The Japan Economic Scope--December 7, 2007

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TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope--December 7, 2007


1. (U) This cable contains the Japan Economic Scope from
December 7, 2007.


2. (SBU) Table of Contents

Bilateral Dialogs

3. Sub Cabinet Meetings Taking Place in Tokyo

4. Megaports Discussions Continue in Tokyo

5. Chukeiren Vice Chairman Frustrated With China; Favors FTA

6. Japan-China High-level Econ Dialogue Yields Minimal Results

Health Issues

7. Embassy Concerned About Looming Changes to GOJ MedPharm
Pricing Policies

Farming and Agriculture

8. Furious Fukuoka Farmers Demand Subsidy Revival

9. Hokkaido Governor to Ask Local Legislature to Continue BSE
Testing

10. Shiga Exports Beef to U.S.

Money Matters

11. ConGen Econ Officer Promotes Investment and Economic
Revitalization in Nara

12. Tourism--Kyoto Popular Among Americans, but No Growth

13. Restrictive City Planning Law for Large Retail Stores Went
into Effect November 30

14. FY07 Supplemental Budget Won't Break the Bank

15. Kansai Manufacturers Face Hard Times; Bears Closing In

16. Minister Amari Concerned About Foreign Participation in
JPower Management

Aviation

17. American Air Cargo Company Looks at Chitose in Hokkaido as
Transport Hub

Oil and Gas

18. GOJ Infighting Hampering East China Sea Talks

19. INPEX's Questionable Oil Deal

20. GOJ to Offset High Cost of Crude Oil

Sporting News

21. Baseball's Greatest Team Set for Tokyo Dome, Ambassador,
Embassy Fans Will be There

22. This Week's Cables

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BILATERAL DIALOGS
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3. (SBU) Tokyo Sub Cabinet Meetings

A six-agency Sub Cabinet team, led by Deputy National Security
Advisor for Economic Affairs Dan Price met December 6-7 with
their Japanese counterparts, headed by Deputy Foreign Minister
Masaharu Kohno.

The meetings covered a range of bilateral, regional and global
issues, including climate change, Doha, development assistance,
U.S. beef exports, and medical devices and pharmaceuticals.
In conjunction with the visit, Price delivered a speech on U.S.
--Japan economic relations at a function co-sponsored by the
Japan Association of Corporate Executives (Keizai Doyukai) and
the American Chamber of Commerce in Japan. (Econ: Nicholas
Hill)


4. (SBU) Megaports Discussions Continue

The GOJ continues to cogitate about Megaports, with comments to
USG officials in the Sub Cabinet and Regulatory Reform
dialogues indicating Japanese commitment to the program. See
Tokyo 5478 for details on the Megaports experts meeting Nov.
28--30. (ECON: Charlotte Crouch)
Back to Top


5. (SBU) Chukeiren Vice Chairman Frustrated With China; Favors
FTA

Akira Yokoi, Vice Chairman of the Chukeiren and former Chairman
of Toyota Industries, was very critical of China at a December
4 meeting in Nagoya with visiting DAUSTR for Japan Michael
Beeman. Yokoi said that, while taking easier steps like

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lowering tariffs, China has ignored major commitments
associated with its accession to the WTO including national
treatment for foreign automakers and IPR obligations. The PRC's
refusal to allow more than 50 percent ownership for foreign
firms in the auto sector has hampered Toyota's efforts to fully
introduce the Toyota Production System in China, he said.
Yokoi acknowledged that dealing with China is extremely
sensitive but said it would be a big mistake if Japan "keeps
quiet."

Yokoi said that, without a bilateral U.S.-Japan FTA, Japan's
economic future would be dim, particularly in light of the
growing web of intra-Asia trade agreements that threatens to
shut out Japan. Although Japanese automakers are wary of
coming out too strongly in favor of an FTA that includes
agriculture, Yokoi said, he understands the necessity of
including all sectors and hopes there is enough political will
in Tokyo to make it so. (Nagoya: Tamiki Mizuno)
Back to Top


6. (SBU) Japan-China High-level Econ Dialogue Yields Minimal
Results

The first session of the Japan-China High-level Economic
Dialogue (HED),Japan's version of the U.S.-China Strategic
Economic Dialogue, produced little in the way of tangible
results. Held December 1 in Beijing, the meeting, attended by
six Japanese Cabinet ministers, reviewed a number of areas for
stronger cooperation between the two countries but without
specifying any real activities. A MOFA official who attended
the talks noted Chinese approval of the Japanese Environment
Ministry's "co-benefit approach" on pollution and global
warming and the intention to establish an information sharing
system on intellectual property violations in China as two of
the HED's most substantive achievements. The official also
indicated the Japanese did not assent to China's request to be
recognized as full market economy in the WTO. A separate
December 1 meeting between the Chinese and Japanese foreign
ministers achieved no progress on the East China Sea dispute
except to stress that both countries hoped to resolve the issue
in the near future before Prime Minister Fukuda's expected trip
to China (as yet unscheduled). (ECON: Chris Wurzel)

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HEALTH ISSUES
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7. (SBU) Embassy Concerned About Looming Changes to GOJ
MedPharm Pricing Policies

The Embassy has raised concerns with the GOJ about the
government's reimbursement pricing for medical devices and
pharmaceuticals. Final decisions on price levels for drugs and
devices under the framework will be made in the coming days and
is set to be announced on December 12.

To encourage innovation in what is a rapidly growing sector,
the United States has pushed for policies that create a fair
and predictable reimbursement environment. Some U.S. companies
have complained that Japan's reimbursement policies are leading
them not to introduce some of their best products into Japan.

In particular the United States objects to a drug re-pricing
policy based on market expansion--that is, a scheme under
which the GOJ slashes the price it pays for some drugs when
producers enjoy larger than expected growth in sales. The
policy penalizes the most widely recognized and innovative
medicines for their success in treating disease.

For medical devices, the U.S. has concerns about a foreign
average price rule which caps reimbursement prices at 1.5 times
the average price in the United States, Britain, France, and
Germany for devices already on the market and two times the
average for new devices. The GOJ wants to slash the latter cap
from 2.0 times to 1.7 times.

The Ambassador met with Health Minister Yoichi Masuzoe on
December 5 to underscore U.S. concerns. For more on that
meeting, please see Tokyo 5471. (Econ: Nicholas Hill)

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FARMING AND AGRICULTURE

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8. (U) Furious Fukuoka Farmers Demand Subsidy Revival

Calling for the revision of the government's farm subsidy
system that caters only to large farms producing major staples
such as rice and wheat, 3,700 local farmers converged on
central Fukuoka on December 1. A number of Fukuoka LDP Diet
members, including Makoto Koga, Election Strategy Chief,
attended the pre-demonstration rally in an effort to limit
political fallout. The demonstration was the largest so far by
Fukuoka farmers.

The demonstrators criticized the subsidy system (introduced in
2007),claiming it has not been successful in assisting the
large farms it was supposed to protect. Instead, they insist,
it has lead to a decline in farm incomes despite a good harvest
year. An estimated seven percent of small scale Fukuoka dairy
farmers (183 households) have been forced out of business over
the past year as a result of the rise in oil and feed prices.
The farmers demanded redress against falling rice prices and
the protection of Japanese agriculture in future free trade
agreements.

Note: Responding to pressure with an election on the horizon,
the LDP recently announced plans to review its farm subsidy
system, possibly revising it to include small scale farms in
the fiscal 2007 supplementary budget. Moreover, in a meeting
with Fukuoka Prefectural Assembly leaders from the LDP, farmers
explained the LDP was actively courting small farmers to bring
them back to the LDP fold. They claimed the defection to the
DPJ by farmers in the recent Upper House election was a
temporary reaction to the Koizumi reforms, but now that the LDP
was addressing the farmers' concerns the defections could be
reversed and the LDP's hold on the prefecture would be
consolidated. (Fukuoka: Yuko Nagatomo/James Crow and Takafumi
Sato/Margot Carrington)


9. (U) Hokkaido Governor to Ask Local Legislature to Continue
BSE Testing

Late last week, local newspapers headlined Hokkaido Governor
Harumi Takahashi's decision to request funding from the
Hokkaido Prefectural Assembly to pay for continued BSE testing
on cattle 20 months and younger. She will ask the assembly to
approve an additional 70 million Yen ($636,000) to cover the
cost of testing 77,000 cattle 20 months and younger once the
GOJ cuts off funding in July 2008. Local analysts already
predict a 50 billion Yen ($455 million) deficit in Hokkaido's
budget next year; it is not clear where the money will come
from.

Unlike other beef producing prefectures in Japan, Governor
Takahashi did not immediately call for local funding of BSE
testing when the GOJ announced it would no longer fund the
tests. Instead, the governor made several trips to Tokyo to
appeal directly to the Ministry of Agriculture, Fisheries and
Forestry and the Ministry of Health, Labor and Welfare for
reconsideration. With no success -- and other prefectures such
as Miyazaki and Niigata stating they will fund continued
testing -- the governor now feels compelled to do the same.
Despite no proven scientific value to conducting BSE testing on
all cattle, local Hokkaido residents seem to agree. A Hokkaido
Prefectural Government survey and discussions at recent public
hearings show over 70 percent of local consumers support
continued BSE testing. Local farmers also fear that without the
tests, Hokkaido's beef will be perceived as unsafe.
Hokkaido is Japan's top beef producer. A total of 22 of
Japan's 33 confirmed BSE cases were found in Hokkaido. A series
of recent food scandals originating in Hokkaido has further
shaken consumer confidence in local products. (Sapporo: Ian
Hillman/Yumi Baba)


10. (U) Shiga Exports Beef to U.S.

JA Shiga Headquarters has started to export "Ohmi Beef," Shiga
Prefecture's well-known brand of beef, to the U.S. in a pilot
project. JA is targeting high-end American restaurants with a
taste for prime Japanese beef. Exports in the pilot total one
ton of sirloin, rib, and another four cuts, destined for Los
Angeles.


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The demand for Japanese beef in large cities such as New York
and Los Angeles has increased after the exports from Japan
resumed in 2005. So far, Japan has exported 54 tons of its
expensive beef since the resumption of trade. JA Shiga expects
to enhance the motivation of local livestock farmers and expand
the market in the future. (Osaka-Kobe: Phil Cummings/Naomi
Shibui)

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MONEY MATTERS
--------------


11. (SBU) ConGen Econ Officer Promotes Investment and Economic
Revitalization in Nara

Osaka-Kobe Pol-Econ Officer spoke to 50 representatives of
local political, business, media and Buddhist leaders on ways
to revitalize the economy of Nara Prefecture at the Nara
Chamber of Commerce and Industry this week. Nara has begun to
strengthen its business promotion strategy, a hallmark of new
Governor Shogo Arai. Both Nara City and the prefecture have
pushed new tourist promotion campaigns, including plans to
attract luxury American hotels to Nara. The mayor already
announced that it will bring a Marriott to open in the city
center in a couple of years. This stole the thunder from Gov.
Arai, who had been working with ACCJ and METI Kinki Bureau to
bring a different American hotel to the city, underlining
continuing problems in convincing the different levels of
bureaucracy to work together on economic development. Nara is
gearing up to the 2010 1300th anniversary of the establishment
of Heijo-kyo, the ancient 8th Century Japanese capital
predating Kyoto.

Pol-Econ Officer pointed out problems with the poor tourist
infrastructure in Nara, the small levels of FDI, and lack of
cooperation among local governments and businesses, despite the
abundance of tourism resources in Nara. The reaction of local
audience was very receptive to these messages, and Nara
Prefectural officials commented that they will make use of
these suggestions in improving their economic planning and
coordination. (Osaka-Kobe: Phil Cummings/Naomi Shibui)


12. (SBU) Tourism--Kyoto Popular Among Americans, but No
Growth

MLIT Kinki Transportation Bureau recently released the study of
tourist trends in the Kansai for the first half of 2007. It
showed that 13.6 percent of tourists in Japan visited the
Kansai's six prefectures, and 80 percent of those visitors stay
in three prefectures: Osaka, Kyoto, and Hyogo. The largest
number of the Kansai's foreign tourists is from South Korea,
followed by Taiwan. Tourists from the U.S. came in third.
Amid the trend of rapid growth in Asian tourists visiting the
region, American tourists still make up over a quarter (26
percent) of the total foreigners who stay overnight in Kyoto,
the largest group.

This survey is the Kinki Transportation Bureau's first attempt
to analyze lodging tourists rather than day travelers. One
official told ConGen that the Kansai has been successful in
attracting Asian tourists, but attempts to lure American and
European travelers remain problematic, since the GOJ's Western-
oriented tourism promotion is still in its infancy. American
travelers love Kyoto, but their numbers are flat, according to
the official. (Osaka-Kobe: Phil Cummings/Naomi Shibui)
Back to Top


13. (U) Restrictive City Planning Law for Large Retail Stores
Went into Effect November 30

The amended Town Planning Law went into effect on November 30.
The law is expected to restrict new establishment of large
retail stores and shopping malls in the suburbs, and it is
aimed at revitalizing city centers by restricting the opening
of commercial facilities with total floor spaces of more than
10,000 sq. meters.

According to Mainichi Shinbun, some retailers have already
started coordinating with local governments over the opening of
new stores, foreseeing the amendment of the law. Retail
industry is promoting a campaign to have the openings of large
stores incorporated into local governments' development plans.

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(ECON: Junko Nagahama)


14. (U) FY07 Supplemental Budget Won't Break the Bank

Press reports indicate that the FY07 supplemental budget being
compiled by the Ministry of Finance will be limited to about
Q1.5 trillion ($14 billion). This is quite small by
supplemental budget standards, and is a good indication that
the GOJ is aiming to stick to its fiscal consolidation goals,
despite some spending to address income and regional
disparities. The supplemental will be finalized by MOF in mid-
December, approved by the Cabinet in late December and
submitted to the ordinary Diet session in January, 2008.
Anticipated spending will cover disaster relief, Q150 billion
to compensate for postponing the increase in medical payments
by the elderly, additional aid for Afghanistan and UN programs,
and possibly programs to support industries that have been hit
hard by the oil price spike. Finance Minister Nukaga told the
press on December 5 that the government will not issue any
additional bonds to pay for the supplemental, despite lower
than expected tax revenues this fiscal year. (FINATT: Maureen
Grewe)


15. (SBU) Kansai Manufacturers Face Hard Times; Bears Closing
In

Most Kansai manufacturers have released closing accounts of the
first half of JFY2007, April to September. According to the
recent Nikkei Kansai Edition survey, although the average
profit level of Kansai businesses increased eight percent from
the previous year, profits are slowing annually, decelerating
from 23 percent growth in 2005-6, and falling below the
national average. Sharp, buoyed by LCD flat TV sales, dropped
12 percent in its profit margins nonetheless. In spite of
increased sales, Matsushita (Panasonic) also fell back to 2006
nominal profits. Both companies blamed a drop in product
demand in the U.S. market, the most competitive market for flat
TVs, over the subprime loan problem and yen appreciation.
Matsushita only reached 80 percent of its North American sales
target.

Rising oil prices strongly affected the textile, chemical, and
food industries, strong sectors in the Kansai. Most businesses
in these industries shrank their profits over raising raw
material costs. BOJ's Osaka Head Masahiro Samejima commented
to the Sankei Shimbun Osaka edition that Kansai businesses
depend on the world economy, so it might be hard to return to
last year's high levels of growth until the global economy
recovers. (Osaka-Kobe: Phil Cummings/Naomi Shibui)


16. (U) Minister Amari Concerned About Foreign Participation
in JPower Management

Japanese media reported on November 4 The Children's Investment
Fund (TCI),a UK investment fund known for its aggressive
shareholder rights activities, has demanded JPower appoint two
TCI executives to its board as outside directors. JPower,
formally known as Electric Power Development Co., is the
largest wholesale electric company in Japan. TCI is JPower's
largest shareholder, holding 9.9% of the company's stock.
JPower executives acknowledged receipt of a letter from TCI,
but declined to publicly release its contents.

JPower was established as a state-owned company in 1952, but
was privatized between 1997 and 2003, and listed on the Tokyo
Stock Exchange in October 2004. At a November 4 press
conference, Economy, Trade and Investment Minister Akira Amari
stated he "cannot imagine" a foreign investment fund being
involved in the management of such a highly important and
sensitive infrastructure company so vital to Japan's national
security. (ECON: (ECON: Eriko Marks)

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AVIATION
--------------


17. (SBU) American Air Cargo Company Looks at Chitose in
Hokkaido as Transport Hub

On December 1, a Hokkaido newspaper reported the Oregon-based
air cargo company Evergreen is researching the possibility of
developing a shipping route between the United States and China

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using Sapporo New Chitose International Airport. The proposed
route would fly cargo from New York through Anchorage to
Chitose. From Chitose, the airline would dispatch cargo to
Shanghai and Hong Kong as well as other potential sites such as
South Korea and Sakhalin, Russia. Evergreen Chairman Delford
Smith reportedly plans to visit Sapporo in mid-December to ask
Hokkaido Governor Harumi Takahashi for her support.

According to the article, Evergreen must overcome several
obstacles before the proposed shipping route can be realized.
Challenges include obtaining GOJ approval to fly from Hokkaido
to China, South Korea and Russia; establishing a cargo hub to
station smaller aircraft at Chitose airport for region-based
flights; and securing bonded facilities and warehouses around
Chitose. In addition, conditions at Chitose airport itself
must be improved to allow for late night flights and
construction of a longer runway.

ConGen Sapporo has not yet been able to confirm that formal
talks on a shipping route through Hokkaido are underway.
However, prominent Sapporo businessman Yoshiro Ito, who was
mentioned in the article, told Consul General Welton in October
that he had met with Evergreen during a recent trip to the
United States. Furthermore, Embassy Tokyo learned from MLIT
International Aviation in November that Evergreen had asked
Hokkaido airport authorities for permission to fly to China
from Hokkaido. MLIT reportedly told Evergreen their request
constitutes fifth freedom rights and would therefore have to be
negotiated in government-to-government talks.
Evergreen would not be the first American shipping company to
propose utilizing Hokkaido as a gateway to China. In 2005,
Federal Express tried to establish a similar route. That
company's plans fell through after it was unable to obtain
rights to fly from Chitose airport to other countries.
(Sapporo: Ian Hillman/Yumi Baba)

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OIL AND GAS
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18. (SBU) GOJ Infighting Hampering East China Sea Talks

METI contacts told us that working-level negotiations regarding
the dispute over East China Sea gas fields, which they
previously called "a waste of time," have been positive over
the last several months. However, higher level talks remain at
an impasse, presumably due to political pressures in Tokyo to
maintain a hard line with the Chinese. Please see Tokyo 5457
for more on this issue. (ECON: Sally Behrhorst/Eriko Marks)


19. (SBU) INPEX's Questionable Oil Deal

Japanese media report that INPEX Holdings, one of Japan's
leading oil developers, will join forces with Canada's Ivanhoe
Energy to explore for oil in the Qaiyarah oil field in Northern
Iraq. According to a METI contact, INPEX hopes to capitalize
on Ivanhoe's proprietary technology which simplifies the
processing of Iraq's "asphalt-like" heavy crude. With total
reserves estimated at 400-800 million barrels, daily production
could reach 100,000 barrels if the venture is successful.
Our contact told us, however, this deal is highly questionable
given Ivanhoe's unproven technology claims and uncertain
financial status. "They don't have a single processing plant
to prove their technology works," he said. He demurred when
asked to speculate why METI, which owns 30% of INPEX, would
permit such an agreement. (ECON: Sally Behrhorst/Eriko Marks)


20. (U) GOJ to Offset High Cost of Crude Oil

Nearly 90% of small and medium enterprises (SMEs) have been
adversely affected by the soaring cost of crude oil according
to a November 29 report released by the Ministry of Economy,
Trade and Industry (METI). In response, PM Fukuda on December
4 instructed his cabinet to find ways to assist SMEs and
citizens most impacted by the high prices. Economic and Fiscal
Policy Minister Hiroko Ota promised to study the issue and
deliver recommendations the week of December 10. According to
media reports, possible approaches include reducing highway
tolls, easing loan repayment terms for SMEs and providing
subsidies for heating oil to households in northern Japan.
Chief Cabinet Secretary Nobutaka Machimura has suggested a
portion of the supplemental budget may be used to fund this

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program. (ECON: Sally Behrhorst/Eriko Marks)

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SPORTING NEWS
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21. (U) Baseball's Greatest Team Set for Tokyo Dome,
Ambassador, Embassy Fans Will be There

The Boston Red Sox are coming to Tokyo along with the Oakland
A's to open Major League Baseball's regular season on March 25
and 26. The Embassy has been offered the opportunity to
purchase tickets and a group--including the Mission's chapter
of Red Sox Nation--will be on hand.

The arrival of the Red Sox in Tokyo will be an historic
opportunity to see baseball's greatest team. The Red Sox were
Major League Baseball's first dynasty. They won the first
World Series ever played in 1903 and a number of other
championships since then, including the most recent World
Series. The Red Sox include Japanese stars Daisuke Matsuzaka
and Hideki Okajima.


22. (SBU) THIS WEEK'S CABLES
5480 Japan: Undersecretary Level Consults
5478 Megaports Creeps Forward
5477 Taiwan, East China Sea Major Topics
5476 Cuba: Japan's Response
5475 Ambassador Urges HNS Deal Finalization
5460 Burma NGO Letter
5458 Japan and Vietnam Aim for Partnership
5457 East China Sea Talks Hampered
5456 Reactions to NIE
5454 APEC Anti-Counterfeiting Health Products
5407 Japan Considering Sectoral Targets
5401 Climate Change
5402 ASEA FTA Negotiations Complete


23. (U) This SENSITIVE BUT UNCLASSIFIED e-newsletter from U.S.
Embassy Tokyo's Economic Section, with contributions from the
consulates, is for internal USG use only. Please do not
forward in whole or in part outside of the government. The
Scope is edited this week by Charlotte Crouch
(CrouchCA@state.gov) and Joy Progar (ProgarJ@state.gov).
Please visit the Tokyo Econ Intranet webpage for back issues of
the Scope. Apologies, this option is only available to State
users. Please contact Joy Progar if you are from a different
agency and are interested in a back issue.
SCHIEFFER