JAPAN'S NEW NATIONAL INVESTMENT STRATEGY

UNCLAS SECTION 01 OF 04 TOKYO 000721 SENSITIVE SIPDIS DEPT FOR EAP AND EAP/J DEPT ALSO FOR EEB/IFD DEPT PASS USTR FOR CUTLER, BEEMAN AND HOLLOWAY NSC FOR LOI USDOC FOR 4410/ITA/MAC/OJ JUSTICE FOR ANTITRUST DIVISION - CHEMTOB TREASURY DEPT FOR IA/CARNES AND POGGI GENEVA FOR USTR E.O. 12958: N/A TAGS: EINV ECON PGOV OECD JA SUBJECT: JAPAN'S NEW NATIONAL INVESTMENT STRATEGY REF: A. 08 TOKYO 1421 ¶B. 08 TOKYO 1199 SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY ¶1. (SBU) Summary: The GOJ unveiled its new national investment strategy at a March 23 JETRO-sponsored investment seminar in Tokyo with little fanfare and no publicity. The new strategy, in draft since December 2008, retains much of framework of the earlier strategy adopted in 2006, while incorporating the key recommendations of a 2008 Cabinet Office ad-hoc committee of investment experts (Ref A). Japan's national target of doubling its foreign direct investment (FDI) stock, as a percentage of GDP, by the end of FY2010 remains unchanged. METI officials, however, publicly acknowledge this target will be difficult to achieve in the current recession. The new strategy, while comprehensive, is simply a blueprint of actions the GOJ hopes to take. It contains no timetable for implementation or assurances of new budget allocations. In the absence of ministerial-level attention to investment issues, lacking since mid-2008, it is uncertain how effective implementation will be. End Summary. ¶2. (SBU) The impetus to revise Japan's national investment strategy was the May 2008 report from the Cabinet Office's Expert Committee on FDI Promotion (known as the "Shimada report" after the name of the committee's chairman, Keio University Economics Professor Haruo Shimada). Former State Minister for Economic and Fiscal Policy Hiroko Ota appointed the panel, whose members included the heads of the U.S. and European business chambers as well as several prominent pro-investment academics, in January 2008 in response to widespread public criticism that Japan's pro-FDI policies had weakened since the departure of aggressively pro-reform Prime Minister Junichiro Koizumi. ¶3. (SBU) Most importantly, METI and the Cabinet office in drafting the new strategy retained the government's long-term target of increasing Japan's FDI stock to the equivalent of five percent of GDP by the end of FY2010 (March 2011). METI Director of Trade and Investment Facilitation, who unveiled the new strategy at the JETRO seminar, estimates meeting that target will require boosting Japan's FDI stock from its current level of 17.1 trillion yen (3.3 percent of GDP) to between 24-25 trillion yen over the next two years. He admits, however, that goal will be difficult to achieve. As of January 2008 (the latest figures available),Japan's net FDI inflows remain positive, although they have slowed considerably since mid-2008. METI fears, however, Japan will experience a net FDI outflow in 2009 as a result of likely disinvestment by several financial multinationals. The financial sector currently accounts for 41 percent of Japan's overall FDI, according to Ministry of Finance figures. A Revised National FDI Promotion Blueprint -------------- ¶4. (SBU) The core of the new investment strategy is a revision of the government's "Program for Acceleration of Inward FDI" last updated in June 2006. The new strategy focuses, in part, on targeting inward FDI to support the government's parallel goal of revitalizing Japan's regional economies. The government will encourage local governments to collaborate in drafting regional investment promotion programs and establishing "industrial development clusters", based on local industrial specializations. Under JETRO's TOKYO 00000721 002 OF 004 leadership, the central government will publicize these regional hubs to foreign investors. JETRO's outreach efforts will target foreign firms with existing business operations in Japan and encourage them to consider secondary investments in beyond the capital. At present, more than 75 percent of Japan's inward FDI ends up in the greater Tokyo area. (Ref B.) ¶5. (SBU) The revised program also lays out concrete steps the government intends to take to improve the overall climate for FDI and the market for cross-border mergers and acquisition (M&A). Most of these proposals draw from recommendations in the Shimada Report. ¶6. (SBU) To facilitate increased M&A activity, the government, inter alia, will: -- publicize the July 2008 METI Corporate Value Study Group report on the appropriate use of corporate takeover defenses (a process which has already begun); -- promote dialogue between industry groups and private investment funds in order to "effectively utilize investment funds as an important source of risk capital;" -- actively collect and disseminate success stories of how cross-border M&A and other types of strategic alliances between foreign and Japanese firms have contributed to the revitalization of local business activities and improved job security at target Japanese companies. The second half of the March 23 JETRO seminar consisted of presentations by academics on the benefits of M&A and video testimonials from several small and medium-sized high-tech firms, most based in Japan's regions, which have built strategic alliances with foreign partners or investment funds to obtain capital to expand their business activities or enter overseas markets. This portion of the program stimulated lively and mostly positive discussion among the more than 150 assembled business executives. ¶7. (SBU) The strategic plan also promises the government will undertake a study of the current M&A climate in Japan, including the number and value of recent cases, and will disseminate the results widely both domestically and abroad. This proposal is consistent with the USG recommendation in the current round of the Regulatory Reform Initiative that asks Japan to undertake a study of the reasons for the limited number of cross-border deals since the coming into force of the triangular merger provisions in Japan's 2006 Company Law. ¶8. (SBU) The plan also states the government will seek to enhance Japan's cross-border investment flows by accelerating negotiation of bilateral investment treaties and Economic Partnership Agreements (Japan's version of FTAs) with investment chapters. The government will also promote greater transparency of investment policies among its major regional trading partners in line with APEC's Investment Facilitation Action Plan. ¶9. (SBU) Finally, the government commits to "review the effective corporate tax rate" in line with another of the Shimada report's recommendations. The timing and size of any changes to tax rates is left undefined, although the FY2009 budget does include a specific measure to reduce tax rates for the next two fiscal years for certain small and medium-sized firms. (See paragraph 13.) TOKYO 00000721 003 OF 004 Sector Specific Measures -------------- ¶10. (SBU) The revised strategy also includes a proposal to develop an action plan for the acceleration of the examination of new medical devices (as called for in the Shimada report) and to create "Super Special Zones" for state-of-the-art healthcare development to facilitate "cutting-edge medical technology", in particular, in the fields of regenerative medicine, pharmaceuticals, and medical devices. ¶11. (SBU) The plan also promises the government will facilitate the internationalization of Haneda airport and 24-hour operation of international airports in Japan's major metropolitan areas. Tax Code Changes -------------- ¶12. (SBU) The new investment strategy also references three tax changes included in the FY2009 budget that passed the Diet on March 27, in addition to the agreement to review the overall corporate tax rate. The first change provides an exemption from Japanese taxation for passive investors who invest in Japanese companies through off-shore investment funds, provided the investor owns no more than 25 percent of the fund's total assets. The second change will temporarily allow 100 percent deprecation in the first year for investments in energy-saving equipment or new energy development projects. The third change will lower the applied tax rate from 22 percent to 18 percent rate through the end of FY2010 for the first 8 million yen in income earned by small and medium-sized enterprises. Venture Capital Fund -------------- ¶13. (SBU) In a surprise move, METI also announced at the March 23 investment seminar the creation of an Innovation Corporation of Japan, a public-private consortium that will receive 400 million yen (USD 4.2 million) in government capital to partner with private investors to fund start up projects in the area of clean energy, life sciences, and other "green" projects. The idea has not yet moved beyond the planning stage, according to the METI official who introduced the concept at the JETRO seminar. The timing of the announcment, however, is fortuitous. Japan's lack of secure sources of venture capital has become a topic of interest among Tokyo's foreign investor community. The chairman of ACCJ's FDI Committee, in a February 26 Asian Wall Street Journal op-ed piece, called on the Japanese government to allocate part of its planned FY2009 stimulus spending to revitalize Japan's venture capital industry. Comment -------------- ¶14. (SBU) While the new investment strategy includes policy measures the USG and U.S. business community have long advocated, effective implementation of the strategy is uncertain. None of the current cabinet lineup has taken an active interet in promoting increased FDI. The Prime Minister and his senior economic policy officials are more focused on responding to Japan's export decline and the TOKYO 00000721 004 OF 004 recent sharp rise in unemployment. While working level officials at METI, JETRO and the Cabinet office with direct responsibility for promoting investment are serious and committed, how successful they can be in the absence of senior political support remains an open question. POST