The Japan Economic Scope - February 16, 2007

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SUBJECT: The Japan Economic Scope - February 16, 2007

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1. (SBU) Table of Contents


3. Ambassador Schieffer on U.S.-Japan Economic Relations at the
ACCJ

4. Fourth Quarter Real GDP Grew 4.8 Percent; Up 2.2 Percent in
CY2006

5. Minister of State for Economic and Fiscal Policy Hiroko Ota
on GDP News

6. Japan Post Privatization: Level Playing Field Concerns

7. Japan to be Third Party in U.S. WTO Subsidy Case Against
China

8. Tyson Beef Shipment Held

9. Japan Agriculture Feeling the Heat

10. ACCJ Washington DC "Door Knock" Set for April 17-18

11. Nagoya Looks to Attract U.S. Companies

12. Telecoms: MRA Signing Set for February 16

13. EXBS: Unmanned Helicopters Sold to PRC?

14. Civair: If Matsuzaka Draws a Crowd, Flights to Boston?

15. Basic Industries: Japan Firms Will Continue to Dominate
Carbon Fiber Market

16. Maritime: New Maritime Subcommittee Discussions on Future of
Ocean Transport

17. Agriculture: Hokkaido Biotech Forum Shows Local Anxiety Still
High

18. Embassy Fights Unfair Meat Labeling Rules

19. Regions: The Next Business Leader of Kansai Economic
Federation is From Tokyo

20. New Large Scale Retail Stores Applications in Kansai Decline


2. (U) This cable contains the Japan Economic Scope from February
16, 2007.


3. Ambassador Schieffer on U.S.-Japan Economic Relations at the
ACCJ
--------------

The Ambassador made a speech on February 14 to the American
Chamber of Commerce in Japan regarding the development of East
Asia and the future of the U.S.-Japan economic relationship. The
full text of the speech is attached.


4. (U) Fourth Quarter Real GDP Grew 4.8 Percent; Up 2.2 Percent
in CY2006
--------------

Japan's real GDP grew at a 4.8 percent annual rate in the 2006
fourth quarter, the strongest growth in almost three years,
according to preliminary data announced by the Cabinet Office
February 16. GDP growth was considerably higher than the 3.8
percent consensus forecast of private analysts.
Overall real GDP growth reflected strong growth in domestic
demand, notably a rebound in personal consumption and firm
business investment, and also strong exports. With the surge in
demand, business inventories were down by a half a percentage
point.

The overall GDP deflator, the broadest measure of overall prices,
improved from a 0.7 percent year-on-year decline in the third
quarter to a 0.5 percent drop in the fourth quarter, the smallest
drop since the last quarter of 2004.

Some private analysts interpreted the results as a tailwind
nudging the BOJ to raise interest rates at the upcoming Policy
Board meeting on February 20-21.

Please see attached analysis for more details.


5. (U) Minister of State for Economic and Fiscal Policy Hiroko
Ota on GDP News
--------------

At a February 15 press conference after the release of the GDP
figures, Minister Ota said, "Data confirm that the Japanese
economy continues to recover. But it also shows that consumption
is still weak," according to Nikkei. She noted, "Price-related
figures are slowly, but steadily improving. I think the deflation
exit is definitely in sight."


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Regarding the Bank of Japan's position, she said, "I want the
bank to support the economy through its monetary policy." She
added, "We, the government, will aggressively implement reforms
in order to bolster economic growth," and "I think the BOJ will
support the economy from the monetary side."

The BOJ will hold a policy meeting next week.


6. (SBU) Japan Post Privatization: Level Playing Field Concerns
--------------

Administration and Congressional concern in Washington about the
course of Japan's postal privatization process -- in particular,
that the private financial institutions emerging out of the
process will enjoy unfair advantages against existing companies -
- is getting attention in Tokyo.

According to Nikkei on February 15, Nobuyuki Kinoshita, Director-
general of the Office for the Promotion of the Privatisation of
Postal Services, said U.S. worries were based on a
"misunderstanding." He was responding to statements made in the
House Ways and Means Committee earlier this week and also to
remarks by U.S. Trade Representative Susan Schwab, who said the
Administration was closely monitoring the process.

At a February 16 breakfast meeting with the State Department's
Japan Affairs Director, James Zumwalt, ACCJ members in Tokyo
connected to the industry expressed appreciation for Ambassador
Schwab and the U.S. government's continued commitment to a level
playing field as Japanese regulators proceed on privatization.
They lamented that the draft "Findings" of the Postal Services
Privatization Commission on introduction of new products focused
on consumer convenience rather than a level playing field, and
said they would make this point to the Commission when they
testified on February 20.

According to Nikkei, privatization of Japan Post's financial
services entities will transfer management of more than $3
trillion of assets into the private sector. Japan Post operates
the world's largest bank and insurance company.


7. (SBU) Japan to be Third Party in U.S. WTO Subsidy Case
Against China
--------------

Japanese Trade Minister Amari announced February 16 that the GOJ
would participate as a third party in the U.S. WTO subsidy case
against China. The Japanese Embassy in Washington will brief
USTR on the decision on February 16. According to a METI contact,
the Nikkei story February 15 reporting Japan's decision came
earlier than the ministry would have liked, but the information
was basically accurate.

According to the contact, the GOJ sought further information from
the Chinese on the case but did not receive it. An interagency
decision was subsequently taken to move ahead as a third party.
METI was surprised at how fast the United States had decided to
lodge a case against China and would monitor closely Beijing and
Washington's consultations.

According to earlier press reports, because many Japanese
companies run joint ventures with Chinese partners, Amari had
hinted that Japan would take a "softer" third party approach.
Our METI contact indicated this was a concern for the Ministry,
but ultimately concerns about China's WTO compliance on subsidies
loomed larger. How much larger we may know after USTR is briefed
on the GOJ's decision.


8. (U) Tyson Beef Shipment Held
--------------

A shipment of U.S. beef is being held by Japanese customs
authorities because it contained two cartons that were not
certified for export to Japan.

MAFF and MHLW issued a press release on February 15 and the story
was carried on national television.

When asked if imported U.S. beef should be stopped, Prime
Minister Abe told reporters, "I've been informed that this case

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is different from the past when we imposed an import ban, since
no specified risk materials (SRM) were discovered." The Prime
Minister added that he would deal with the case "based on the
facts." He had instructed authorities to take measures against
the establishment which shipped the beef in question.
Earlier in the week, Japanese officials made resolution of this
incident an additional precondition for discussing age
restrictions on U.S. beef.

USDA is conducting an investigation to determine the cause of the
mis-shipment and plans to share a report with the Government of
Japan the week of February 19.


9. (SBU) Japan Agriculture Feeling the Heat
--------------

Japan Agriculture (JA),the country's leading agricultural
lobbying group and cooperative, is feeling some heat for its
monopoly practices.

The Japan Fair Trade Commission, responding to a Cabinet
decision made in March 2006, came out February 14 with a list of
JA's monopoly practices and announced a 30-day public comment
period ending March 16.

A JA source told us February 15 that the organization was
expecting the news and was working on remedying some of the
concerns raised. In addition it will file its own public
comments in advance of the deadline.

The monopoly practices JA is accused of are fairly wide ranging
and include, for example, forcing farmers to use JA distribution
services and materials in order to qualify for JA credits.
The Council for the Promotion of Regulatory Reform (CPRR) in its
annual report at the end of 2006 noted that JA's monopoly
practices could hinder future measures to revitalize the farming
sector.


10. (U) ACCJ Washington DC "Door Knock" Set for April 17-18
--------------

At a breakfast meeting in Tokyo February 16 attended by the State
Department's Office of Japan Affairs Director, Jim Zumwalt,
American Chamber of Commerce in Japan members said they plan a
series of meetings in April on Capitol Hill and with key economic
agencies, focusing on the importance of economic integration and
the other issues identified in the ACCJ's White Paper released at
the end of last year.

The ACCJ decided to push up the calendar for its annual visit so
as not to conflict with the Summit meeting between Prime Minister
Abe and President Bush scheduled for early May.
For questions regarding this year's door knock, please contact
Clemence Mayali at the ACCJ (cmayali@accj.or.jp).


11. (SBU) Nagoya Looks to Attract U.S. Companies
--------------

A February 14 forum held by I-BAC (the Aichi-Nagoya International
Business Access Center) stressed the city and prefecture's
commitment to welcoming foreign firms.

Among the participants Consulate staff spoke to were U.S.
representatives of a Michigan-based forged metal components
company and a Rhode Island-based company specializing in
automotive electrical equipment. Both companies anticipate
opening Nagoya representative offices to increase sales to
Japanese automakers as "designed-in" parts, primarily in North
America.

Despite the fact that neither has plans for production in Japan,
both companies made clear they have received strong and
substantial support from JETRO and local authorities for
establishing offices in Nagoya. In past years, such support
would have been much less likely, since almost by definition, any
success by these U.S. firms in expanding their market share will
come at the expense of potential sales by competitors from
Central Japan.

In this case at least, it appears regional authorities are living

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up to their word in promoting the further internationalization of
the local economy, a conclusion supported by many other similar
conversations we have had with U.S. firms over the past year.


12. (U) Telecoms: MRA Signing Set for February 16
The United States and Japan will sign a Mutual Recognition
Agreement (MRA) on Telecommunications Equipment in Washington on
February 16 capping years of negotiations.

It will be the first mutual recognition agreement between the
United States and Japan in any sector.

The agreement will allow U.S. and Japanese regulators to accept
the results of testing labs and certifications on
telecommunications equipment obtained in either country leading
to easier market access for manufacturers wishing to sell in
either Japan or the United States.

MOFA plans to submit the agreement to the Diet in March so that
the agreement will come into force later this year.

In 2005 the United States exported about $1 billion in
telecommunications equipment to Japan and Japan exported about
$1.6 billion in telecommunications equipment to the United States.
One of the benefits of the agreement will come through speeding
up the process of bringing telecoms products to market by opening
up competition among certification labs.

U.S. telecoms equipment makers, including Motorola and Cisco as
well as many smaller firms are expected to benefit.


13. (SBU) EXBS: Unmanned Helicopters Sold to PRC?
--------------

Press reports state that Yamaha Motor Co. may have sold seven or
eight unmanned helicopters to China, violating METI export
control laws.

Yamaha allegedly understated the helicopters' performance
capabilities thereby skirting the Foreign Exchange and Foreign
Trade Law of 2005.

Sales of the aircraft are strictly controlled due to their
potential to be used for military purposes and the dispersal of
chemical weapons.
Shizuoka and Fukuoka police raided Yamaha offices and questioned
ten officials in January 2006.

We are following-up with METI contacts to determine the status of
this case.


14. (U) Civair: If Matsuzaka Draws a Crowd, Flights to Boston?
--------------

The Boston Globe ran a lengthy piece on February 11 about how the
Red Sox are "reinventing" themselves to welcome Daisuke Matsuzaka
to the team. Aside from lifting the Red Sox's fortunes,
Bostonians hope Matsuzaka will draw more Japanese visitors to the
home of the bean and cod.

Pat Moscaritolo, head of the Greater Boston Convention and
Visitors Bureau told the Globe that there were about 12,000
visitors from Japan last year, and they are expecting at least
20,000 this year. Moscaritolo estimates this could mean an
additional $14 million flowing into the local economy. A tour
operator affiliated with All Nippon Airways sold out 350 packages
that included Sox tickets in three days, he said. The package
cost $3,000.

However, Peter Grilli, president of the Japan Society of Boston,
noted the lack of nonstop flights from Japan to Boston places the
city at a competitive disadvantage to Seattle and New York,
respective homes of Japanese stars Ichiro Suzuki and Hideki
Matsui.


15. (U) Basic Industries: Japan Firms Will Continue to Dominate
Carbon Fiber Market
--------------

Three Japanese companies -- Toray, Teijin Ltd., Toho Tenax Co.,

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and Mitsubishi Rayon Co. -- together have 70 percent of the
global carbon fiber market, according to a February 9 Nikkei
story.

Nikkei reports the three firms are expected to continue to
dominate the market as it expands because of their advanced
production technology. Sales of the material, moreover, are
adding substantially to the companies' bottom lines.
Toray is the number one carbon fiber producer worldwide with 34
percent market share in 2006 and is aiming to expand its market
share to 40 percent by 2010.

Toray announced on February 9 that it will spend 55 billion yen
to increase its production capacity by 4,000 tons or some 30
percent by December 2008.

In addition to Japan, Toray will develop production in the United
States at its plants in Decatur, Alabama and Tacoma, Washington
-- and France. (See Toray's press release for details on planned
production increases and locations.)

About half of the planned increase is for production of Boeing's
787 jet for which Toray is the exclusive supplier, according to
Nikkei.

Toray foresees carbon fiber demand expanding by 15 percent per
year. In addition to aviation, increased use for auto parts and
gas tanks as well as other non-aviation products is expected.
Toho Tenax also plans to open a large production facility in
April 2008 in Japan, says Nikkei.


16. (U) Maritime: New Maritime Subcommittee Discussions on
Future of Ocean Transport
--------------

The Ministry of Land, Infrastructure and Transport (MLIT)
announced on its website that the 12th meeting of Maritime
Subcommittee will be held on February 16 at the Mita Meeting Hall
in Tokyo. MLIT Minister Tetsuzo Fuyushiba is scheduled to give
the opening remarks.

A Maritime Bureau official confirmed that this is a new round of
discussions, a main theme of which is the future of Japan's ocean
transport industry, including the tax and competition policy
governing this sector.

We plan further coverage after meetings with MLIT officials
covering these and related issues.


17. (SBU) Agriculture: Hokkaido Biotech Forum Shows Local
Anxiety Still High
--------------

On January 15, a Consulate staff member joined forty others in
attending a region-wide forum on biotechnology in Sapporo. The
forum was the last of eight "regional communication meetings"
hosted by the Society for Techno-innovation of Agriculture,
Forestry and Fisheries with sponsorship from the Ministry of
Agriculture, Forestry and Fisheries. Fourteen residents from
across Hokkaido representing a wide range of age groups
participated in a panel discussion on biotechnology and
genetically modified organisms (GMO).

The majority of panelists expressed serious anxiety about GMOs,
mainly focusing their discussion on food safety concerns.
Panelists, however, expressed dissatisfaction with the GOJ for
the way it disseminates information on biotech products. Several
participants asked the GOJ to clarify why it approves of GMO
products and encourages further advancement in biotech research
but still does not strongly recommend use of GMO products.

At the conclusion of the forum, many participants left
disappointed, stating that the meeting had failed to alleviate
suspicions and anxiety regarding GMOs.


18. (U) Embassy Fights Unfair Meat Labeling Rules
--------------

On February 9, Embassy Tokyo submitted comments to a draft MAFF
proposal on Wagyu beef. Please click here for the comments.

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19. (U) Regions: The Next Business Leader of Kansai Economic
Federation is From Tokyo
--------------

The Kansai Economic Federation (Kankeiren) informally announced
its next Chairman, Hiroshi Shimozuma, the Chairman of Sumitomo
Metal Industry, starting in May. It is the third time for
Sumitomo Metal to serve as the head of the Kansai region's prime
business lobby group.

Kankeiren has been struggling to name a new leader to succeed
current Chairman Yoshihisa Akiyama, Chairman of Kansai Electric
Power Co., Inc., who has been in charge for eight years. After
the top candidate, Daikin Industry Chairman Noriyuki Inoue,
refused, citing Daikin's renewed attempt at entering the U.S.
market in 2007, Mr. Shimozuma, already a Kankeiren vice chairman,
decided to take over.

Mr. Shimozuma is well-known for revamping Sumitomo Metal after a
period of decline. Although Sumitomo Metal is one of the leading
businesses originally from Osaka, the company has shifted its
headquarters to Tokyo, and Mr. Shimozuma lives there. This has
led some businesspeople to complain that Shimozuma is ill-suited
to represent the needs of the Osaka business community.


20. (SBU) New Large Scale Retail Stores Applications in Kansai
Decline
--------------

The number of applications for new large scale retail store
openings in the Kansai declined 15 percent (76 cases) last year,
due in part to the revised town planning laws. Among the six
prefectures in the region, the number of applications in Wakayama
and Nara decreased by 60-70 percent from the previous year, while
Osaka held steady and Kyoto increased modestly.

The gap between large store openings in rural and urban areas is
growing. A Kyoto city official in the commercial promotion
section predicted that the trend of more urban and less rural
large stores will continue. In November 2007, nationwide
regulations will come into force restricting new starts of stores
larger than 10,000 square meters in suburban neighborhoods.
SCHIEFFER