research Center Opens in Aomori Prefecture (U) Ag Akagi, Doha, Agriculture ¶7. Akagi Faces Corruption Allegations over Office Expenses (SBU) ¶8. Akagi in Europe to Press Japan's Doha Stance (SBU) ¶9. Ag Reform Proposals Proliferating? (U) ¶10. NAMA 6: New Block is Born? (U) ¶11. Gate Price System Under Scrutiny (U) ¶12. Chinese Food Exporters Primary Reason for Japan's Stricter Food Import Rules (SBU) ¶13. EMS: Competitive and Expanding (SBU) ¶14. METI White Paper to Push Service Sector Development: Greater Regional Integration (U) ¶15. METI's Leading Director for WTO Negotiations Will Head EPA Division (U) ¶16. TSE to Revise Technical Listing System to Encourage the Triangular Merger (U) ¶17. Citigroup Plans Japan Expansion (U) ¶18. High Court Hammers Another Nail in Steel Partners' Coffin (U) ¶3. (SBU) Informal Civ Air Talks in Tokyo -------------- EB DAS John Byerly and DOT's Paul Gretch held mostly successful informal, government-only talks in Tokyo with their counterparts in the Japan Civil Aviation Bureau (JCAB) on July10-11. JCAB largely accepted U.S. proposals for treating the issue of Narita slots in an eventual agreement, which would center on U.S.-supported references to the IATA Worldwide Scheduling Guidelines and avoid U.S. acceptance of the Japanese view that U.S. carriers hold an "inappropriate" percentage of slots at Narita. In addition, the Japanese accepted the U.S. proposal to defer discussion until late 2008 of "whether and under what conditions" scheduled service would be authorized between close-in Haneda airport (HND) and points in the United States. Several U.S. passenger carriers fear that Japan's plans for a very limited nighttime opening of HND for scheduled service to points outside a narrow "perimeter" would allow Japanese carriers an unfair competitive advantage. The carriers had urged that no 
flights be authorized if a broader opening was not allowed. The two sides agreed to resume formal talks in early September in either Tokyo or Washington. A successful outcome is not guaranteed; however, as Japan is still balking at granting some additional rights for a U.S. cargo carrier and additional charter flights between HND and U.S. points, including Guam, may be an issue. (ECON: Josh Handler) ¶4. (U) Star Flyer to Open KIX -- HND Flight -------------- The evening Asahi Newspaper (Osaka edition) reported that the Kitakyushu-based Star Flyer Inc., a newly established commercial airline in Japan, is planning to add a Kansai International Airport (KIX) -- Haneda Airport (HND) flight this fall. It will be the second route operated by Star Flyer besides its Kitakyushu -- HND service. According to the sales department of Kansai International Airport Co. (KIAC),there are currently 15 flights a day between KIX and HND from 6am to 10am, but there are no flights between 10am and 3pm. The airport hopes that Sky Flier will fill its dearth of HND connector service between 10am and 3pm. KIAC expects Sky Flyer to operate during this time period. KIAC welcomes the news, but believes Star Flyer will be unable to start this route immediately given that Haneda has maxed out its slots. KIAC thinks that the KIX -- Haneda flight will not begin until the fourth runway at Haneda is completed in 2009. TOKYO 00003236 002 OF 007 Skymarks Airlines previously operated a KIX -- HND flight, but discontinued the route after a year due to low demand. In contrast to Skymarks, Star Flyer will use a smaller aircraft (the 144-seat Airbus 320) to ensure 70 percent of its seats are full at all times. (Osaka-Kobe: Phil Cummings/ Scott Ravenhill/ Naomi Shibui) ¶5. (SBU) Centrair Strongly Supports USG Cargo Position -------------- Officials of Nagoya's Central Japan International Airport told visiting Tokyo Ecouns Fantozzi that, heading into the July 10-11 informal bilateral civair talks, they were in complete agreement with the USG's position on allowing new cargo service by UPS, Evergreen and Polar Air to Nagoya and beyond. The officals said they would stress this to MLIT Deputy DG Maeda in advance of the talks. Inaba noted his other top priorities include a second runway and a new Nagoya-Los Angeles passenger route, although our contacts among the three American passenger carriers currently serving Nagoya are dubious about the prospects for both. See the attached cable for additional details. (Nagoya: Dan Rochman) ¶6. (U)Nuclear Fusion Research Center Opens in Aomori Prefecture -------------- On July 3, the International Fusion Energy Research Center (IFERC) opened its temporary office in Rokkasho, Aomori Prefecture. IFERC's main facility, to be completed in 2009, is one of two key components of the $12.1 billion ITER international nuclear fusion project, which are to be built in Rokkasho. (Note: ITER has dropped its original title, International Thermonuclear Experimental Reactor, and now is known only by its acronym-ITER.) IFERC and its sister organization will coordinate their research with ITER's primary reactor in France. Future components at the Rokkasho site will also include a powerful supercomputer used for plasma research. Attendees at the opening ceremony included Aomori Governor Shingo Mimura, Lower House Diet member Oshima Tadamori, and Toshio Okazaki, president of the Japan Atomic Energy Agency. In addition, 13 ITER researchers attended, including 12 Japanese researchers and ITER official Pascal Garin. The number of researchers will increase to 30 by fall, and the entire ITER site will eventually employ several hundred. ITER is only one component of the sprawling Mutsu-Ogawara industrial complex. Generous GOJ subsidies are available for companies wishing to settle in the complex, and government officials appear committed to providing a welcoming environment for foreign researchers and professionals. (Sapporo: Michael Ivey/Ian Hillman/Yumi Baba) ¶7. (SBU) Akagi Faces Corruption Allegations over Office Expenses -------------- There has been a blizzard of stories in the Japanese media covering allegations that Agriculture Minister Akagi "mishandled" office expenses, recalling problems that his predecessor faced before committing suicide in May. His parents' home in Ibaraki Prefecture has been registered as an office for his political organization and received over 90 million yen to cover expenses in the ten years up to 2005. Similarly, his wife's parents' home in Tokyo's Setagaya Ward was registered and received 15 million yen in the same ten year period. Akagi's father initially denied any political activity was conducted in his home, and then changed his story as the media pressure built. The agriculture minister told reporters that his father's earlier statement was based on a "simple misunderstanding." The political fall out is still uncertain at this stage. PM Abe stood by his embattled minister, saying that Akagi did not need to provide further explanations. Akagi himself dealt with the issue in an hour-long press conference on July 10. TOKYO 00003236 003 OF 007 Editorials in Japan's major dailies have called for Akagi to come clean and provide all the information available on the allegations. Nikkei and Sankei said the minister should provide actual receipts. Mainichi called the episode a "big blow" for the Abe government. A MAFF official we talked to predicted that the Agriculture Minister would survive the media storm and continue in office. (ECON: Nicholas Hill/Ryoko Nakano) ¶8. (SBU) Akagi in Europe to Press Japan's Doha Stance -------------- After addressing awkward corruption charges during an hour-long press conference in Tokyo (see separate story),Agriculture Minister Akagi flew to Europe to discuss Doha. A MOFA official told us that Akagi, in meetings in Geneva on July 11 and 12 with WTO Director General Lamy and Agriculture Chair Falconer, wanted to restate Japan's views on tariff capping and sensitive products before Falconer issues his draft text on July ¶16. In addition, Akagi plans to travel to Paris to meet with his new French counterpart, Agriculture Minister Michel Barnier. A MOFA contact told us the visit would be primarily a courtesy call. The two have never met before. A MAFF official indicated to us that Akagi also plans to hold a meeting of ambassadors assigned to the WTO representing developing countries. Meanwhile, Chairman Isami Miyata of Japan Agriculture (JA),Japan's protectionist farmers' organization, met with Chief Cabinet Secretary Shiozaki on July 10 to restate the organization's opposition to substantial market opening. Miyata had just returned from Europe where he met Lamy in Geneva last week and officials from the French government in Paris. (ECON: Nicholas Hill) ¶9. (U) Ag Reform Proposals Proliferating? -------------- While talking about agricultural reform is different from actually implementing agricultural reform, it is something. And now the Japan Business Federation (Keidanren) is getting into the act of looking at farm sector reform. A Keidanren source told us on July 10 that the organization's Agriculture Committee has met several times and plans to issue a report on agricultural reform sometime in the latter half of September. The source told us the report will be comprehensive. Keidanren's Agriculture Committee is soliciting input from the private sector and academics. The Agriculture Ministry (MAFF) has already been tasked by the government to produce a report this fall on comprehensive agricultural reform. In addition, a source on the Council for Economic and Fiscal Policy (CEFP) working group responsible for looking at agricultural reform told us that the group will issue a second report in November. (ECON: Nicholas Hill/Ryoko Nakano) ¶10. (U) NAMA 6: New Block is Born? -------------- Japan's role in the Doha talks could be in "forging the differences" between developed and developing countries. That was what Trade Minister Amari told a press conference on July 10 in Tokyo. Just back from a visit to India to cover largely energy-related bilateral issues and an APEC trade ministers meeting in Australia July 5-6, Amari said that a meeting with his counterparts from Mexico, Indonesia, Thailand, the Philippines, and China went well. He said that the ministers agreed to keep meeting and quipped that the group could call itself the "NAMA 6." For Amari's full statement in Japanese, click here. Meanwhile, Nikkei reported on July 9 that one of Amari's deputies at METI, Takao Kitabata, the Vice Minister for Economic Trade and Industry, is still holding out hope for a Doha deal. TOKYO 00003236 004 OF 007 The Vice Minister said he hoped countries would get interested in the talks once the chairs for the NAMA and Agriculture negotiations present their draft texts. (ECON: Nicholas Hill/Ryoko Nakano) ¶11. (U) Gate Price System Under Scrutiny -------------- Japan's importers and users of pork are stepping up their efforts to change the gate price system for assessing duties on imported pork products. The gate price mechanism was negotiated in the Uruguay Round and effectively puts a floor on the price of pork imported to Japan. When the system functions, cheaper pork products result in a higher tariff. Conversely, the system encourages fraud and traders regularly over-invoice to exaggerate the price of products and thus avoid paying import duties. Last year Japan's major meat wholesaler, Kyochiku, was indicted for its attempt to avoid $111 million in duties. Embassy sources say that other very well known importers have been under investigation. Japan is the largest market for U.S. pork, with exports topping $1 billion last year. Over the past two weeks, the Embassy has been approached by the Japan Meat Importers Association, an umbrella group of meat importers; the Japan Ham and Sausage Processors Association; Japan's biggest users of pork; and an industry supported non- profit called "The Group on Import Regulations and Distribution of Meat." The latter runs a web page and has a slick DVD arguing against the Gate Price System. They are asking for the USG's help in trying to convince the Japanese government to do away with the system. The gate price system has been on the government's radar for a while. In May the sub- committee under the CEFP, charged with identifying ways to promote Japan's trade liberalization efforts -- particularly with respect to FTA and agricultural policies -- recommended that the government abolish the system. In June, the full CEFP, which is more in tune with the political realities and vested interests, rejected the recommendation in its Basic Polices Report, saying only that the gate price system should be "reconsidered." (ECON: Nicholas Hill/Ryoko Nakano) ¶12. (SBU) Chinese Food Exporters Primary Reason for Japan's Stricter Food Import Rules -------------- Japan's stricter rules on minimum residue levels (MRLs), implemented over the last year, were put in place primarily in reaction to concerns about Chinese food exporters, a senior Health Ministry (MHLW) official told us on July 10. Press coverage in Japan has been intense since scandals came to light involving Chinese food exporters and the country's regulatory regime for food and other products. According to a Mainichi story on July 9, the number of food products banned for exceeding limits on agricultural chemicals increased eight- fold between June 2006 and May 2007, a period when the government was implementing a tighter regulatory framework. According to the story, of 761 products banned during the period, 250 involved Chinese products. "The increased number of banned products shows that the positive list is effective in maintaining the safety of food products from China," Mitsuru Ando, a professor at Toyama University, told Mainichi. The MHLW official told us that the tighter rules in place in Japan since last year -- involving a positive list which punishes all exporters from the same country -- is in place because of conditions in China. TOKYO 00003236 005 OF 007 Japanese officials have told us that it is difficult to punish companies on an individual basis because in China they tend to disappear and then reemerge under a different name. Because of WTO requirements, however, all countries are subject to the same onerous rules. The United States has been addressing concerns about Japan's system in our bilateral regulatory reform process with the Japanese government. (ECON: Nicholas Hill) ¶13. (SBU) EMS: Competitive and Expanding -------------- Contacts at Japan Federal Trade Commission (JFTC) reaffirmed the commission's position that Japan Post's Express Mail Service (EMS) is competitive with international express mail delivery services (FedEx and UPS) as detailed in the commission's July 2006 report during a July 6 meeting with Ecouns. They specifically called out the report's discussion of the accounting procedures that should be used to ensure proper costing to account for EMS' use of the Japan Post infrastructure. Failing to do so could constitute dumping, they suggested. However, they also stated that JFTC could only issue its opinion on the matter and had little enforcement capabilities unless there was a clear violation of Japan's Anti-Monopoly Act. The commission also has no ability to take action against another government agency, the sources said. The best way to resolve the issue of EMS' unfair competitive advantage would be for industry to bring suit in a Japanese court, they said. Stay tuned for more reporting on this issue. Separately, news reports state that Japan Post will seal a "comprehensive" deal with China Post. Plans are to expand the areas of next-day delivery from exclusively Shanghai at present to Beijing and other major cities. Japan Post will also accelerate customs clearance procedures so that delivery times for mail bound for Shanghai will be reduced by up to five hours. Finally, it plans to launch a packing and container cargo delivery business for Japanese businesses shipping to Chinese destinations. (ECON: Sally Behrhorst) ¶14. (U) METI White Paper to Push Service Sector Development: Greater Regional Integration -------------- On July 10, METI Minister Akira Amari submitted to the Cabinet the 2007 White Paper on International Economy and Trade. This year's report advocates steps to invigorate Japan's underdeveloped service sector as well as steps toward creating an "open and seamless architecture for the economic system" through greater regional economic integration via bilateral and multilateral agreements. It also provides detailed analysis on the present global economic climate, with special attention to the rapidly expanding economies of China and India, and notes the expansion and deepening of regional business networks. On July 17, METI will brief the diplomatic corps in Tokyo on the white paper's conclusions. An English summary will be available shortly with a full translation of the report ready later in the year. Click here for the Japanese summary. (ECON: Chris Wurzel) ¶15. (U) METI's Leading Director for WTO Negotiations Will Head EPA Division -------------- On July 10, METI announced that Shigehiro Tanaka will leave his WTO negotiations post to head the Ministry's Economic Partnership Division. Naoshi Hirose will succeed Tanaka as the Principal Director in the Multilateral Trade System Department. Hirose was previously responsible for WTO dispute settlements in the same division. (ECON: Ryoko Nakano) TOKYO 00003236 006 OF 007 ¶16. (U) TSE to Revise Technical Listing System to Encourage Triangular Mergers -------------- The Tokyo Stock Exchange (TSE) has announced it will implement a revised "technical listing system" that will allow expedited listings of foreign companies involved in cross-border triangular mergers. The new system may take effect during this month. Under the existing system, when a listed company merges with an unlisted company, TSE will approve facilitated listing of the surviving company (as long as it meets TSE's liquidity standards). The revised system will be applied to cross-border triangular mergers, where the shares of foreign parent companies will be offered as merger considerations to the shareholders of the domestic target company. TSE will examine whether the company can ensure appropriate SIPDIS liquidity and settlement of its shares under the regulations of its home country. In the case of the cross-border triangular merger, applicants will be requested to make prior consultations so that TSE can enhance its assessment. With this new system, TSE seeks increased cross-border triangular mergers, and SIPDIS therefore, further inward investment, while maintaining shareholders protection. In a seminar, NikkoCitigroup analyst Tsutomu Fujita said recognizes this system as one of Japan's efforts to make the triangular merger scheme accessible and workable, though he does not expect many cross-border triangular mergers to occur due to various disadvantages of the scheme. (ECON: Satoshi Hattori) ¶17. (U) Citigroup Plans Japan Expansion -------------- Citigroup CEO Charles Prince announced on July 9 that not only has his firm invested $10 billion in Japan over the past two months, but would also expand its reach from 137 to 200 locations over the "next couple of years." Prince cited Citi's ability to differentiate, promising that "we can offer the most advanced products to Japanese customers by leveraging our global network," including developing-market mutual funds and private equity funds. Citi's expansion plans include doubling the current 32 banking branches, as well as further proliferation of the brokerage business of recently purchased Nikko Cordial Securities, with Prince emphasizing, "the primary focus for business expansion is organic growth; acquisitions are complementary." At an ACCJ breakfast in Tokyo on July 12, Prince also signaled Citi's intent to list Citigroup stock on the TSE, a measure that had been rumored but unconfirmed until now. Prince told the Wall Street Journal that when Citi's stock is listed on the TSE, "I want to come back [to Tokyo] and ring the bell." Additionally, Prince has asked Howard Baker, former U.S. Ambassador to Japan, and Masajuro Shiokawa, former Finance Minister to join the advisory board of Citi's financial holding company in Japan. Citi's Japan financial holding company would manage Citigroup Japan's banking, securities- including Nikko Cordial, credit cards, and consumer finance arms. (FINATT: Mateo Ayala) ¶18. (U) High Court Hammers Another Nail in Steel Partners' Coffin -------------- On July 9, the Tokyo High Court upheld a June 28 lower court ruling rejecting a suit by U.S. hedge fund Steel Partners, which sought a temporary injunction against implementation of takeover defenses by Osaka-based Bull-Dog Sauce Company. The fund has announced it will appeal to the Supreme Court, but few expect it to prevail there. The ruling opens the way for Bull-Dog to implement its "poison pill" which will dilute Steel Partners' holdings by 75 percent and compensate the fund with a cash payout. The High Court's decision was expected but the vehemence of its TOKYO 00003236 007 OF 007 ruling surprised many observers. The Court justified Bull-Dog's defensive measures on the grounds that Steel Partners was an "abusive acquirer." In contrast, the lower court dismissed Steel Partners' request by deferring to the shareholders' will as expressed at the company's annual meeting last month. The court's description of Steel Partners as "abusive" is now likely to embolden future targets of the fund to adopt their own takeover defenses and widens the scope of allowable defenses under Japanese corporate law. The Embassy is working on an analysis of the outcome of the corporate meeting season including the impact of the Steel Partners case. (ECON: David DiGiovanna) SCHIEFFER