MLIT POLICIES UNDER FIRE

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 000467 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/J, EEB/TRA FOR BYERLY PASS TO USTR FOR BEEMAN PASS TO DOT FOR GRETCH E.O. 12958: DECL: 02/21/2018 TAGS: EAIR PGOV EINV PREL JA SUBJECT: MLIT POLICIES UNDER FIRE REF: A. TOKYO 0408 ¶B. TOKYO 0024 Classified By: Ambassador J. Thomas Schieffer. Reason 1.4 (b)(d) ¶1. (C) Summary: The recent public squabble over a draft bill that would limit the size of foreign shareholding and thus prevent foreign control of Japanese airport operators seems less about limiting foreign direct investment (FDI) and more about reducing the Transportation Ministry,s (MLIT) stranglehold on private transport institutions. Opponents of the bill say they want to see an end to the practice of assigning retired senior MLIT officials to executive positions in ostensibly private airport institutions or other private companies where they can collude with current ministry officials to obstruct competition. So far, the opponents have succeeded in postponing a decision on the bill, but not in defeating the bill. End Summary. ¶2. (SBU) The bill to curb foreign ownership in Japan's privatized airports was put forward by MLIT Civil Aviation DG Hisayasu Suzuki. A Ministry of Foreign Affairs (MOFA) aviation official told us February 12 that the bill, which has not yet been formally submitted to the Diet, would put limits on three categories of shareholders: individual non-Japanese investors, foreign governments or representatives of foreign governments, and foreign companies. Under the current draft, the combined shareholding of these three categories of stockholders could not exceed one-third. There is a similar provision in the 1987 bill that privatized former state-owned telecom operator NTT (ref A). ¶3. (C) An MLIT official told us that currently all appointments with Suzuki are on hold to provide the director general time to lobby the Diet on the bill. TBS reported February 20 that the ruling coalition is making major changes to the draft, including excluding coverage of the already publicly-listed Haneda Airport operating company to prevent any negative impact on existing foreign investors. This would undermine one of the bill's opponents' main objections to the draft. The LDP has already cut the provision in the bill that would eliminate the word "international" from Haneda airport's official name. Airports Bill Faces Coalition of Pro-Reform Diet Members -------------- -------------- ¶4. (SBU) A JAL executive told us the current battle actually started a year ago with Financial Services Minister Yoshimi Watanabe,s push for reform in Japan's transportation sector during his term as Minister for Administrative Reform during the Abe administration. Along with then-Chief Cabinet Secretary Yasuhisa Shiozaki, Watanabe was an architect of the Asia Gateway Initiative (AGI) which called for a more aggressive reform agenda than MLIT wanted. (Note: Asia Gateway emerged out of the Prime Minister's office under Abe as an effort to promote airline traffic into Japan.) In a surprisingly public move, Fuyushiba opposed the AGI initiative and many of its details were subsequently watered down. According to public opinion at the time, TOKYO 00000467 002 OF 003 Fuyushiba "won" the clash with Watanabe, and according to the JAL executive, the two have been engaged in a personal "vendetta" ever since. ¶5. (C) The face-off is deeper than egos, however. Pro-reform Diet members see the MLIT bill as a clear example of the business as usual mindset that persists in many government ministries. Diet Member Hiroshige Seko (LDP, Upper House, Wakayama) agreed with EMIN February 15 that the draft bill sent a very negative signal to investors about Japan's openness to FDI. In particular, putting restrictions on aggregate foreign ownership of publicly-listed Haneda Airport Corporation was, in Seko's works, "unthinkable" since it would be interpreted as a post-facto changing of the rules for existing investors. Seko and other pro-reform Diet members, including Shiozaki and former LDP Secretary General Hideo Nakagawa, have formed a ad-hoc parliamentary group to oppose the MLIT bill. Public Attention Focuses on MLIT Policy -------------- ¶6. (SBU) Diet members are not the only ones pushing MLIT for change. This month two major pro-reform speakers urged Japan to further open its aviation sector. During a February 7 luncheon honoring him as ACCJ Person of the Year, former Minister Heizo Takenaka called for more reform, including Open Skies. International Air Transport Association Director General Giovanni Gisignani delivered the keynote speech for the international business community February 14. To a crowd that included key MLIT officials, among them Director General Suzuki and Deputy Director General Ryuhei Maeda, Gisignani urged Japan to take the lead in airport privatization. ¶7. (SBU) During the first week of February, two TV news features on different channels highlighted economic professors who discussed how a more open aviation market in the capital would reinvigorate Japan's economy. Keio University Economic Professor Ushio Chujo bluntly suggested the government should let JAL go bust so the economy can move on. The other TV new feature focused on the potential economic value of low cost carriers in Japan and compared them to the revolutionary impact the 1853 arrival of Perry's Black Ships in Tokyo Bay. Both news segments blamed MLIT and the lack of optimized service in aviation for the country's general economic malaise. ¶8. (SBU) Diet members are not the only ones wrestling with MLIT for more freedom. Tokyo governor Shintaro Ishihara realized that, with this year's record-breaking eight million tourists, there is money to be made in the international aviation market, and he has chipped into the power base of MLIT, JAL and the airports. On December 11, Ishihara met with PM Fukuda and announced that he brokered a trade of Tokyo taxes in the name of contribution to the nation's regional disparity in exchange for more international flights for the predominately domestic Haneda Airport (ref B). An MLIT official told us earlier that ministry officials were "scared" by Ishihara,s statements. On February 18, the Cabinet held the first meeting to discuss the increased international flights at Haneda with MLIT officials including TOKYO 00000467 003 OF 003 DG Suzuki and Tokyo's vice governor Naoki Inose as well as officials from Kanagawa and Chiba prefectures. The next meeting is slated for April. ¶9. (C) Despite the chorus of voices, MLIT continues to do business according to an "old boys" system. A JAL executive told us the reason that MLIT drafted the bill is because Japanese stockholders are more susceptible to manipulation. There are unwritten laws in Japan, he explained, and Japanese stockholders understand these laws and will abide by them. Such unwritten laws include giving executive positions to former ministry officials and working to block unwanted competition rather than optimize operations. What Needs To Be Done -------------- ¶10. (C) Diet member Seko warned against direct USG intervention, however, claiming opponents of the bill are susceptible to accusations from conservative opponents that they are willing to "sell out important national assets to foreigners." Although admitting such charges are ridiculous, Seko thought political leaders would be more open to the opinions of the Tokyo Stock Exchange and the Finance Ministry. Nevertheless, Seko suggested, the Ambassador and senior Embassy officials should use their meetings with Prime Minister Fukuda on other issues to convey quietly U.S. concerns. ¶11. (SUB) Surprisingly, a U.S. airline executive told us February 18 he believes the climate for aviation liberalization is right, but a new phrase needs to be invented so that the GOJ is not perceived as following in the path of others. We can get Open Skies, he said, but we need to call it something else. Comment -------------- ¶12. (C) MLIT is facing what may be unprecedented heat in the postwar period, but it is too soon to predict whether it will lead to fundamental reform in the civil aviation sector. The ministry has strong institutional reasons to oppose reform. Increased foreign ownership at airports would plausibly incline management teams to be more sensitive to market forces -- which, among other things, would make it more difficult for MLIT to park ex-senior officials in sinecure positions. While the USG, along with the Japanese public, has strong reasons to want civil aviation reform in Japan, we must be careful in urging reform so that our actions do not turn out to be counterproductive. SCHIEFFER