Identifier
Created
Classification
Origin
07TOKYO385
2007-01-29 06:11:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tokyo
Cable title:  

The Japan Economic Scope - January 25, 2007

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DE RUEHKO #0385/01 0290611
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R 290611Z JAN 07
FM AMEMBASSY TOKYO
TO CIA WASHDC
UNCLAS SECTION 01 OF 07 TOKYO 000385 

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SUBJECT: The Japan Economic Scope - January 25, 2007

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UNCLAS SECTION 01 OF 07 TOKYO 000385

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SUBJECT: The Japan Economic Scope - January 25, 2007

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1. (SBU) Table of Contents


3. Keidanren Tells Ambassador Position on M&A "Misunderstood"

4. Kansai Association of Corporate Executives: Support for
Agriculture Reforms, Abe's Survivability

5. Keidanren Hasn't Given Up on Doha

6. U.S.-Japan Reg Reform Talks Commence

7. Financial Services Working Group Meets in Tokyo

8. FTAs: Private Sector Interest: Joint Statement Calls for EPA
Discussion

9. Japan-Swiss Report Calling for FTA Issued

10. Reform: CPRR Members Hopeful; Abe's Press Treatment

11. House of Councilors' Member Hayashi on Reform and Leadership

12. Japanese M&A Surge; Most Domestic Deals

13. Ag: U.S. Beef Imports to Japan Remain Low

14. New Barriers to Trade Being Erected?

15. Energy: Joint Seminar Examines Asia Pacific Energy Security

16. Business: Keidanren Leadership Reshuffle

17. Osaka Prefecture to Provide Japan's First SME Tax Incentives

18. Civair: Israeli FM Discussed Tel Aviv Tokyo Flights

19. MLIT's Airports Discussion Group Members Express Need for
More Meetings

20. New Study Group to Promote KIX U.S. Routes

21. Regional Airports in Western Japan Focus on Profit and Shed
Low-Demand Routes

22. Basic Industries: Japanese Diemakers Look to Expand Abroad


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


3. (SBU) Keidanren Tells Ambassador Position on M&A
"Misunderstood"
--------------

At a January 23 lunch hosted by Keidanren Chairman Fujio Mitarai,
the Ambassador expressed the United States' disappointment at
Keidanren's very public lobbying against proposed new triangular
merger rules and warned it was inconsistent with the business
group's position favoring a bilateral FTA.

Mitarai responded that Keidanren's position on triangular mergers
had been "misrepresented" both in the editorials in the Nikkei
newspaper as well as public and private comments from METI.

Mitarai promised to set up a briefing for the Ambassador to
explain Keidanren's real views. A hint of those views came in
comments by Keidanren Vice Chairman Miyahara at the same event

who described Japanese companies as "weak" and "vulnerable" to
hostile take over bids in comparison to U.S. and European firms.
For a full report on the Ambassador's lunch see Tokyo 0368.


4. (SBU) Kansai Association of Corporate Executives: Support for
Agriculture Reforms, Abe's Survivability
--------------

At a recent dinner with Osaka-Kobe Consul General Danny Russel,
Co-Chair of the Kansai Association of Corporate Executives
(Kansai Keizai Doyukai) Atsushi Kojima again showed himself to be
a strong advocate of agricultural liberalization.

He repeated his belief that a handful of farmers are locking up
Japan's agricultural sector to the detriment of public/national
interest. Beyond the unsustainability of farming demographics
and the high cost to consumers, he argues that the demanding
Japanese palate will support the domestic niche market for
certain uniquely Japanese items (so there is no need for import
barriers) and that Japanese agriculture can be competitive in
producing/exporting certain high-end products.

Although personally he favors developing a scheme to promote
imported labor in Japan, his Doyukai colleagues are not ready to
support changes to Japan's immigration system yet.

Kojima said that he and other business leaders are worried about
Prime Minister Abe's survivability. Lately, people commonly ask
one another "is he going to make it?"

Kojima said the business community in Osaka needs to back the
government and he -- as well as Doyukai -- is determined to
support Abe.

He clearly was very pleased with Abe's perceived responsiveness
to Kansai Doyukai's recommendations on economic policy issues,
praising Abe for making adjustments to GOJ policy based on
Osaka's input.

He said Abe was an ineffective communicator and that was not
likely to change -- attributing it to his regional background.


5. (U) Keidanren Hasn't Given Up on Doha

TOKYO 00000385 002 OF 007


--------------

With the Davos meeting of world economic leaders set to start,
the Japan Business Federation (Keidanren) joined with several
non-Japanese business organizations to call on WTO members to
redouble efforts to reach an agreement on the Doha Round of
multilateral trade talks.

The joint statement was drafted under the leadership of the
American Chamber of Commerce to the European Union, together with
other business organizations from the United States, European
Union, Australia, Canada, Hong Kong, Brazil, Taiwan, South Korea
and India.

It urges WTO members to jump start the Round and achieve
agreements on core elements within the next 2-3 months.

The business organizations suggest that if the round fails it
could lead to increased regionalism and protectionism.

A Keidanren official told us that, compared to a similar
statement issued in July 2006, this one enjoyed wider support,
with more organizations signing on. She added that the joint
statement is more balanced and ambitious, covering core sectors
such as industrial goods, agriculture, services, trade
facilitation, and development.

The U.S. business organizations included the Coalition of Service
Industries (CSI),National Foreign Trade Council (NFTC),the
United States Council for International Business (USCIB),and the
American Chamber of Commerce to the European Union.


6. (U) U.S.-Japan Reg Reform Talks Commence
--------------

An inter-agency team arrived from Washington to meet with their
GOJ counterparts to launch the sixth round of talks on Regulatory
Reform the week of January 22.
They are discussing each government's recommendations, which were
exchanged last month between Deputy Foreign Minister Yabunaka and
Deputy U.S. Trade Representative Bhatia.

The recommendations are covered in working groups on
Telecommunications, Cross Sectoral, Information Technology,
Financial Services, and MedPharm and can be found on the U.S.
Embassy website.


7. (U) Financial Services Working Group Meets in Tokyo
--------------

Treasury DAS Mark Sobel led a delegation of U.S. financial
services regulators to the annual Financial Services Working
Group on January 22.

Participants included: the Securities and Exchange Commission,
the Federal Reserve Bank, the Office of the Comptroller of the
Currency, the Commodity Futures Trading Commission, and the
Federal Deposit Insurance Corporation.

Interfacing primarily with the Financial Services Agency, much of
the talk centered on banking and financial service regulatory
matters, with a series of regulator-to-regulator meetings
subsequent to the main discussion.

Given Financial Services Minister Yamamoto's recent exhortations
for Tokyo to become an international financial center, Japan's
financial regulatory regime will be subject to frequent
assessment leading up to next year's talks.


8. (U) FTAs: Private Sector Interest: Joint Statement Calls for
EPA Discussion
--------------

The U.S. Business Roundtable and the Japan Business Federation
(Keidanren) issued a joint statement on January 19 urging both
governments to begin discussions toward a framework of
negotiations for an economic partnership agreement as soon as
possible.

In the joint statement, the two organizations agree that the
United States and Japan already enjoy a strong, interdependent
relationship, but that an EPA would further remove inefficient
regulations that impede economic growth in certain areas, such as
liberalization in trade in services, investment and protection of
intellectual property rights.

The statement has so far received scant attention in the Japanese
press.


9. (U) Japan-Swiss Report Calling for FTA Issued
--------------

TOKYO 00000385 003 OF 007


The 35-page Report of the Joint Governmental Study Group for
Strengthening Economic Relations between Japan and Switzerland is
now on the MOFA website in English.

(Texts in English of agreements relating to FTAs with other
countries can also be found on this site.)

The Study Group recommends launching negotiations for a
comprehensive FTA/EPA between Japan and Switzerland "as soon as
possible."

If reached, the report notes, the FTA/EPA would be the first of
its kind between Japan and a European country.

Topics covered in the report include: trade in goods; trade in
services; investment; government procurement; IPR; movement of
natural persons; competition policy; improvement of business
environment; cooperation; institutional issues and dispute
settlement; and a simulation study on the economic effects of an
EPA.

The report's appendix has a lengthy list of the Japanese and
Swiss officials involved in the Study Group.

For the uninitiated, the agricultural section makes for a
fascinating read.


10. (SBU) Reform: CPRR Members Hopeful; Abe's Press Treatment
--------------

CPRR chairman Takao Kusakari and council members Keiko Honda and
Tatsuo Hatta conveyed their disappointment to EMIN during a
January 24 meeting on the relative lack of progress on reform
recommendations in the council's December 2006 final report (see
Tokyo 7180 on December 2006 final report).
The trio expressed hope, however, that the infusion of new
members and a change of Ministers responsible for the CPRR would
breathe new life into the reform process.

(Note: Ms. Honda comments from two weeks ago were distinctly
negative about the reform process, see Tokyo 0154)

They stated that Prime Minister Abe is a gifted politician but is
not being treated fairly by the press and speculated as to why.

We will report more on this in an upcoming cable.


11. (SBU) House of Councilors' Member Hayashi on Reform and
Leadership
--------------

In a January 24 meeting with EMIN, fourth generation politician
Yoshimasa Hayashi expounded upon efforts to consolidate Japan's
47 prefectures into 14 administrative blocks, stating that, if
achieved, it would be the biggest reform movement since the Meiji
era.

The consolidation, which will begin this year with Hokkaido as a
test case, would push powers currently held by the central
government down to the prefectural level and would have wide-
ranging implications, including necessitating to re-organize
government ministries.

Hayashi also stated that Abe has a more orthodox negotiating
style than his predecessor, Junichiro Koizumi, and is perhaps
finding it difficult to get out from under that shadow.

We will report more on this in an upcoming cable.


12. (U) Japanese M&A Surge; Most Domestic Deals
--------------

There were a record high of 2,775 M&A transactions involving
Japanese companies in 2006 worth 15.2 trillion yen, up 27.1
percent from the previous year, according to M&A consulting firm
RECOF.

RECOF noted this growth showed the aggressiveness of business
managers against the backdrop of satisfactory business
performance and the rise in stock prices.
This value of transactions was the second highest on record after
the 18 trillion yen worth of deals in 2001 when several major
Japanese banks were reorganized.

An analysis of the figures by direction shows the vast majority -
- 2,175 -- were purely domestic deals ("IN-IN"). The rest of the
breakdown was: purchases of foreign companies by Japanese
companies ("IN-OUT"): 412 transactions; purchases of Japanese
companies by foreign companies ("OUT-IN"): 171 transactions and;
purchases by Japanese overseas subsidiaries of other overseas
firms ("OUT-OUT"): 17 deals.

TOKYO 00000385 004 OF 007


Despite the increase in total M&A transactions, inward M&As
showed a slight year-on-year decline.

The top three deals by value were Japan Tobacco's purchase of the
British firm, Gallaher (2,253 billion yen) Softbank's purchase of
the mobile phone operator Vodafone's Japanese operations (1,917
billion yen, combination LBO/TOB),and Toshiba and Ishikwajima
Harima's purchase of Westinghouse (621 billion yen).
Among top 20 deals, 12 were outward investment and the other 8
were domestic transactions.


13. (SBU) Ag: U.S. Beef Imports to Japan Remain Low
--------------

After the partial lifting of an import ban last summer, Japanese
consumers are not coming back to U.S. beef.

According to a January 25 Nikkei article, trade statistics show
import levels at only 10 percent of pre-ban levels.

In November 2006, 1,600 tons were imported, compared to 20,000
tons before the discovery of a BSE infected cow in the United
States in 2003 prompted GOJ authorities to halt trade.

A MOFA official told us it does not help that Japan's media,
including NHK, continue to produce alarming stories about the BSE
problem.

According to Nikkei, "safety-sensitive" housewives have switched
to Australian products and far fewer Japanese retailers now sell
U.S. beef.

The article did not note that a major part of the problem is on
the supply side -- Japan's continued ban on beef from cows over
20 months old has severely constricted U.S. efforts to export to
Japan.


14. (SBU) New Barriers to Trade Being Erected
--------------

At a meeting at the Agriculture Ministry (MAFF) on January 24, an
inter-agency delegation from USTR, USDA, the U.S. Patent Office
and the Embassy raised concerns about a new labeling system the
Japanese are developing which could make impossible all imports
of wagyu beef. (To read about the background of wagyu, click
here.)

The Japanese are taking steps to ban imports at a time when the
United States -- saddled with restraints on U.S. beef exports
over the BSE problem -- is blocked from shipping wagyu to Japan
anyway.

The Embassy is preparing points (attached below) to submit during
a public comment period that concludes on February 10.

The labeling initiative is a troubling precedent that suggests
Japan is willing to move beyond tariff and phytosanitary barriers
to restrict agricultural trade.
The MAFF officials said that the new guidelines were "voluntary."
They were put forward by a study group over which the Ministry
has no control.

The U.S. delegation countered that the guidelines in question
were drafted by MAFF before being taken up by the study group at
MAFF's request.

The Embassy's FAS section heard separately that MAFF's original
intention was to put out the wagyu guidelines as mandatory
regulations, but when Japan's Fair Trade Commission balked, they
were recast as "voluntary."

A key concern the United States has is whether authorities are
planning other similar guidelines on products such as Japonica
rice. Perhaps recognizing the larger WTO/trade implications of
the broader issue, MAFF deflected this line of questioning, with
one official indicating they were meeting "only to discuss
wagyu."

The MAFF officials said that the guidelines could be changed
after new information is introduced. If foreign producers could
prove that their product meets the strict domestic standards of
wagyu producers, one official asserted, the born-and-raised-in-
Japan requirement could be reconsidered.


15. (U) Energy: Joint Seminar Examines Asia Pacific Energy
Security
--------------

MOFA and METI co-sponsored an Energy Security Seminar on January
19 with guest speakers from the International Energy Agency (IEA),
the Canadian and New Zealand Embassies, the Australian Department
of Industry, Tourism and Resources, the Korean Ministry of

TOKYO 00000385 005 OF 007


Commerce, Industry and Energy, and Singapore's ReCAAP Information
Sharing Centre, which looks at piracy and armed robbery in Asia.
Discussions ranged from energy security policy to energy
efficiency to emergency response in the Asia Pacific region.

Ambassador William Ramsay of IEA defined energy security as clean,
affordable, reliable energy, while New Zealand's Bruce McCallum
argued that definitions of energy security often have varying
emphases on reliability, market volatility, adequacy of supply
and environmental trade-offs.

Ramsay addressed concerns over China and India participating in
IEA responses to emergencies such as Hurricanes Katrina and Rita,
highlighting the IEA's ongoing efforts to help the two countries
understand coordination efforts and impact. He also raised the
need to stockpile natural gas similar to the way oil is now
stockpiled.

Participants generally agreed that energy security is a growing
concern requiring increased investment and cooperation. The Asia
Pacific will need to increase its energy diversification and
efficiency as well as improve its data sharing. Collectively,
the region and the world can mitigate disruptions to energy
supply but without coordination the region is vulnerable.


16. (U) Business: Keidanren Leadership Reshuffle
--------------

The Japan Business Federation (Nippon Keidanren) has announced
the new makeup of its board to take effect after its general
meeting in late May. Seven of the current 15 Vice-Chairmen will
be replaced.

The seven incoming Vice-Chairmen are:
Mikio Sasaki (Chairman, Mitsubishi Corp);
Kunio Nakamura (Chairman, Matsushita Electric Industrial);
Tomijiro Morita (Chairman, Dai-Ichi Mutual Life Insurance);
Shoei Utsuda (CEO, Mitsui & Co.);
Sadayuki Sakakibara (CEO, Toray Industrial);
Terunobu Maeda (CEO, Mizuho Financial Group),and;
Kazuo Furukawa (CEO, Hitachi).
The remaining eight Vice-Chairmen reappointed for another term
are:

Hiromasa Yonekura (President, Sumitomo Chemical);
Takao Kusakari (Chairman, Nippon Yusen (NYK Line));
Tsunehisa Katsumata (President, Tokyo Electric Power);

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Fujio Cho, Chairman (Toyota Motor);
Tadashi Okamura (Chairman, Toshiba) (Former Keidanren chair);
Akio Mimura (President, Nippon Steel);
Watari Fumiaki (Chairman, Nippon Oil),and;
Kunio Egashira (Chairman, Ajinomoto).


17. (SBU) Osaka Prefecture to Provide Japan's First SME Tax
Incentives
--------------

In 2007, Osaka Prefecture will introduce a 1.6 billion yen (13.3
million USD) tax incentive program targeted at investment by
small and medium enterprises (SMEs) with capital of less than 10
million yen (83,000 USD).
The prefecture will reduce corporate taxes by 20 percent for
companies making a capital investment of more than $13,000 in
Osaka.

Although many local governments, including Osaka, have provided
subsidies and loans for SMEs, this is reportedly the first tax
exemption program in the country.

Takumi Hirai, senior industrial researcher with the prefecture,
commented that the advantage of attracting new businesses and
halting the flight of businesses already in Osaka outweighs the
estimated reduction in short term corporate tax revenues from the
plan.

Approximately one third of Osaka's 3.3 billion USD tax revenue in
FY2005 came from businesses.

Hirai speculated that the real impact of the plan would be hard
to predict because businesses with a deficit already do not pay
any corporate tax to the prefecture.



18. (U) Civair: Israeli FM Discussed Tel Aviv Tokyo Flights
--------------

Amidst front burner Middle East issues, Israeli Foreign Minister
Tzipi Livni also discussed arranging direct flights between Tel
Aviv and Tokyo during her January 17-18 trip to Japan, according
to the Israeli Ministry of Foreign Affairs' website. For more on
her trip see Tokyo 0356.

TOKYO 00000385 006 OF 007



19. (U) MLIT's Airports Discussion Group Members Express Need for
More Meetings
--------------

According to a January 22 Aviation Daily Japan article, the
Airports Discussion Group 4th meeting held on January 19 concluded
that further discussion was needed of the "internationalization"
of Haneda airport, 24-hour operation at Japan's three
international airports, and the operations of fully privatized
international airports.

Members of the group reportedly requested to Japan Civil Aviation
Bureau that other related parties, such as representatives from
other ministries and the tourism and cargo service industries,
which had not been invited to previous meetings, should be
invited to make presentations.

In response, Mr. Hisayasu Suzuki, Director-General of Civil
Aviation Bureau at Ministry of Land, Infrastructure and Transport
(MLIT),hinted at the possibility of extending the number of
meetings before the final report is to be produced. It is
currently expected by the end of March.

The Airports Discussion Group has held a series of meeting since
October 24, 2006 with the goal of producing a report on "concept
of Japan's international airport in future" by end of March 2007.
In the previous meetings, Japanese airport companies, Japanese
airlines and municipal governments related to international
airports made presentations.

The final report is scheduled to be submitted to Aviation
Subcommittee, which sits under the Transportation policy
committee in MLIT, to be taken up for the budgetary request for
implementation in 2008.

The USG had requested transparency of those discussions for all
stakeholders in the recent bilateral regulatory reform
recommendations, but foreign airlines' association has not been
invited for those hearings so far.


20. (SBU) New Study Group to Promote KIX U.S. Routes
--------------

Kansai International Airport Co., Ltd. (KIAC),the Kansai
Economic Federation, the Osaka Chamber of Commerce and Industry,
the Japan Association of Travel Agents, and Osaka Prefecture will
establish a study group for increasing KIX U.S. routes. ConGen
Econoff will join the group as an observer.

Those involved are seriously concerned about the precipitous
drop in flights between KIX and the U.S. KIX used to have six
carriers operating 63 flights a week to six cities on the U.S.
mainland. Now there are only 14 flights to two cities, United's
San Francisco route and Northwest's Detroit route. Japan
Airlines has decided to discontinue all flights to the mainland
United States after the summer of 2006.

In 2006, the number of passengers traveling between KIX and U.S.
cities is almost half of the 1999 level.

The study group understands that carriers are concentrating on
Narita for improved efficiency given rising fuel and security
costs and the dearth of KIX business passengers. Therefore, the
study group will target both U.S. and Japanese carriers as well
as the local business customer base.

The GOJ stipulated that KIX reach 130,000 flights in 2007 in
order to receive national budget funding for its 2nd runway, which
is scheduled to be opened in August 2007.

More China routes have improved KIX's bottom line, but these are
being offset by the reduction in flights to North America.


21. (U) Regional Airports in Western Japan Focus on Profit and
Shed Low-Demand Routes
--------------

In revised new flight schedule starting April 2007, KIX will
increase its Sapporo, Fukuoka, and Kochi routes and discontinue
flights to Miyazaki. Kobe Airport will increase flights to
Haneda, Sapporo, and Naha, and cut Sendai, Kumamoto, Niigata, and
Kagoshima. The total number of domestic flights will remain
unchanged, but all airports are focusing on maximizing more
profitable routes.

On the other hand, Itami Airport, despite having a higher load
factor than a similar route from KIX, is cutting back on its
Sapporo route to only one flight a day. Starting in April, Itami
will be under an MLIT ceiling of 370 flights (200 jet flights)
per day.

Airlines use jet flights for long hauls to Hokkaido and Okinawa,

TOKYO 00000385 007 OF 007


so the MLIT policy is forcing airlines to sacrifice these high
demand flights.

Local business travelers and tourists still like the convenience
of Itami and are reportedly unhappy about the central
government's new policy.


22. (U) Basic Industries: Japanese Diemakers Look to Expand
Abroad
--------------

Nikkei's fifth annual survey of Japanese die and mold makers
shows they are seeking to increase overseas operations as their
customers globalize, according to the Nikkei Weekly of January

22.

Nikkei notes that Japanese manufactures' "state-of-the-art dies
and molds have underpinned the overall competitiveness of
Japanese industry."
Nikkei reports that there are some 7,000 diemakers employing
approximately 100,000 workers in Japan. Declines in output
recently have been reversed due to a rise in exports.

The Ministry of Economy, Trade and Industry supports the industry
as it is considered to have important technologies that are basic
to manufacturing operations.

According to Nikkei's industry sources, high-precision dies that
have error margins of only 10-20 microns are only made in Japan.

Japanese diemakers are facing greater competition from foreign
producers of dies and molds as computer-aided design and quality
machine tools have spread. While going abroad, Japanese firms
worry about technology loss and quality issues, Nikkei notes.

SCHIEFFER