Identifier
Created
Classification
Origin
07TOKYO520
2007-02-06 00:34:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tokyo
Cable title:  

The Japan Economic Scope - February 2, 2007

Tags:  ETRD ECON JA ZO EAGR 
pdf how-to read a cable
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DE RUEHKO #0520/01 0370034
ZNR UUUUU ZZH
R 060034Z FEB 07
FM AMEMBASSY TOKYO
TO CIA WASHDC
UNCLAS SECTION 01 OF 05 TOKYO 000520 

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E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - February 2, 2007


Sensitive but unclassified. Please protect accordingly.

UNCLAS SECTION 01 OF 05 TOKYO 000520

SIPDIS

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - February 2, 2007


Sensitive but unclassified. Please protect accordingly.


1. (SBU) Table of Contents


3. High Pathology Avian Influenza in Japan

4. Abe Urges Early Listing of Japan Post Corporation Stock

5. USG Urges Postal Privatization Committee to Get Serious About
Level Playing Field

6. ANRE's Hosaka Discusses Russian, Chinese Energy Issues

7. Machimura Lauds Japan's Strengths, Calls for Improved
Diplomacy

8. JFTC Releases New Merger Guidelines

9. Read-outs on Cebu Summit Meeting Results

10. Consumer Finance Legislation Already Leading to Contraction,
Retrenchment of Industry

11. Japan's Core Consumer Price Growth Decelerates to 0.1% in
December

12. Midterm Economic Policy Guidelines Expect Over 2% Real, 3.5%
Nominal Growth

13. GOJ Seeks to Boost Tokyo's Status

14. KIX Victimized by Stock Fraud?

15. JAL and ANA Announce 2007 Business Plan

16. FedEx Showcases State-of-the-Art Warehouse

17. Kansai Firms Favor ASEAN EPAs for Business Opportunities

18. Western Japan: Unemployment Rate Falls But Contractors
Increasing

19. Economic Recovery Widens Kyushu-Tokyo Income Gap

21. Again, Fabricated Earthquake-Resistance Reports

22. FDI Success For Central Japan: AMB Property To Open
Distribution Center

23. FCS-Sponsored Export Controls Conference a Big Success


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


3. (U) High Pathology Avian Influenza in Japan
--------------

Over the past month and a half Japan has undergone a series of
four outbreaks of High Pathology H5N1 Avian Influenza. Three
cases have been in Miyazaki Prefecture with one in Okayama
Prefecture. The source is currently unknown but suspected to be
commingling with wild birds. These outbreaks have resulted in
the culling of over 170,000 birds. The most recent outbreak in
Miyazaki is especially troubling because within the 10km
quarantine zone there are currently 3.5 million broiler chickens,
one of the largest chicken production areas in Japan.


4. (U) Abe Urges Early Listing of Japan Post Corporation Stock
--------------

On January 26, the Postal Privatization Promotion Headquarters

(chaired by Prime Minister Abe) instructed Japan Post Corporation
to discuss concrete measures for the early listing of the two
postal financial institutions and to start preparations for the
early listing of Japan Post Corporation's own shares. Prime
Minister Abe repeated the statement in his policy speech that
afternoon saying that it is important to implement privatization
in October as scheduled. Abe told Headquarter members that after
the privatization each postal entity must be quickly integrated
into the private economy. The Prime Minister requested that each
responsible Minister, i.e. Minister of Internal Affairs and
Communications, Minister of Land, Infrastructure and Transport
and Minister of Finance, make proactive efforts to accelerate
privatization.


5. (U) USG Urges Postal Privatization Committee to Get Serious
About
Level Playing Field
--------------

On January 31, the USG submitted its comments to the Postal
Service Privatization Committee (PSPC) on their "Findings
Regarding the Investigation and Deliberation Over New Business
Operations by the Postal Savings Bank and Postal Insurance
corporation," The USG welcomed the PSPC's statement that the new
Japan Post entities should be fully integrated into Japan's
financial system on an equal basis with private financial
institutions. At the same time, however, the USG indicated
disappointment and concern that the Findings do not clearly
mandate equivalent conditions of competition and urged the PSPC
to include the requirement of truly equivalent conditions of
competition. The USG urged that, after privatization, necessary
measures should be implemented to eliminate the perception of a
government guarantee and that rigorous inspection and supervision
of the postal financial institutions should be established in the
same manner as for other private financial institutions. The
USG's comments also asked the PSPC not to allow the new postal
financial institutions to enter into new businesses before
establishing equivalent conditions of competition. In addition,
the Japan Association of Corporate Executives (Keizai Doyukai)
also submitted comments on the Findings to the PSPC saying that

TOKYO 00000520 002 OF 005


the PSPC's views could lead to a setback of the postal
privatization process. The association insisted that the
restructuring of current business operations to improve their
efficiency must be the priority.


6. (SBU) ANRE's Hosaka Discusses Russian, Chinese Energy Issues
--------------

Agency of Natural Resources and Energy (ANRE) Petroleum and
Natural Gas Division Director Shin Hosaka accompanied ANRE
Director General Harufumi Mochizuki on a visit to Moscow the week
of January 22 to talk to Gazprom about Japanese companies aiding
the construction of a gas infrastructure in Eastern Siberia.
Japanese companies are uninterested, however, because of the
difficulty of the projects. Hosaka expressed frustration over
Gazprom's takeover of Sakhalin 2 and praised ExxonMobil's
management of Sakhalin 1, although he complained that its gas
likely would go to China. He lamented the lack of cooperation
from China over the East China Sea oil and natural gas dispute
and blamed the warming relations between the two countries,
claiming it prevents Japan from pressing China too hard to
resolve the issue. For a complete read-out of this meeting,
please see Tokyo 00478.


7. (SBU) Machimura Lauds Japan's Strengths, Calls for Improved
Diplomacy
--------------

Former Foreign Minister Nobutaka Machimura assured listeners
during a presentation this week on "Japan's Assertive Diplomacy"
that Japan will surely become a permanent member of the UN
Security Council in the near future. Describing Japan as among
the most popular countries at the UN, he highlighted Japan's
activities in Africa, such as training sessions for technical
engineers, as meaningful and beneficial in the long term. He
noted that many foreign countries appreciate Japan's overseas
development aid (ODA) despite media criticism and he declared his
support for aiding developing countries--in particular, Eastern
Europe--through Japanese monetary and technological aid. As
Deputy Chair of the LDP Special Committee to Enhance Foreign
Policy Capability, Machimura and Chairman Yoshio Mori plan to
advocate an increase in the number of Japanese Embassies in
Africa and Eastern Europe. Machimura promised that Japan would
halt ODA to China after the 2008 Olympics because Japan can no
longer tolerate China's investment in Africa in exchange for
Africa's natural resources. Machimura defended the cost of the
relocation of United States Forces Japan (USFJ)--most of which
will be paid by Japan--explaining that Japan was the beneficiary
of the USFJ's presence. He also referred to Foreign Minister
Taro Aso's "Arc of Freedom and Prosperity," calling on Japan to
strengthen ties with friendly nations that share common views and
interests--namely the United States, Australia, India, and
countries in the EU and NATO.


8. (U) JFTC Releases New Merger Guidelines
--------------

The Japan Fair Trade Commission announced a new set of merger
review guidelines on January 31. The new rules eliminate the
market share criteria for such mergers, with assessments based
solely on an industry's market concentration. The JFTC will use
the Herfindahl-Hirschman Index, which takes the squares of
companies' market shares and adds them together to show an
industry's concentration as a single number. For industries with
international competition, the merging companies' share of
overseas markets will be taken into account. Firms in industries
facing global competition -- such as the semiconductor, LCD and
software businesses -- are expected to be evaluated in terms of
their market share worldwide. Steelmakers and others competing
primarily with Asian rivals will be assessed by their share of
the regional market.


9. (U) Read-outs on Cebu Summit Meeting Results
--------------

Telegrams Tokyo 448 and 450 report on views of GOJ officials on
the outcomes from the East Asian Summit and related meetings,
notably the implications for various initiatives on regional
economic architecture and the effort to improve ties with South
Korea and China.


10. (U) Consumer Finance Legislation Already Leading to
Contraction, Retrenchment of Industry
--------------

Consumer finance legislation intended to protect borrowers passed
by the Diet just over a month ago has prompted branch closures
and has increased loss reserves and job cuts.

Citigroup, one of the largest players in the industry, plans to
close 270 consumer finance branches and has allocated an
additional $375 million to cover anticipated losses due to what

TOKYO 00000520 003 OF 005


will now be considered interest overcharging.
The new law, which will lower maximum interest rates on these
loans from 29.2 percent to 20 percent in the next few years, is
expected to significantly lower profitability.

Credia, based in Shizuoka Prefecture, is just one of many
regional lenders affected. Its decision to shut all 178 branches
of its branches, cut its work force 30 percent, and focus
primarily on screening loan applicants online, is typical of the
response we are seeing by these lenders.


11. (U) Japan's Core Consumer Price Growth Decelerates to 0.1% in
December
--------------

Japan's nationwide core CPI, which excludes perishable food items,
rose 0.1 percent in December from the year before, after having
increased 0.2 percent in November, the Ministry of Internal
Affairs and Communications (MIC) announced January 26. Also,
overall CPI was up 0.3% in December, the same rate of increase as
in November. Please see attached for more details.


12. (U) Midterm Economic Policy Guidelines Expect Over 2% Real,
3.5% Nominal Growth
--------------

On January 25, the Cabinet formally approved new medium-term
economic policy guidelines for the FY07-11 period, formulated by
the Council on Economic and Fiscal Policy (CEFP). The new
guidelines, entitled "The Future Course and Strategy for Japan's
Economy," represents the first keynote of a pro-growth economic
agenda by the Abe administration, and serves as the basic roadmap
for the management of economic and fiscal policy over the next
five years. The CEFP forecasts the achievement of ambitious
economic growth of more than 2 percent in real and 3.5 percent in
nominal terms, by relying primarily on a substantial improvement
in total factor productivity (TFP) and accommodative monetary
policy. Please see attached analysis and reference guide for
more details.


13. (U) GOJ Seeks to Boost Tokyo's Status
--------------

The CEFP and the FSA both launched study groups this week to make
recommendations on ways to develop Tokyo as an international
financial center. The groups are also charged with exploring ways
to improve supervisory measures for "complicated financial
transactions" and harmonizing Japan's accounting rules, financial
market taxation, and corporate governance measures with global
practices. Earlier this month, Financial Services Minister Yuji
Yamamoto declared the government's intention "to create a hub
bustling with many overseas financial institutions by offering
tax incentives and other preferential measures." The focus has
since been broadened to include improving the competitiveness of
all Japanese financial markets, perhaps to accommodate
suggestions from Osaka-based lawmakers.

The CEFP group's recommendations will likely be included in
June's annual "big boned" policy program.


14. (U) KIX Victimized by Stock Fraud?
--------------

The Asahi Shimbun Kansai version reported recently that Kansai
International Airport Co., Ltd. (KIAC) discovered that its
unlisted stock had been sold by 11 investment companies to
individual investors at 10-20 times the issue price; triggering
an investigation by the Osaka Prefectural Police. KIAC is not,
nor will it be, listed in the foreseeable future, but KIAC was
surprised by inquiries from individual investors since last fall
regarding potential IPO dates and called in the police. The GOJ
and Osaka Prefecture together hold 88 percent of KIAC shares,
with the remainder issued to private companies and individual
investors. According to a KIAC official, three private companies
holding KIAC's stocks in Osaka and Kyoto sold brokers 700 shares
for the investment firms in question, falsely claiming that KIAC
would be listed in 2007. The amount of damage for the fraud is
estimated at more than 100 million yen. Although KIAC's stocks
can be traded, selling in the market is not authorized.
KIAC's CFO told ConGen that they were the victims in this case,
and that they worried about negative spillovers affecting KIX
business after opening its second runway in July.


15. (U) JAL and ANA Announce 2007 Business Plans
--------------

Japan's two largest airlines, Japan Airlines (JAL) and All Nippon
Airways (ANA) announced their FY2007 operational plans on January
29 and January 25, respectively.

JAL will increase flights on four domestic routes and add one new
route in/out of KIX/Kobe airports while suspending ten routes and

TOKYO 00000520 004 OF 005


decreasing flights on five routes. In the midst of restructuring,
JAL has cancelled its least profitable routes to focus more on
profitable ones. JAL is expected to announce the lay-off of
3,000 employees in early February.

ANA will increase flights in/out of KIX/Kobe airports by six and
will add flights on two other routes. ANA will suspend six routes,
and decrease flights at eight routes. ANA is optimizing its
operational plan to take advantage of the Haneda airport
expansion in 2009. The company plans to convert passenger
flights to cargo to focus on its international postal cargo
operations to China and other Asian countries.


16. (U) FedEx Showcases State-of-the-Art Warehouse
--------------

In a 6am visit to FedEx's Narita Airport facilities, EMIN
observed the complex operations necessary to handle the more than
4,500 packages the company recieves everyday. FedEx, the world's
largest airline with 677 planes, also showcased its new 76,000
sqm. warehouse located in Odaiba. At a cost of $18.5 million, it
is the company's largest capital expenditure in the Asia Pacific.
Representatives told EMIN that FedEx will close its Subic Bay
facility and move the operations to Guangzhou in early 2008.
They cited Subic Bay's short runways and Guangzhou's more central
location as the reasons driving the move.


17. (U) Kansai Firms Favor ASEAN EPAs for Business Opportunities
--------------

Approximately 80 companies from Kobe and Osaka attended JETRO
Kobe's recent FAZ seminar to hear about trade opportunities with
ASEAN members, especially those with Japanese EPAs/FTAs. JETRO's
Trade and Investment Advisor Kota Nagai told the audience that
many countries were seeking to circumvent the "slow WTO process"
with free trade agreements, and that such agreements presented
firms with excellent business opportunities. Economic activity
with ASEAN and Asia is becoming more important for Japan, he said.

He suggested that Osaka and Kobe firms with strong ties to
mainland Asia could capitalize on cultural exchange and tourism
business from EPAs. Nagai also cautioned that although large
firms could quickly benefit from trade with EPA partners, SMEs
would take several years due to the drag of high tariffs in EPA-
excluded sectors.


18. (U) Western Japan: Unemployment Rate Falls But Contractors
Increasing
--------------

According to the Ministry of Internal Affairs and Communications,
unemployment in Western Japan mirrored the national downward
trend. Following on the heels of the October decline, the
unemployment rate in the Kansai fell by 0.6 points to 4.8 percent.

The median effective job offer rate throughout the Kansai region
is 1.1, higher than the national median of 1.06 (with even better
conditions in Osaka (1.28),and Shiga (1.31)).

Although the job offers are increasing, the growth appears to be
coming from contractors and temporary employees rather than
permanent positions. With 75 percent of job applicants seeking
permanent positions and only 43 percent of companies offering
them, there is a significant mismatch embedded in the job offer
data. Despite the economic growth in the Kansai over the past
two years, manufacturers continue to cut labor costs.

Nonetheless, one industry source said the current employment
situation was still an improvement over what faced college grads
a couple of years ago.


19. (U) Economic Recovery Widens Kyushu-Tokyo Income Gap
--------------

According to the Kyushu Economic Research Center (KERC),Japan's
economic recovery has increased the income disparity between
Kyushu and Tokyo residents.

Although the salary gap between the Greater Tokyo Area (Tokyo,
Saitama, Chiba, and Kanagawa prefectures) and the nine-prefecture
Kyushu (including Okinawa)/Yamaguchi region somewhat narrowed
from 2001-2003 when Japan's economy stagnated, the disparity
began to grow again following the economy's recovery in 2003.
For instance, while average total monthly wages (including
overtime) for regular employees in Kyushu/Yamaguchi were 76.4% of
those in Tokyo in 2003, they fell to 73.6% in 2005. A KERC
official attributed the decrease to regional differences in the
pace of the economic recovery. For now, it is unclear whether
this regional income disparity issue will play a role in
Kyushu/Yamaguchi during the upcoming unified local and Upper
House elections in April and July, respectively.

TOKYO 00000520 005 OF 005



20. (SBU) Again, Fabricated Earthquake-Resistance Reports
--------------

Kyoto City officials announced January 25 that two hotels in the
APA hotel group in Kyoto were built based on falsified
structural-strength reports. According to MLIT and the city,
Mitsuo Mizuochi, a Toyama City architect in charge of structural
strength designs for the hotel chain, has admitted to falsifying
the report for one of the hotels. MLIT is asking municipal
governments in 15 prefectures including Toyama, Hiroshima, Hyogo,
Osaka, and Ishikawa to look into the 168 other structures with
which Mizuochi was involved. 116 of the buildings under
investigation are in Toyama. A ConGen Osaka contact at Kyoto
City denied the city had any involvement in the deception.
According to media reports, last June Kobe City asked Mizuochi to
submit additional information regarding APA hotels and
condominiums in that city, a request Mizuochi ignored. It
appears that Kobe took no further action, something that is
likely to turn into an election issue very quickly. A MLIT Kinki
Regional Bureau official said that the APA Group is well-known
for undercutting the bids of other firms on public works projects.



21. (U) FDI Success For Central Japan: AMB Property To Open
Distribution Center
--------------

San Francisco-based AMB Property Corp. announced January 30 that
it will invest USD 100 million to build a six-story, 120,000
square meter (1.3 million square feet) logistics and distribution
center in Kasugai City, Aichi Prefecture, by end of 2007. The
distribution center will be AMB's largest facility in Japan and
will be located in a suburb of Nagoya known as a hub of aerospace
and machinery manufacturing.

AMB's decision to build in the region marks a success for the
Greater Nagoya Initiative (GNI),the joint effort of Central
Japan local and prefectural governments to attract FDI. AMB
participated in the summer 2006 GNI Economic Symposium. Working
through the GNI, Kasugai City assisted AMB with preliminary site
negotiations, in particular helping smooth relations with
neighbors concerned about an influx of cargo trucks.


22. (U) FCS-Sponsored Export Controls Conference a Big Success
--------------

Over 300 businesses signed-up to participate in a February 2 - 3
export control conference sponsored by FCS. Experts from
Commerce, Treasury and State explained their respective control
regimes and answered a myriad of questions. On the second day,
businesses had an opportunity to have one-on-one consultations
with these experts. This is the first export control conference
to be held in Tokyo in three years.

SCHIEFFER