The Japan Economic Scope - January 19, 2007

UNCLAS SECTION 01 OF 06 TOKYO 000346

SIPDIS

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - January 19, 2007

Sensitive but unclassified. Please protect accordingly.


1. (SBU) Table of Contents


3. New Regional Economic Initiatives

4. Keidanren Board Plays Same Old Tune on Triangular Mergers

5. Ambassador Attends American Airlines Ceremony at Narita

6. Central Japan Outlook for 2007 -- Optimistic but Wary

7. Regional Economic Integration: Kyushu Businesses to Visit
Vietnam as Part of "Beyond China" Strategy

8. Reform: JFTC Reportedly to Order MLIT to Act Against Bid
Rigging

9. Government Drops White Collar Exemption; Cites Lack of
"Public Understanding"

10. Proposed Changes to Defined Contribution Pension Schemes

11. Politics: DPJ Annual Convention Focuses on July Election

12. LDP Convention Promotes "Beautiful Japan" Theme

13. Nippon TV Correspondent on Abe, Koizumi, Upper House
Elections

14. DPJ Commercial Misses the Boat

15. Agriculture: China to Resume Imports of Japanese Rice

16. Banking: Hokkaido Banks to Merge

17. Civair: Chief Cabinet Secretary Hopes for Full 24-Hour
Operations at Haneda before 2009

18. JAL Restructuring; Further Details on Routes Emerge

19. Boeing's Dreamlifter Takes Flight from Nagoya




2. (U) This cable contains the Japan Economic Scope from January
19, 2007.



3. (U) New Regional Economic Initiatives
--------------

At East Asia Summit (EAS) meetings in Cebu January 15, Japan
engaged further on a number of new initiatives to increase its
economic cooperation with other countries in the region.

Perhaps most important is the agreement among the leaders of
Japan, China, and South Korea to begin negotiations on a
tripartite investment treaty as well as to initiate a study on
the possibility of an FTA among the three countries.
Prime Minister Abe also announced a ten-item proposal calling for
greater cooperation among the 16 EAS member states in such areas
as energy security, disaster prevention, and people-to-people
exchanges.

In addition, the EAS members agreed to launch a "Track Two" study
of Japan's idea for a "Comprehensive Economic Partnership in East
Asia" (i.e., ASEAN+6 FTA),an initiative that conflicts with the
U.S. proposal at APEC for a Free Trade Area of the Asia-Pacific.


4. (U) Keidanren Board Plays Same Old Tune on Triangular Mergers
--------------

In a January 16 meeting with EMIN, the chairman of Matsushita
Electric Corp., Kunio Nakamura, who also serves as chairman of
Keidanren's Committee on Economic Law, insisted that Keidanren
was in favor of M&A and that it supported the government's goal
of increasing Japan's FDI. It was necessary, however, to have
legal safeguards to protect "small investors" and prevent a loss
of Japan's "sensitive" technology to foreign acquirers, he said.

According to Nakamura, Keidanren was not so concerned about
investors from the United States, where there is a strong system
of corporate governance and transparency in accounting rules, but
many of Japan's neighbors were developing countries "where
accounting rules and corporate governance were weak."

Japan needed an M&A process that ensured shareholders had
adequate and accurate information on which to judge any proposed
deal.

Nakamura advocated a legal review, similar to the United States'
CFIUS procedure, to protect critical high technology from falling
into foreign hands. Much of that technology, he asserted, was
held by medium-sized enterprises that did not have the same
ability as large corporations to implement defensive measures
against hostile takeovers.

Despite repeated assertions that Keidanren was pro-M&A, Nakamura
did not accept EMIN's point that Keidanren's strong public
opposition to draft regulations on triangular mergers sent a
negative signal to investors.

When EMIN suggested the GOJ and Keidanren balance that signal
with statements renewing Japan's welcome of foreign investment,
Nakamura blandly noted Prime Minister Abe had already done so,
clearly implying he did not see the need for Keidanren to do the
same.

TOKYO 00000346 002 OF 006




5. (U) Ambassador Attends American Airlines Ceremony at Narita
--------------

Ambassador Schieffer cut the ribbon at Gate 71 along with VIPs
from Narita airport and American Airlines to celebrate the
inaugural flight -- AA 176 to Dallas/Fort Worth -- from AA's new
gate area in Terminal-2 on January 17. He also toured the new AA
Admirals Club.

Narita Airport has been upgrading its facilities at Terminal-1
and Terminal-2, allowing the three major airline alliance
partners to collocate their operations all under one roof in
either Terminal -1 or -2.

AA's new location will bring all members of the Oneworld alliance
together in Terminal-2, shortening transfer times between flights.



6. (U) Central Japan Outlook for 2007 -- Optimistic but Wary
--------------

Led by strong demand in the manufacturing sector, the economic
outlook for 2007 in Central Japan is bright. That said, the
regional industrial giants appear to be reaping most of the gains
while their small and medium-sized suppliers continue to be
squeezed. Manufacturers of all sizes face a labor shortage.

Investment in facilities and infrastructure remains high, and,
publicly at least, both regional government authorities and
private-sector leaders say one of their top priorities is
avoiding the hubris and overreach that could turn the current
good times into a bubble.

See attached Nagoya 03 for details.


7. (U) Regional Economic Integration: Kyushu Businesses to Visit
Vietnam as Part of "Beyond China" Strategy
--------------

In anticipation of Vietnam becoming one of Japan's most promising
economic partners along with China, members of various Kyushu
public and private entities will travel to Vietnam from January
21-28 on a business mission headed by Kyushu Economic Federation
Chairman Michisada Kamata.

The 30-member delegation includes representatives from METI
Kyushu, Kyushu Economic Federation, Kyushu Federation of Chambers
and Commerce and Industry, and companies specializing in energy,
transportation, IT, finance, civil engineering, medical service,
and agriculture.

Although Kyushu firms currently account for only 2.8 percent of
all Japanese companies operating in Vietnam (e.g. 10 out of 361
firms),interest in Vietnam is expanding as part of local efforts
to diversify regional business ties beyond the China-centric
focus of the past several years.

Vietnam's accession to the WTO on January 11, 2007, and its
negotiations on an economic partnership agreement with Japan
provided additional impetuses for this mission and a second one
in June to continue to lay the groundwork for a regular economic
forum between Kyushu businesses and their Vietnamese counterparts.



8. (U) Reform: JFTC Reportedly to Order MLIT to Act Against Bid
Rigging
--------------

In what would be a ground-breaking action, the Japan Fair Trade
Commission (JFTC),according to press reports, is preparing to
order the Ministry of Land, Infrastructure, and Transport to take
measures to prevent bid-rigging at the initiative of government
officials after it found that two former officials concerned with
engineering matters in the ministry had participated in a bid-
rigging conspiracy.

The case concerns a public works project to build floodgates and
would be the fourth time that charges have been pressed under the
2002 Law to Prevent Public-Private Bid Rigging (kansei dango
boshiho).

The JFTC action, however, would mark the first time a central
government ministry has been cited under that law.
The only previous application of the law to a central government
entity came in the wake of the 2005 "steel bridge" scandal when
the JFTC called on the Japan Highway Public Corporation to
institute new anti-bid rigging measures.


9. (U) Government Drops White Collar Exemption; Cites Lack of
"Public Understanding"
--------------

TOKYO 00000346 003 OF 006



Prime Minister Abe announced that the government would not submit
amendments to the Labor Standards Law widening the white-collar
exemption from overtime pay in the upcoming regular Diet Session.

MHLW had been preparing amendments to the law to exempt certain
employees earning over nine million yen ($75,000) annually from
being paid overtime but the proposal drew criticism from labor
unions and the opposition Democratic Party of Japan that it was
merely a way for companies to implement a "zero-overtime pay
system."

Abe cited a lack of "public understanding" of the new plan as the
reason for the postponement.

Some CEFP members spoke publicly about the plan in December, but
it was clearly not enough to overcome suspicions among union
members that the outcome would be lower pay packets but not
necessarily shorter working hours.


10. (U) Proposed Changes to Defined Contribution Pension Schemes
--------------

On a related labor issue, MHLW announced plans to revise rules
for defined contribution pension schemes to allow workers to make
individual payments into their accounts.

Currently, only employers can make the payments.

Under the new rules, individual employees will be able to pay up
to 23,000 yen ($200) a month, half of the current maximum paid by
employers, and obtain preferential taxation treatment of the
payments.

MHLW also announced plans to ease the current conditions for
withdrawing funds if an employee changed jobs.

At present, an employee in such a scheme who becomes self-
employed or moves to a company without such a scheme cannot
withdraw his pension funds, a disincentive to labor mobility.

Under the proposed rules an employee could withdraw the funds, if
the accumulated fund balance of in his account is less than
250,000 yen ($2,170),or the participation period in the scheme
is less than three years.


11. (SBU) Politics: DPJ Annual Convention Focuses on July
Election
--------------

The Democratic Party of Japan (DPJ) held its annual convention on
January 15-16. The focus of the convention was the July upper
house election and DPJ President Ichiro Ozawa delivered a speech
in which he vowed to stake his political life on victory.

The press noted that the atmosphere surrounding this year's
convention lacked the sense of helplessness that has defined past
ones, perhaps due to Prime Minister Abe's falling poll numbers
and a rash of recent scandals involving Cabinet members.
The Convention included five guest speakers: Social Democratic
Party president Mizuho Fukushima; People's New Party secretary
general Hisaoki Kamei; New Party Nippon representative Yasuo
Tanaka; Japan Trade Union Confederation (RENGO) president
Tsuyoshi Takagi; and Chinese Communist Party International

SIPDIS
Department chief Wang Jiarui.

Fukushima emphasized cooperation among the opposition parties and
called on the DPJ to withhold support for the national referendum
bill.

Kamei and Tanaka stressed the need to "fight jointly" (kyoutou)
to defeat the LDP coalition in the July upper house election.
Takagi strongly criticized the Abe Cabinet's policy favoring
employers over employees and underscored the need for a worker-
friendly DPJ.

Wang highlighted the importance of stronger China-Japan relations.



12. (U) LDP Convention Promotes "Beautiful Japan" Theme
--------------

The Liberal Democratic Party held its annual convention on
January 17 during which Prime Minister Abe focused on winning the
two elections in April and July and creating a "Beautiful Japan."

He pointed to passage of the Basic Education law and JDA upgrade
bills in the last Diet session as evidence of his progress thus
far.

Abe also promised constitutional revision, further educational
reform, economic growth through innovation and openness, civil

TOKYO 00000346 004 OF 006


service and government agency restructuring, and a more assertive
diplomacy.

Secretary General Hidenao Nakagawa positioned the upper house

SIPDIS
election as a decisive battle and called for the cooperation of
all LDP organizations and supporters. He also ridiculed the
DPJ's new commercial (see accompanying article).

Komeito representative Akihiro Ota, the guest speaker and a much
more powerful orator than Abe, repeatedly thanked the LDP for its
efforts to include Komeito in every policy-making opportunity and
promised to work closely with the LDP to win both elections.

LDP supporters filled an enormous hall with many attendees left
standing around the edges.

The audience and upper house candidates consisted mostly of
middle-aged men with a smattering of women.


13. (SBU) Nippon TV Correspondent on Abe, Koizumi, Upper House
Elections
--------------

Nippon TV political correspondent Takayuki Kasuya outlined his
views on the current Abe administration, the upcoming July upper
house elections, and the possible return of former Prime Minister
Koizumi on January 18 at a talk at LDP headquarters.

He began by noting that the dramatic fall in Prime Minister Abe's
approval ratings can be traced partly to legacies of the previous
Koizumi administration such as the prearranged town meetings and
the fall of Government Tax Committee Chairman Honma, a member of
the Council for Economic and Fiscal Policy during Koizumi's
administration.

Kasuya opined that Koizumi had remained in power for a very long
time because of the lack of scandals involving the illegal use of
political funds.

He blamed Abe for neglecting to thoroughly vet some of his
Cabinet members before their appointments.
Kasuya believes Chief Cabinet Secretary Shiozaki realizes there
is a lack of communication among Cabinet members and is taking
steps to rectify the situation.

Kasuya predicted that the LDP would lose seats in this summer's
election. Asked about Koizumi returning to power if the LDP lost
badly, Kasuya said he thought there was "ZERO" chance of that.

The ex-PM had already accomplished his main goal: postal
privatization.


14. (SBU) DPJ Commercial Misses the Boat
--------------

The Democratic Party of Japan (DPJ) included a showing of its
newest party commercial at its annual convention on January 16.
The ad features an 18th century ship struggling against a howling
storm with a bedraggled President Ichiro Ozawa struggling at the
wheel.

The two other party leaders Naoto Kan and Yukio Hatoyama are also
shown manning various parts of the ship.

Suddenly, a gust of wind knocks Ozawa away from the wheel and he
slams against a wall behind him. Kan and Hatoyama run to his aid
and Ozawa looks up at them with a slightly dazed expression as
they help him to his feet. In the next scene the three men are
staring off into the now blue sky.

Apparently, the commercial is meant to emphasize the teamwork of
the three men.

Instead, it leaves one concerned about a ship captain unable to
manage his boat in a storm.

Other questions the commercial raises include whether this
ancient ship represents the DPJ. If so, the viewer is left
longing for a newer one.

Does the raging storm represent Japan's current political and
economic condition? If so, many Japanese might question that
view.

And finally, does the country want to be led by a man who loses
hold of the ship's wheel?

In all, we assess that this commercial is a misguided effort at
creating confidence in the DPJ.


15. (U) Agriculture: China to Resume Imports of Japanese Rice
--------------

TOKYO 00000346 005 OF 006



Agriculture Minister Matsuoka and China's top quarantine official
agreed in principle on January 18 to resume rice exports to China,
which had been stopped since 2003.

The two countries still need to iron out some pest issues that
prompted the ban in the first place, but hope to conclude a final
agreement before Prime Minister Wen Jiabao visits Japan in April,
with exports to China resuming by July.

The agreement is something that Matsuoka, according to an
analysis in the Japan Agricultural News, "desperately" needs to
reach his goal of tripling food exports by 2013.

According to the same analysis, he also needs a success story to
deflect fallout from a scandal that continues to brew over
political funding allegations.

Given the extremely high price of Japanese rice, however, most
observers do not anticipate a big surge in exports to China even
after the agreement is completed.


16. (SBU) Banking: Hokkaido Banks to Merge
--------------

North Pacific Bank (Hokuyo Ginkou) and Sapporo Bank, Hokkaido's
largest and third largest regional banks, announced plans to
merge operations by 2008.

If realized, this will be the first bank merger in Hokkaido since
the collapse of Hokkaido Takushoku Bank a decade ago.

The new bank will retain the name North Pacific Bank, but its
holdings will increase to $52.5 billion, making it the fifth
largest regional bank in Japan.

Representatives from both banks promise the merger will occur
without layoffs, but post's contact at North Pacific Bank tells
us that anxiety among Sapporo Bank employees is high.

With the merger, North Pacific Bank and Hokkaido bank will be the
only regional banks still operating in Hokkaido.


17. (U) Civair: Chief Cabinet Secretary Hopes for Full 24-Hour
Operations at Haneda before 2009
--------------

Chief Cabinet Secretary, Yasuhisa Shiozaki noting that the
Ministry of Land, Infrastructure, and Transport is studying the
internationalization of Haneda Airport for when its new fourth
runway opens in 2009, reportedly said he wondered if full 24-hour
operations at Haneda can be realized "much earlier" at a lecture
held in Tokyo on January 11 according to the press.

Prime Minister Abe has proposed 24/7 operations at airports and
seaports under his Asia Gateway initiative.

Under the initiative, Shiozaki stated that the increase of
international charter flights from Haneda Airport to Shanghai and
other Asian cities is under study.

He suggested that the operational hours at Narita Airport could
be increased. Currently, late-night to early-morning flights are
banned due to noise and arrangements with the local communities.


18. (U) JAL Restructuring; Further Details on Routes Emerge
--------------

Japan Airlines' restructuring moves continued to receive
considerable coverage this week.

The press learned that unprofitable international routes from
Kansai to Australia will be stopped in March and three times a
week summer flights from Narita to Zurich will be scrapped.
Flights on two routes between Narita and China will be reduced.
Meanwhile, more profitable international routes that have a lot
of business travelers -- Narita to New York, Hong Kong, Paris,
Moscow, and New Delhi and Kansai to China -- will be augmented.

Flights to New York reportedly will increase from 10 to 13 a week,
and four flights a week will be added to the current 10 flights a
week to Paris. JAL is negotiating with China to increase the
number of flights between Osaka and Hangzhou to three a week from
two, and to increase the flights between Tokyo and Beijing.

JAL will be selling or reducing its stake in retail and hotel
operations to raise cash for debt payments, according to the
press articles.

JAL President Haruka Nishimatsu told the press that he would like
to continue to contain costs by reducing the basic pay of JAL's
workers, and perhaps cutting bonuses and retirement allowances.

TOKYO 00000346 006 OF 006



The press remains skeptical whether the steps taken so far by JAL
will be enough.

Meanwhile, however, the press says JAL is seeing its stock do
better in recent days due to declining oil prices. Also, reports
that JAL would seek 60 billion yen in loans to cover redemption
of convertible bonds have buoyed its stock.


19. (SBU) Boeing's Dreamlifter Takes Flight from Nagoya
--------------

The first of Boeing's "Dreamlifters," one of three modified 747-
400 aircraft with triple the capacity of a standard 747 cargo
plane, made its maiden flight from Nagoya to the United States on
January 12, with a cargo of 787 fuselage components, marking a
key milestone in the production of the Boeing 787 Dreamliner.

Christer Hellstrand, Boeing's Director of Japan 787 Production,
told Nagoya Principal Officer he was "very, very, very happy"
with the progress Boeing and its Japanese partners have made in
meeting development and production target dates so far and said
Mitsubishi Heavy Industries in Nagoya remains on track for the
delivery of the first 787 wings in March. Please see attached
Nagoya 04 for more details.

Note: In the interest of time, Boeing did not paint the
Dreamlifter beyond its primer coat until just before it began
operations. Due to its bulbous shape, wags in the aerospace
sector suggested a "Weinermobile" motif and circulated a
Photoshopped version of the Dreamlifter in the appropriate colors.

For reference, a copy is attached.

SCHIEFFER