1. (SBU) Summary: The U.S.-Japan Investment Initiative
recently completed its eighth year of work on improving
Japan's investment climate and contributing to economic
growth in both countries. The Initiative can claim a number
of successes. However, we may be able to engage Japan more
effectively to open to foreign investment -- and the trade
flows and U.S. domestic job creation associated with such
investment -- and to work jointly for stronger investment
regimes in the region, if we enhance bilateral
investment-related discussions. End Summary.

Past Success of U.S.-Japan Investment Initiative


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2. (U) The U.S.-Japan Investment Initiative and its
associated bilateral Investment Working Group have, since
their establishment in 2001, achieved concrete improvement in
Japan's investment climate and raised the awareness among GOJ
officials of the contribution of cross-border investment
flows to long-term economic growth. Japan's stock of FDI
over the lifetime of the Initiative tripled from 6.1 trillion
yen to over 18 trillion yen (about USD 180 billion at current
exchange rates.) Meanwhile, both U.S. investors and Japanese
companies have benefited from the increasingly important role
of foreign capital in Japan's equity markets. Foreign
investors are a major force in Japan's capital markets owning
approximately 27 percent of Japan-listed equities (compared
with less than five percent 20 years ago), and accounting for
between 50 and 60 percent of the daily trading volume of the
Tokyo Stock Exchange. Business representatives and academics
also consistently note that success in opening Japan to
greater foreign investment yields benefits in terms of
opening Japan generally to increased economic engagement, to
further economic reforms, and to more trade with the United
States.

Investment Issues Remain Salient


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3. (U) Investment liberalization and opportunities for
merger and acquisition (M&A) activity in the Japanese market
continue to interest U.S. businesses. The American Chamber
of Commerce in Japan (ACCJ) remains a vocal advocate of
expanding the types of cross-border M&A transactions
allowable under Japanese law and of introducing global
standards of corporate governance to Japan-listed companies
as a means of improving their financial efficiency. ACCJ has
issued five "Viewpoint" position papers on subjects related
to corporate governance since the beginning of 2008.
Officials from U.S. companies -- both manufacturing as well
as financial services firms -- also repeatedly emphasize that
trade, with benefits in terms of increased U.S. exports and
the creation of U.S.-based jobs, follows U.S. investments in
Japan.



4. (U) Investment issues are also of continuing interest to
the Japanese government. The government's official goal of
doubling Japan's stock of foreign direct investment (FDI), as
a percentage of GDP, by the end of FY2010 (March 2011)
remains in place. Although, at present, there is a lack of
cabinet-level policy direction in this area, working level
officials at the Ministry of Economy, Trade and Industry
(METI) and the quasi-governmental Japan External Trade
Organization (JETRO) continue to actively promote inward FDI.
The Financial Services Agency (FSA) is implementing policies
to make Japan's capital markets more attractive to foreign
investors.

Benefits from Combining Discussions into Single Forum


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5. (SBU) Embassy Tokyo believes there would be benefits from
a more coordinated approach to all current investment-related
bilateral activities. While we do not propose a particular
format or level for these discussions, we believe there is a
critical mass of issues surrounding investment policy that
are ripe for progress with Japan over the next several years.
The Investment Initiative in recent years has been
discussing liberalization of cross-border merger techniques,
policies governing national security reviews of proposed FDI
transactions, Japan's obstacles to foreign investment in
educational services, and GOJ and USG strategies towards
negotiating bilateral investment treaties (BITs) with third
countries. Separately, the Regulatory Reform and Competition
Policy Initiative discusses corporate governance issues and
regulations to strengthen protection of minority shareholder
rights. The Financial Services Working Group has reviewed
tax policies that may have an impact on investment.
Discussion on multilateral and regional investment policy
largely takes place in APEC working groups. All of these
issues remain relevant to U.S. companies operating in Japan.



6. (SBU) Private sector interest in these issues, however,
is moving beyond simply seeking improvements to Japan's
regulatory structure and in the direction of a more
comprehensive policy approach to improving the investment
climate. This includes issues such as tax policy, the role
of independent directors on company boards, and Japan's
climate for entrepreneurship and innovation. At the May 2009
Investment Working Group session, the METI co-chair expressed
interest in continuing an investment dialogue with the U.S.
and the two sides had a preliminary discussions on how we
might link our bilateral investment discussions to related
activities in multilateral organizations such as APEC and
OECD.

Policy Objectives for an Expanded Investment Dialogue


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7. (SBU) The policy objectives of an expanded investment
dialogue would be to:

-- Promote investment as a positive contribution to the
global economic recovery;

-- Respond to the concerns of U.S. businesses about continued
legal and regulatory obstacles in Japan to cross-border
investment flows;

-- Promote needed Japanese domestic structural reforms; and

-- Contribute to improved regulatory transparency and
corporate governance in Japan.

Outline of an Enhanced Investment Agenda


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8. (SBU) Possible items for an enhanced investment agenda
could include:

-- Improving Japanese Corporate Governance by encouraging an
expanded role for independent directors on corporate boards,
limiting cross-shareholding linkages between operating
companies without explicit approval of shareholders, and
strengthening minority shareholder rights;

-- Seeking changes to Japan's Company Law to expand the
allowable structures for M&A;

-- Promoting increased regional autonomy in Japan and
empowering local governments so they can provide targeted
incentives to potential investors;

-- Exploring ways to promote innovation and entrepreneurship
and support corporate start-ups;

-- Removing disincentives to corporate reorganization (an
issue first raised by Japan at the May 2009 working group);

-- Expanding U.S.-Japan cooperation to oppose investment
protectionism and promote investment liberalization and
investor protection schemes in third countries;

-- Tax issues, including Japan's high corporate tax rates and
the lack of effective tax deferral for cross-border stock
swaps.
ZUMWALT