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Cablegate: The Japan Economic Scope - April 6, 2007

VZCZCXRO9049
RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #1541/01 1000019
ZNR UUUUU ZZH
R 100019Z APR 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 2454
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5415
RUEHFK/AMCONSUL FUKUOKA 0590
RUEHNAG/AMCONSUL NAGOYA 9908
RUEHNH/AMCONSUL NAHA 3046
RUEHOK/AMCONSUL OSAKA KOBE 4117
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 07 TOKYO 001541

SIPDIS

PARIS PLEASE PASS TO USOEDC
STATE PLEASE PASS TO USTR

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - April 6, 2007

Sensitive but unclassified. Please protect accordingly.

1. (U) This cable contains the Japan Economic Scope from April 6,
2007.

2.(SBU) Table of Contents

3. Japan Feels the Pressure from US-Korea FTA
4. Japan-Thailand Free Trade Agreement Signed
5. Hokkaido Gubernatorial Candidates Oppose EPA with Australia
6. Fukuoka Company Officials Charged with Foreign Bribery
Offense
7. Chilly GOJ Response to U.S. Calls to Open Beef Market
Completely
8. "Deregulation Warrior" Feels "Like a Broken Record"
9. Symposium Reveals Problems at KIX
10. KIX Launches Study Group to Regain U.S. Business
11. KIX Welcomes Asia Gateway Strategy Panel Interim Report
12. Central Japan International Airport Has New Leadership
13. Major Oil Distributor Withdraws from Electric Power Retail
Market
14. Hokuriku Electric Power Hid Past Problem at its Nuclear Plant
15. California Looks to Japan for How to Bring Broadband to the
Masses
16. Sharp's New LCD Plant in Hyogo
17. Part-Timer Pension Coverage To Be Expanded, Slightly
18. Unemployment Steady; Wages Remain Flat
19. Overall Economic Assessments
20. BOJ Tankan Survey Reveals Slight Deterioration in Business
Sentiment

3. (SBU) Japan Feels the Pressure from US-Korea FTA
------------------------------

GOJ officials felt the pressure this week from Japanese business
leaders and editorial writers who worried that a U.S.-Korea FTA
will hurt Japanese exports to the United States and Korea and
that Japan must catch up and conclude more FTAs with its trade
partners.

Many Japanese had expected the U.S.-Korea talks to fail and were
caught by surprise by the agreement.

PM Abe commented that FTA talks with Korea should resume and that
a free trade deal with the United States was something "Japan
needs to consider as a future topic," while METI Vice Minister
Kitabata stated that Japan should focus on strategic trade
agreements in East Asia.

The Agriculture Ministry responded with vague remarks about
needing to study the deal, but was said to be relieved that rice
was excluded from the agreement.

Several Japanese business leaders argued that Japan should pursue
an FTA with the United States, including the heads of Keidanren,
the Japan Chamber of Commerce and Industry, and the Japan
Association of Corporate Executives (KeizaiDoyukai).

Editorials in the Yomiuri, Asahi, and Nikkei urged the government
to speed up FTA talks, beginning with resuming talks with Korea.
Industry, academics, and the press asserted that Japan must find
a way to reform and liberalize Japan's agricultural market, which
they recognize as the main obstacle for Japan in negotiating FTAs.
While the press was full of warnings that Japanese auto and
electronics exports would suffer because of the U.S.-Korea deal,
others pointed out that Japanese companies could easily step up
production in the United States, Mexico, and Canada, and would
feel few ill effects. Indeed, Koreans now worry that U.S.-made
Japanese cars will now gain easy access to their market. (ECON:
Marilyn Ereshefsky)

4. (SBU) Japan-Thailand Free Trade Agreement Signed
------------------------------

Prime Minister Shinzo Abe signed an "economic partnership
agreement" (EPA) with visiting Thai interim Prime Minister
Surayud Chulanont on April 3.

Under the pact, Thailand will eliminate tariffs on 97% of imports
from Japan in value terms over 10 years -- including steel
products and auto parts -- while Japan will remove tariffs on 92%

TOKYO 00001541 002 OF 007


of imports from Thailand including agricultural and fisheries
products. In addition, Thailand will remove tariffs on auto parts
-- whose rates are now set at 15 -30% -- by 2012. Japan will
reduce tariffs on chicken and pork imported from Thailand. Rice
was excluded from the agreement.

The agreement will likely come into effect in the fall of 2007,
following formal ratification by Tokyo and Bangkok.

Japan and Thailand came to basic agreement on the terms of the
EPA in September 2005 and were scheduled to sign the agreement in
April 2006. Political instability in Thailand culminating in the
coup in last September delayed the signing.

Japanese press commentary has tended to compare unfavorably the
relatively limited liberalization under the Thailand-Japan
agreement to the much more significant terms of the Korea-U.S.
agreement signed a day earlier. (ECON: Chris Wurzel)

5. (U) Hokkaido Gubernatorial Candidates Oppose EPA with
Australia
---------

Hokkaido's three gubernatorial candidates for the April 8
elections oppose a Japan-Australia Economic Partnership Agreement
(EPA).

Liberal Democratic Party incumbent Harumi Takahashi joined
Democratic Party of Japan challenger Satoshi Arai and Japan
Communist Party challenger Satoshi Miyauchi in denouncing EPA
negotiations in official campaign statements.

Hokkaido government officials continue to predict that an EPA
with Australia will have devastating effects on the local economy,
bringing losses totaling $11.6 billion if tariffs are lifted on
Hokkaido-produced wheat, dairy products, sugar beets and beef.
(Sapporo: Ian Hillman/Yumi Baba)

6. (SBU) Fukuoka Company Officials Charged with Foreign Bribery
Offense
-------

On March 16, the Fukuoka Public Prosecutor's Office indicted two
officials of Fukuoka-based electrical engineering company
Kyudenko Corp. on bribery charges involving Philippine government
officials.

This legal action is the first one to be carried out under the
foreign bribery provision of Japan's 1998 Unfair Competition
Prevention Law.

The officials, who provided gifts to secure a fingerprint
identification system contract, were fined approximately $5,900.
While Kyudenko Corp. itself avoided indictment, prosecutors
expect the Kyudenko case to serve as a warning to other Japanese
firms. For more details see Fukuoka 0018. (Fukuoka: Yuko
Nagtomo/Jim Crow)

7. (SBU) Chilly GOJ Response to U.S. Calls to Open Beef Market
Completely
----------

Agriculture Minister Matsuoka told USTR Schwab in a phone call on
April 3 that Tokyo would not accept the U.S. demand to open
Japan's market to cattle under 30 months until Washington first
accepted Japanese inspectors at U.S. meatpacking plants,
according to Japanese press reports.

The GOJ insists that it needs to verify which factories are in
compliance with the export rules agreed upon between the two
countries.

Press reports also indicate that "senior government officials" do
not want to take up the beef issue during PM Abe's visit to
Washington despite President Bush's remarks that the beef issue
should be discussed when the meet. (ECON: Ryoko Nakano/Marilyn
Ereshefsky)

8. (SBU) "Deregulation Warrior" Feels "Like a Broken Record"
------------------------------


TOKYO 00001541 003 OF 007


Council for the Promotion of Regulatory Reform (CPRR) member and
Keio University Professor Ushio Chujo told EMIN that since the
early 1990s, regulatory reform has taken on a variety of shapes
and forms, but the issues remain fundamentally unchanged.
Chujo cited civil aviation as an example, lamenting that while a
law was passed in 2000 to liberalize the airline industry, few
new companies had been able to enter the market due to MLIT's
firm control of Haneda's landing slots.

The lack of competition in the world's second largest domestic
air transport is egregious, he said.

The Japanese people fear competition when in fact competition can
help companies become stronger, Chujo stated. JAL should be
allowed to declare Chapter 11 bankruptcy so that it can re-
organize and emerge healthy. Instead, the GOJ will continue to
pour money into the beleaguered company to allow it to continue
to stumble on, Chujo opined.

The CPRR would like to reform areas which the Prime Minister has
termed the "hard rocks:" medical, social security, agriculture,
and international air transport.

Chujo's own work will focus on international trade, civil air and
legal issues. He told EMIN that he will push for an "open sky"
agreement within Asia by advocating for more international
flights at Haneda.

Chujo believed that while PM Abe's Asian Gateway concept would
necessitate liberalization for it to succeed, he doubts Abe would
have the political tenacity to address such issues that would
ensure that success such as foreign investment in national
airlines or foreign management of Japanese airports.

Professor Chujo is a long-time advocate of regulatory reform. In
1997, he was featured in Time magazine as a "Deregulation
Warrior" and was once fired from an MLIT advisory group for his
radical views. He told us that while he was named a
"deregulation warrior" these days he feels more like a
"deregulation worrier."

See the attached memo for a complete read-out. (ECON: Sally
Behrhorst/Masumi Ono)

9. (U) Symposium Reveals Problems at KIX
------------------------------

At a Kansai Airport Research Institute symposium in Osaka, KIAC
President Atsushi Murayama announced that if he could not reach
129,000 flights/year in 2007, he would resign.

Another KIAC official told us off the record that KIAC's national
budget injection had been cut by a significant yet unspecified
amount due to missing the airport's 2006 flight target.
KIAC cited a Sankei Shimbun front page article from last week
claiming that KIX's success was dependent on the airport
restoring its declining U.S. routes.

Other local economic stakeholders in KIX proposed solutions to
KIX's faltering business.

The Kansai Economic Federation and KIAC suggested KIX increase
its cargo business after its second runway comes online in August
since the cargo business is recovering in parallel with the
regional economy.

An MLIT Kinki Regional Development Bureau official emphasized the
Kansai is home to 50 percent of Japan's national treasures and
five world heritage sites. He emphasized that the local
governments of the Kansai need to collaborate on attractive
tourism projects. (Osaka-Kobe: Phil Cummings/Naomi Shibui)

10. (SBU) KIX Launches Study Group to Regain U.S. Business
------------------------------

At a new study group on increasing KIX's U.S. routes,
participants got an earful from American Airlines' sales manager
for western Japan, who went into depth as to why the company
stopped its recently restored KIX "Dallas-Fort Worth flight.
Airline economics were responsible for the move, but AA pointed
out tangible ways for the airport to appeal to U.S. customers,

TOKYO 00001541 004 OF 007


including U.S. military customers transferring from Okinawa.
(Individuals interested in AA's presentation should contact
post.)

KIX currently operates only 14 weekly flights to two U.S. cities
-- Northwest Airlines to Detroit and United Airlines to San
Francisco -- down from 63 flights to seven cities in the peak
year of 1998.

The study group will meet three times per month for the next
three months, and then issue recommendations for reversing the
current trend.

ConGen Osaka will continue to participate as a member, along with
the Osaka Prefecture, JATA, KIAC and the Kansai Economic
Federation. (Osaka-Kobe: Phil Cummings/Naomi Shibui)

11. (SBU) KIX Welcomes Asia Gateway Strategy Panel Interim
Report
------

Kansai International Airport Co., Ltd. (KIAC) welcomed the Asia
Gateway Strategy Panel's release of their interim report (also
see: JES, March 23, 2007).

The panel says that GOJ should allocate more international
flights slots to foreign airlines, and to the other airports in
Japan outside Haneda and Narita.

According to a KIAC official, Narita already uses all of its
slots and 40 airlines are on the waiting list to get in, but KIAC
is still eager for more airlines to use KIX.
He praised the report for putting pressure on Japanese carriers,
especially Japan Airlines (JAL), to give up their underused slots
at airports like Narita.

Once airlines get slots at busy airports such as Narita, they are
loath to release them when demand falls, since it is difficult to
recover the slots when business picks up.

In the face of declining demand, JAL is substituting smaller
aircraft for jumbo jets in order to boost its total flights
without reducing the load factor.

Some of JAL's slots at Narita should be allocated to needy
foreign airlines, he said. If GOJ protects JAL at the expense of
other carriers, the government will interfere with the economic
potential offered by regional airports like KIX or Centrair.
(Osaka-Kobe: Phil Cummings/Naomi Shibui)

12. (SBU) Central Japan International Airport Has New Leadership
------------------------------

Local press has reported that Central Japan International Airport
Company (CJIAC) President Hirano will retire this June. He is to
be replaced by Mr. Yoshimi Inaba, Vice President of Toyota Motor
Corporation. In 1999, Inaba served as president of Toyota Motor
Sales USA, Inc.

CJIAC has been plagued by stagnant growth in both passengers and
cargo. A major priority for Inaba will be gaining approval from
the GOJ to build a second runway, which the airport needs to stay
competitive.

The initial phase of CJIAC's construction was viewed as a
government procurement success.

Under the U.S.-Japan Major Projects Arrangements (MPA), U.S.
firms were awarded 17 of 22 contracts on which they bid for the
construction of CJIAC.

Since the airport opened in 2005, however, CJIAC claims it no
longer needs to use MPA procedures even though procurements of
about $600 million are planned, including the construction of the
new runway.

Under the MPA, Japan agreed to follow transparent and
nondiscriminatory procedures in the procurement of goods and of
construction, design and consulting services for certain
designated, large-scale construction projects.
The USG continues to pressure the Japanese Government to ensure

TOKYO 00001541 005 OF 007


that MPA procedures are used for all procurements related to the
project. (FCS: Dean Matlack)

13. (U) Major Oil Distributor Withdraws from Electric Power
Retail Market
-------------

On April 2 Idemitsu Kosan requested that the Ministry of Economy,
Trade and Industry (METI) remove it from the registry of Electric
Power Retailers. After only slightly more than two years in the
business, the company decided to pull out due to rising fuel
costs.

The oligopolistic power retail market was liberated in 2000 to
invite new entrants. Since then, about 10 companies have entered
the market, forcing major utility companies to cut the price of
electricity by about 20 percent. The new entrants are struggling
to stay in the market, however.

The problem is not only that these new business operations have
failed, but also that the market environment is inferior. On
April 13 METI's Advisory Council will begin discussions on the
complete liberalization of the retail market and a review of the
current system. Talks will focus on the revitalization of the
Japan Electric Power Exchange (JEPX) to boost trade volume and on
a price reduction for back-up electricity to handle supply-demand
imbalances. (ECON: Eriko Marks)

14. (SBU) Hokuriku Electric Power Hid Past Problem at its
Nuclear Plant
-------------

The press reported a reactor at Hokuriku Electric's Shiga nuclear
power plant, located in Shiga-cho, Ishikawa Prefecture, went
critical and was shut down temporarily in 1999, but the incident
was concealed by Hokuriku Electric officials. There were no
casualties.

Upon hearing of the deception, METI ordered the reactor shut down
immediately and launched an inspection.

Hokuriku Electric Power operates in Fukui, Ishikawa, and Toyama
Prefectures and supplies electricity not only these prefectures
but also other prefectures in central and western Japan.

An official at Kansai Electric Power Company in Osaka was
critical of Hokuriku 's deception, opining that it presented a
major obstacle to reversing the public's negative views on the
safety of nuclear power plants. (Osaka-Kobe POL/ECON: Phil
Cummings/Naomi Shibui)

15. (SBU) California Looks to Japan for How to Bring Broadband
to the Masses
-------------

Looking to find out how California can bring the fastest
broadband to the most Californians, a delegation of California
State officials met with Communications Ministry (MIC) officials,
NTT, DoCoMo, Softbank and others on a study tour organized by the
California Foundation for Economy and the Environment (CFEE).
Their mission was to learn directly from telecommunications
companies in Japan, as well as government officials how Japan is
able to accomplish a large scale rollout of broadband and
advanced technologies to a wide diversity of communities;
including rural, disadvantaged, or otherwise difficult markets to
reach.

They learned that Japan is on track to bring broadband to 100% of
all households by 2010 and that NTT has already laid optical
fiber that can reach 80% of Japanese households.

The delegation came away amazed at the progress Japan has made
and will make in the next few years, but they also realized that
the Japanese market, with major distortions created by close
collaboration between MIC and NTT, the dominant carrier it still
partly owns, is not a model that California could easily copy.
The delegation included three State Senators, one Assemblyman,
two Public Utilities Commissioners and representatives from
telecoms industry and consumers groups. (ECON: Marilyn
Ereshefsky)


TOKYO 00001541 006 OF 007


16. (SBU) Sharp's New LCD Plant in Hyogo
------------------------------

Sharp has decided to build new liquid crystal display (LCD) panel
plant in Himeji City, Hyogo Prefecture to enhance its
manufacturing efficiency.

The total amount for the new investment will be 350 - 400 billion
yen ($300 - $342 million dollars), the largest amount of
investment for a LCD panel plant in the world. It aims to start
operation in 2009.

Sharp already operates two large scale plants in Kameyama, Mie
Prefecture, but the Himeji plant will be larger than either of
the existing facilities.

The plant will be built on the site of a 1.3 million square meter
oil factory near the Port of Himeji. A manager of Sharp's
Overseas Business Strategy Group said that the company decided on
Himeji because it had convenient distribution links to the port
and it is not far from its Osaka headquarters and the Kameyama
plants.

The competition in the flat TV market is heating up between
Japanese and Korean manufacturers, and prices are tumbling,
compelling Sharp to try to stabilize its strong global share of
the technology through increased cost efficiency.
Sharp's rival, Matsushita Electric Industries, is also building a
new plasma display plant in Amagasaki City, Hyogo, to open in
2009.

Hyogo Prefecture will soon be home to the world's top two flat TV
manufacturing facilities. (Osaka-Kobe POL/ECON: Phil
Cummings/Naomi Shibui)

17. (SBU) Part-Timer Pension Coverage To Be Expanded, Slightly
------------------------------

The government and ruling party came to agreement March 27 on a
bill to expand the number of part-time employees eligible for
corporate pension plans, according to news reports. If enacted,
the Unified Pension Bill would make part-timers working more than
twenty hours a week, rather than the current thirty, eligible.
Caveats to the bill, however, will substantially limit its impact,
as student workers and employees of small and mid-size companies
will be exempt. A union contact lamented to us that fewer than
200,000 people are expected to be affected when the regulations
come into force in 2011. By our estimate, that is less than
1.6% of part-timers, or 0.31% of the labor force. (ECON: Marc
Dillard)

18. (SBU) Unemployment Steady; Wages Remain Flat
------------------------------

Against the backdrop of over 850,000 new graduates entering the
workforce this week, newly released labor survey data indicate
unemployment held steady in February at 4.0 percent.

The job offers-to-applicants ratio, however, continued its
gradual decline from a peak of 1.09 in July 2006, reaching 1.05
in February, and nominal wages remained flat.

Nonetheless, given the number of baby boomers coming due for
retirement, an industry observer predicts a continued corporate
interest in hiring over the next three years. (ECON: Marc
Dillard)

19. (SBU) Overall Economic Assessments
------------------------------

The Cabinet Office left its assessment unchanged for the fourth
consecutive month, noting that the economy is recovering, despite
lingering weakness in personal consumption.

The monthly economic report, submitted to the Cabinet on March 15,
confirmed that Japan's economy has expanded 62 straight months,
an ongoing postwar record.

The report said that capital investment is increasing against the
background of high corporate profit, but private consumption is
largely flat, and that personal consumption has been firm,

TOKYO 00001541 007 OF 007


reflecting a moderate increase in household income.
The BOJ report, released on March 20, also left unchanged its
core economic assessment, indicating that the economy is
"expanding moderately," and projected that the economy would
continue to do so.

Refer to attached document for more information. (FINATT: Shuya
Sakurai)

20. (U) BOJ Tankan Survey Reveals Slight Deterioration in
Business Sentiment
------------------

The Bank of Japan's quarterly Tankan survey of business sentiment,
a closely watched business cycle indicator and a principal input
in the central bank's monetary policy deliberations, revealed a
slight deterioration in business sentiment among almost all
categories: large, mid-sized and small firms, primarily
reflecting concerns about recent financial market volatility and
the effects of a likely slowdown in the U.S. economy.
The survey found no change in business sentiment among large non-
manufacturing firms.

The survey's "headline" business sentiment diffusion index (DI)
for large manufacturers was a bit weaker than expected.
The March survey also offered the Tankan's first FY07 projections,
and revealed expectations of continued profit growth for all
categories of firms in the new fiscal year, which began April 1.
Please see attached document for more details. (FINATT: Shuya
Sakurai)
SCHIEFFER

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