The Japan Economic Scope - Economic News At-A-

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1. (SBU) Table of Contents


3. Unemployment Dips to Under 4%

4. Cabinet Approves Conservative Regular Budget for FY07

5. New Tax Commission Chairman Pro-Growth

6. METI "Investment Security" Study Group: Japan's "Exon-Florio"?

7. CPRR Issues Mixed Final Reform Recommendations

8. Japan Post: Rules of the Road Will Apply to Yu-Pac Too

9. Japanese Skeptical of Government's View of the Economy

10. Execs Concerned about Foreign M&As

11. IPR, Doha, Asean +3/+6: Osaka ABAC and APEC Hanoi Meetings
Readout

12. Civair: GOJ to Study 24-hour Use of Haneda Airport

13. Mizutani Construction Allegedly Paid Bribes for Airport Work

14. Kobe Airport Changes Flight Schedule

15. Ports: GOJ to Ease Customs Clearance

16. Call for Swift Establishment of Basic Ocean Law

17. Auto Friction Speculation in the News

18. Manufacturers: Aiming for Profits while Meeting Emission Limits


19. FDI/FTA: Sharp Builds Mexican LCD TV Plant for U.S. Market

20. Kobe: Government and Business Views on 2007 Economic Prospects

21. Japan's Fiscal Consolidation: Smaller Required Adjustment
Estimated

22. Cabinet Office and BOJ Updated Economic Indicators


2. (U) The Japan Economic Scope (JES) is a weekly e-
newsletter produced by Embassy Tokyo's ECON section in
collaboration with other sections and constituent Posts
and published every Friday. It provides a brief
overview of recent economic developments, insights
gleaned from contacts, summaries of the latest cables
and a list of upcoming visitors. This cable contains
the January 5, 2007, JES, minus the attachments that
accompany many of the individual stories in the e-mail
version. To be added to the e-mail list, please email
ProgarJ@state.gov.


3. (SBU) Unemployment Dips to Under 4%
--------------

Japan's seasonally adjusted unemployment rate fell slightly to 3.99%
in November, the first time it has dropped below four percent since
March 1998. The job offers-to-applicants ratio remained 1.06.

While a tighter labor market could encourage workers to change jobs
in search of better pay and benefits, one market observer predicted
that the rate will continue a gradual decline, possibly to the mid-3
percent range, into 2008.

4.(U) Cabinet Approves Conservative Regular Budget for FY07
--------------

The Cabinet approved the central government's regular budget for
FY07 (April 2007 Q March 2008) on December 24, clearing the way for
its submission to the Diet.

As is the typical budgetary pattern, the regular general account
budget for FY07 shows an increase of 4.0 percent in overall outlays
over the initial FY06 budget, but a decline of 0.7 percent from the
revised FY06 budget, inclusive of the supplemental.

The FY07 budget projects a record %4.5 trillion (nearly one percent
of GDP) reduction in government bond issuance, thanks to the
expected brisk growth in tax revenues.

Due to the sizable cut in the deficit, Finance Minister Omi said in
a December 20 press conference that there is the possibility of
moving up the current FY11 target to achieve primary fiscal balance
of the central and local governments by one or two years. See
attached for details.



5. (U) New Tax Commission Chairman Pro-Growth
--------------

Prime Minister Abe selected Yutaka Kosai to replace disgraced

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Masaaki Honma as head of the government's Tax Commission. Kosai, an
economist, is a known reformer.

There was speculation that tax reform would be derailed because of
the personal scandal that brought down Honma, but Kosai is expected
to pursue pro-growth changes to support the Abe administration's
reform efforts.


6. (SBU) METI "Investment Security" Study Group: Japan's
"Exon-Florio"?
--------------

METI announced the establishment of a "Study Group on the
International Investment Climate in a Globalized Economy", under the
chairmanship of Waseda University Graduate School Professor Shujiro
Urata, which is tasked with reviewing regulations concerning inward
FDI (especially the Foreign Exchange Law),with a view toward
securing sensitive technologies and national security.

Such a review was included among the recommendations regarding
Japan's M&A laws issued by Keidanren (KDR) on December 12.
The METI proposal addresses concerns expressed by some business
leaders that increased foreign merger activity risks the loss of
"sensitive" Japanese technology and appears to be a step toward
setting up a formal review procedure for cross-border merger deals
in sensitive sectors similar to the U.S.' CFIUS process.

The 20-member study group consists of academics, leading M&A lawyers
and executives of several large corporate enterprises including
Canon (the company led by KDR chairman Mitarai),Nippon Steel,
Toyota, Mitsubishi Heavy Industry and Sumitomo.
According to a METI press release, the group met for the first time
on December 19 and will advise the Director Generals of the Trade
and Economic Cooperation Bureau and the Economic and Industrial
Policy Bureau on "measures to address problems arising from the
growth of international investment activities and changes in the
national security environment."

Separately, a January 4 Sankei Shimbun press report said METI plans
to tighten its regulations on foreign M&A to prevent the
proliferation of technology that can be used for WMD. The article
hinted the target of the new rules were Chinese state-owned
enterprises.


7. (U) CPRR Issues Mixed Final Reform Recommendations
--------------

The Council for the Promotion of Regulatory Reform (CPRR) issued its
third, final and much watered-down report of recommendations of
issues on which the GOJ should focus its reform efforts on December

25.
Press articles state that key recommendations from the interim
version issued in July were dropped, including several on education
and collective bargaining reform.

The CPRR did recommend revising work hour legislation to eliminate
the need to pay white-collar workers overtime.
Other "recommendations," most notably on Haneda Airport slot
allotment rules and pharmaceutical approvals, however, simply
suggest continued study and discussion rather than specific action.

Separately, the Cabinet Office announced the appointment of fifteen
new members to the Council effective January 2007. Eight current
members, including current Chairman Takao Kusakari, will continue
their reform work. For more details, see Tokyo 7180.


8. (SBU) Japan Post: Rules of the Road Will Apply to Yu-Pac Too
--------------

National Police Administration officials told Econoffs that,
beginning June 2007, new license plates will be issued to
distinguish between Japan Post's Yupac express mail delivery
vehicles and those vehicles delivering Japan Post's universal
service mail.

The former will have to abide by the same parking rules and
enforcement private express mail delivery companies. If a truck is
found in violation of this separation of Yupac and Universal
Service, the license will be revoked.

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This issue has been a major industry concern due to the recent
crackdown in parking enforcement and the resulting increase in the
cost of doing business.


9. (U) Japanese Skeptical of Government's View of the Economy
--------------

In a Yomiuri Shimbun poll conducted on December 9-10, 78 percent of
respondents stated they "felt the government's view that the economy
was recovering was unrealistic or doubtful." A similar number
believe the gap between rich and poor was widening. The full
article can be found here.


10. (SBU) Execs Concerned about Foreign M&As
--------------

The Embassy and the foreign business community here clearly have a
continuing challenge to convince corporate leaders that M&A has
benefits both to the Japanese economy as a whole as well as to
individual companies.
's top executives are "concerned" about new rules for triangular
mergers that are to take effect in May 2007, according to year-end
Nikkei poll. Ironically, 84% percent of respondents also said they
were "actively considering" M&A strategies to increase their firms'
competitiveness in an increasingly global market.

The seeming disparity comes from the strong aversion of Japanese
managers to "hostile" takeovers, although only nine percent
considered this an inevitable risk for a listed company.

According to the poll, Japanese executives still view cross-border
triangular merger as inherently "hostile" and "abusive" and
potential foreign acquirers as only interested in short-term
profits.
Forty percent of those opposed to foreign M&A cited fears "their
firm would be dissolved immediately," while 23% worried their
company "would immediately be resold."



11. (SBU) IPR, Doha, Asean +3/+6: Osaka ABAC and APEC Hanoi Meetings
Readout
--------------

Kansai Economic Federation (Kankeiren) held a briefing on the recent
APEC Business Advisory Council (ABAC) and APEC meeting in Hanoi in
late December.

ABAC consists of private sector committees that formulate advice and
requests to their government counterparts in APEC.
The ABAC Japan Committee is currently composed of Mr. Yukio Shotoku,
Advisor from Matsushita Electric, Mr. Yoshio Ishizaka, Advisor from
Toyota, and Mr. Yasuo Kanzaki, Advisor from Nikko City Group
Securities.

Mr. Nobuhiko Sasaki, APEC negotiator from METI, and Mr. Masashi
Mizukami, Deputy Director-General from MOFA also attended the
meeting to report on the meetings in Hanoi (Click here for further
details).

The GOJ and ABAC Japan representatives present in Osaka were very
much interested in American commitments made in Hanoi.
ABAC urged PM Abe to help resolve Japanese firms' IPR protection
problems in East Asia, and to restart WTO DDR talks prior to APEC
Hanoi. Mr. Shotoku said that the IPR issue was one of the most
important issues for all participants in Hanoi.

METI's Sasaki mentioned that most Asian countries did not welcome
the concept of either ASEAN +3 or +6.

The Kansai region around Osaka is home to many SMEs operating in
China and Southeast Asia, and there was a high level of interest in
the Osaka debriefing on how APEC can protect small business
investors. Mr. Mizukami commented that unfortunately the discussion
in APEC has not followed the issue, but it should be covered in the
near future.

The business audience also expressed strong interest in business
opportunities available through APEC initiatives.

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12. (U) Civair: GOJ to Study 24-hour Use of Haneda Airport
--------------

The Abe administration will establish a study group this January to
examine the 24-hour use of Haneda airport as part of PM Abe's "Asia
Gateway" initiative according to the Tokyo Shimbun.

Special Advisor to the Prime Minister Nemoto will lead the group and
it will produce a report with specific measures for the full 24-hour
use of Haneda airport by May 2007.


13. (SBU) Mizutani Construction Allegedly Paid Bribes for Airport
Work
--------------

Mizutani Construction spent about 1.5 billion yen ($13 million) on
bribes and kickbacks, with the bulk going to yakuza groups and a
lesser amount to Diet members' aides, according to the Asahi
Shimbun.

Many of the bribes were allegedly tied to Mizutani's land
reclamation work for Osaka's Kansai International and Nagoya's Chubu
International Airports.

Mizutani's chairman and other staff pleaded guilty in December to
hiding 3.8 billion yen ($32 million) in corporate income.
Among the Diet members previously reported to have received
legitimate political donations from the Nagoya-area based Mizutani
between 1998 and 2004 were then-Health Labor and Welfare Minister
Jiro Kawasaki, then Science and Technology Minister Iwao Matsuda,
and then-DPJ Vice President Ichiro Ozawa.

Those donations were all relatively small, in the two to three
million yen (about $20,000 to $30,000) range.


14. (SBU) Kobe Airport Changes Flight Schedule
--------------

Kobe City announced that JAL and ANA would change flight schedules
and routes to and from Kobe Airport due to the gap between routes
with high/low load factors, and increasing fuel costs.

Since the opening of UKB in February 2006, Haneda, Naha, and Sapporo
routes reached 60-70 percent load factors, but routes to Sendai,
Niigata, and Kagoshima are only selling at 30-40 percent.

ANA will discontinue its Kagoshima route and add one flight each to
Haneda and Naha in April, and discontinue its Niigata route and add
one flight to Sapporo in June.

JAL will also discontinue its Sendai and Kumamoto routes and
increase coverage of Sapporo and Ishigaki Island, Okinawa in June or
July. There will be no change in each carrier's total flights
servicing Kobe.

A Kobe City official told ConGen that he expects an increase in
revenue from higher landing fees due to the larger aircraft likely
to be used by both ANA and JAL.

However, he noted that the city government was surprised to learn
how airlines quickly react to changes in profitability on their
routes, signaling that the city has a long way to go in
understanding the aviation industry.


15. (SBU) Ports: GOJ to Ease Customs Clearance
--------------

The government's Asian Gateway council plans to recommend changing
cargo handling at ports and airports to improve efficiencies and cut
costs under the heading "Distribution Big Bang," according to the
Yomiuri Shimbun.

The GOJ aims to bring port handling costs more in line with the
other major Asian ports in order to promote trade and stimulate the
economy.

Further discussions on promoting efficiency are to begin in January

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and the council intends to have a final report by late May.

Foreign maritime operators told Econoff in interviews over the past
several weeks that Japanese ports have high cargo handling costs and
as a result have been losing business Q particularly the
transshipment of goods -- to the more efficient Asian ports,
especially Korea.

Shippers, even from Japan's west coast, find it more economic to
aggregate smaller loads into larger shipments at Pusan, Korea.
The GOJ over the last year has been seeking measures to counteract
this trend.


16. (U) Call for Swift Establishment of Basic Ocean Law
--------------

Underscoring the interest in revising Japan's marine policy, a
Yomiuri Shimbun editorial on December 31 called for swift
establishment of Basic ocean law, which is expected to be submitted
to the ordinary Diet Sessions this year. For more background on the
maritime bill, see JES Volume 2 Issue #50 Q December 22, 2006.


17. (U) Auto Friction Speculation in the News
--------------

High level of car exports to the United States Q the highest since
the early 1990s when auto trade friction was at its peak --
increasing sales in the United States Q Toyota taking third place in
sales in 2006 in the United States received wide coverage here Q and
the Democrat Party's control of the new Congress have fueled
Japanese press reports about Japanese automakers worries over a
possible rise of protectionism in the United States.


18. (SBU) Manufacturers: Aiming for Profits while Meeting Emission
Limits
--------------

Even as large Japanese manufacturers, including Osaka-based
Matsushita and Sharp, enjoyed a surge in sales over the past year,
they have bumped up against a new problem: the requirement to reduce
CO2 emissions under Japan's Kyoto Protocol commitments.

The problem is acute for firms relying heavily on coal-dependent
manufacturing plants in China and electronics and auto
manufacturers, whose products contain higher levels of toxic
substances like lead or cadmium or which produce high levels of
carbon emissions while operating.

Some firms, however, are taking a long-range view of these emissions
requirements by rethinking the entire production line in order to
improve total energy efficiency and increase recyclability, while
making their goods more profitable and attractive to American
consumers.

Matsushita, whose carbon emissions have otherwise risen by almost 14
percent since 2002, has had remarkable success in eliminating all
lead from its flat glass displays, which made up approximately 97
percent of the total lead content in their popular flat panel TVs.

The firm has begun emphasizing its corporate responsibility and
environmental consciousness in meetings with ConGen staff.
By incentivizing "green" production for its engineers and designers,
Matsushita executives are confident they will beat a GOJ Environment
Ministry goal of 25 percent reduction in CO2 output from 1990 levels
among electronics manufacturers by 2012.


19. (U) FDI/FTA: Sharp Builds Mexican LCD TV Plant for U.S. Market

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

Sharp Corp, the strongest LCD flat screen TV manufacturer in Japan,
will build a new five billion yen ($41.7 million) LCD TV assembly
plant in Mexico's Baja California region this year, next to an
existing Sharp facility.

Due to the current boom in flat TV sales in the United States, Sharp
aims to produce 150,000 TV sets a month by the fall, increasing
current production capacity threefold.


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Sharp has been slow to join Sony and Matsushita in increasing
production within NAFTA. Sharp had a 9.7 percent and falling share
of the U.S. market in summer 2006.

Japanese competition in the flat TV market in the United States is
set to accelerate in 2007.


20. (U) Kobe: Government and Business Views on 2007 Economic
Prospects
--------------

Highlights of today's Kobe-Hyogo Joint New Year's Party organized by
the Hyogo Chamber of Commerce included Mayor Yada's call for
improving local business conditions in Kobe by making more use of
the city's transportation links, including Kobe Airport (UKB) and
the Port of Kobe, the latter of which is about to enter its 140th
year of operation as an international seaport.
Citing its designation as a super hub port, Yada hoped to see an
increase in the flow of goods and people this year to celebrate this
anniversary.

Although some said the corner had finally been turned on Kobe's
recovery from the 1995 Hanshin Earthquake, at least one SME business
group representative said things were still bad for small business
owners due to the increased competition from Chinese textiles and
manufacturing.

Business, government, academic and military leaders all variously
sought greater cooperation from the USG on economic and political
issues.

Governor Ido specifically asked Econoff to make progress in efforts
to promote greater U.S. SME investment in local markets.


21. (U) Japan's Fiscal Consolidation: Smaller Required Adjustment
Estimated
--------------

The Cabinet Office presented to the Council on Fiscal and Economic
Policy a revised estimate on the required adjustment to achieve a
combined central/local government primary surplus on a national
accounts basis by JPFY11 on December 26.

According to the estimate, the required adjustment was revised
sizably downward, from the initially projected %16.5 trillion (3.2
percent of GDP),to %9.5 trillion (1.9 percent of GDP),reflecting
restrictive discretionary spending and brisk tax revenues projected
in the Cabinet-approved budget for FY07.

Central/local government expenditures for FY07 are estimated to
total %107.3 trillion in FY07, about %3.5 trillion smaller than the
amount without spending reforms.

Tax revenues for FY11 are now projected to be about %3.5 trillion
larger than the initial estimate. See attached for details.


22. (U) Cabinet Office and BOJ Updated Economic Indicators
--------------

The Cabinet Office kept its overall assessment of Japan's economy
unchanged, noting that the economy is recovering, although there is
some weakness in consumption.

The monthly economic report, submitted to the Cabinet on December
25, indicated that personal consumption will increase if the growth
of income changes for the better with improvement in employment.
It added that consumer prices are flat, while growth of corporate
goods prices has slowed with declines in oil prices.
The BOJ report, released on December 19, also left unchanged its
core economic assessment, indicating that the economy is "expanding
moderately."

However, the BOJ indicated somewhat a cautious view on personal
consumption, noting an increasing trend, although at a moderate
pace.

The BOJ outlook expects the economy to continue expanding
moderately. See attached document for further details.


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