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Cablegate: U.S.-Japan Investment Working Group April 2007 Session

VZCZCXRO2101
RR RUEHFK RUEHKSO RUEHNAG
DE RUEHKO #1945/01 1210727
ZNR UUUUU ZZH
R 010727Z MAY 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3198
INFO RUEHOK/AMCONSUL OSAKA KOBE 4460
RUEHFK/AMCONSUL FUKUOKA 0922
RUEHKSO/AMCONSUL SAPPORO 1830
RUEHNAG/AMCONSUL NAGOYA 0197
RUEAWJA/USDOJ WASHDC
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 05 TOKYO 001945

SIPDIS

SENSITIVE
SIPDIS

FOR EAP, EAP/J AND EB/IFD/OIA
USDOC FOR 4410/ITA/MAC/OJ/NMELCHER
STATE PASS USTR FOR WCUTLER, MBEEMAN, RMEYERS

E.O. 12958: N/A
TAGS: EINV ECON ELAB ETRD CVIS JA
SUBJECT: U.S.-JAPAN INVESTMENT WORKING GROUP APRIL 2007 SESSION


SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY

Ref: A) 06 Tokyo 6584
B) Tokyo 454

1. (SBU) Summary: The second session of the U.S.-Japan Investment
Working Group (IWG) for FY-2007 took place on April 13 via digital
videoconference (DVC). The IWG reviewed progress on all agenda
items in advance of the annual report to leaders in June. Both
sides expressed satisfaction with the results of February's
information exchange on investment chapters in bilateral agreements,
which concluded that the United States and Japan took similar
approaches to negotiating investment texts. The IWG agreed to reach
out to the private sector for its views on the investment climate in
both countries, possibly as early as May. On specific U.S.
concerns, METI announced the April 13 promulgation of final tax
deferral rules for triangular mergers. Both sides agreed the market
would be the final judge of the effectiveness of the new rules in
facilitating new investment flows. METI rejected a U.S. proposal to
conduct a formal study of the impact of the tax rules before the end
of 2008 but promised it would continue to "monitor" Japan's M&A
climate. On educational services, MEXT reported it had issued new
regulations which expand nationwide existing special zone rules that
allow universities to lease, not own, their physical facilities.
This should facilitate market entry of new foreign universities by
reducing start-up costs. There were no significant developments on
labor mobility issues. Ambassador Michael Michalak headed the U.S.
delegation and Noriyuki Mita, Director of the Americas Division lead
the Japanese side. End Summary.

Experts Review of Investment Chapters
-------------------------------------

2. (SBU) During an April 13 DVC, the U.S.-Japan Investment Working
Group reviewed the results of the February meeting of the Investment
Experts Sub-committee which conducted a comparison study of the
investment chapters of both countries' bilateral investment treaties
(BITs) and free trade agreements (FTAs). The experts concluded that
the United States and Japan take similar approaches to negotiating
investment texts, putting a priority on guaranteeing national
treatment, obtaining most favored nation status and covering the
full lifecycle of the investment. Both sides also seek a guarantee
of "fair and equitable treatment" as the minimum standard for
investment protection, prohibit specific performance requirements
and take a "negative list" approach to restricted sectors. USTR's
Director for Investment and Services observed that Japan's views on
international investment issues are closer to the U.S.' positions
than any other country with which the U.S. has negotiated an
investment treaty or chapter. In the U.S.' experience, most
countries with which it negotiates are negotiating a high quality
agreement for the first time.

3. (SBU) Where the U.S. and Japanese approaches most differ is in
dispute settlement, with U.S. agreements generally having wider
coverage, allowing dispute mechanisms to handle issues related to
investment authorization and changes to the conditions for
investment approval. Dispute settlement procedures in Japanese
agreements, by contrast, generally cover only disputes arising from
breach of the agreement itself. Japan's acting IWG co-chair, METI's
Director of the Americas Division, noted the particular relevance of
the broad U.S.-style coverage for future investment agreements with
China, which often changes investment rules after the fact. Other
differences between existing U.S. and Japanese texts involve
exceptions to the agreement. U.S. agreements generally allow only
limited exceptions while Japan's agreements include exceptions based
on the OECD's draft Multilateral Agreement on Investment or for
national security concerns.

4. (SBU) Japan also commended the United States negotiators for
their extensive "due diligence" work prior to entering BIT/FTA
negotiations, including internal discussions through the Trade
Policy Review Mechanism and external consultations with both the
Congress and the private sector.

5. (SBU) The IWG also discussed future cooperation in multilateral
investment fora. The two sides agreed to work together to encourage
APEC members to make greater use of the OECD's Policy Framework for
Investment (PFI) matrix as a tool to analyze and improve individual
member's investment regimes. Japan also proposed, and the United
States agreed, to expand bilateral cooperation in multilateral and
plurilateral fora, such as the G-8 where Germany recently proposed

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new language related to investment protection. But both sides
agreed it was not practical to try to advance investment issues
multilaterally through the WTO at the present time.

6. (SBU) Japan requested a briefing on the investment chapter of
the recently-concluded U.S.-Korea FTA (KORUS) but the U.S. side
declined noting that a final KORUS text is not yet publicly
available. The U.S. side did note, however, that the KORUS
investment chapter was very similar to investment chapters in other
U.S. FTAs.

U.S. Concerns
-------------

7. (SBU) Triangular Mergers: The U.S. expressed appreciation for
Japan's work on final implementation of the triangular merger
provisions of the Company Law, which take effect May 1. In the
U.S.' view, these provisions will be key to achieving the Prime
Minister's goal of raising Japan's stock of foreign direct
investment (FDI). However, the U.S. side expressed concern that
proposed tax deferral rules could reduce the amount of FDI Japan
might otherwise receive as a result of the new law. The U.S.
intends to closely track how the new tax rules operate in practice
to determine if they are impeding use of the triangular merger
provisions. It asked the Japanese government to consider
undertaking its own formal review of the new rules by the end of
2008.

8. (SBU) METI's Director of Trade and Investment Facilitation
responded that because the government considers the new tax rules to
be permanent the government would not do a formal review of their
impact but METI will regularly monitor the overall condition of
Japan's M&A regime going forward. The government's policy of
encouraging inward FDI remains unchanged. Both sides agreed to
continue joint efforts to encourage increased FDI into Japan.

9. (SBU) On a related issue, the U.S. side reported that it had
examined MOJ's draft rules for enhanced disclosure requirements by
firms involved in triangular mergers and found nothing
objectionable. MOJ responded that it had received a number of
formal comments on the new rules. Based on those generally positive
comments, MOJ was now making technical modifications to the draft
rules and expected only minor changes in the final regulations.

10. (SBU) Defensive Measures: The U.S. side asked whether METI or
the Tokyo Stock Exchange had undertaken a study of the impact of the
increasing numbers of defensive measures adopted by Japanese
companies since the 2005 Company Law took effect in May 2006.
METI's Director of Industrial Organizations responded that, as of
March 31, 2007, 220 Japanese companies had introduced changes to
their by-laws to allow some form of defensive measures to hostile
takeover bids. With the approach of the season for shareholders'
meetings in June, it was likely additional firms would adopt such
measures. But, METI noted, since few companies had actually used
these measures yet, there was not enough real world experience to
draw valid conclusions as to the impact on the market.

11. (SBU) The U.S. requested an explanation of the recent
reconstitution of METI's Corporate Value Study Group which met for
the first time in more than a year on April 6. According to METI's
Director of Industrial Organizations the study group discussed a
number of recent developments in Japan's M&A market, including the
types of defensive measures firm have adopted, the use of different
classes of stock to improve corporate governance and the need for a
consistent approach toward delisting troubled companies but did not
reach any formal conclusions.

12. (SBU) Educational Services: Ministry of Education, Culture,
Sports, Science and Technology (MEXT) reported that, since the last
IWG meeting (Ref A), MEXT officials have met several times with
representatives of Temple University Japan (TUJ) to discuss the
criteria TUJ would have to meet to receive legal status as a
Japanese educational institution (gakko hojin). Informal
communications with TUJ by phone and e-mail are continuing but,
contrary to press reports, TUJ has not yet submitted a formal
application for gakko hojin status.

13. (SBU) MEXT also reported the result of its request for public
comment on a proposal to drop the requirement that universities and
other institutions of higher education must own their own land and
facilities. MEXT reported it had received a number of comments both

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pro and con and the Ministry had issued final regulations extending
the rules, which previously were limited to special zones for
structural reform, nationwide as of April 1. The U.S. side
expressed hope that the new rules would lower entry costs of new
foreign educational institutions entering the Japanese market.

14. (SBU) Labor Issues: Ministry of Health, Labor and Welfare
(MHLW) reported on the government's efforts to expand rules
governing white collar overtime exemption. The ruling party
originally planned to introduce legislation on this subject in the
current Diet session but according to MHLW had been "unable to gain
the understanding of the Japanese people" for the proposal and
withdrew it. However, MHLW said the government will continue to
look for ways to promote greater flexibility in the workplace.

15. (SBU) On defined contribution pension plans, MHLW has undertaken
a study of the current system, as required by legislation. Based on
that study, the Ministry is now considering changes to the law
including an increase in contribution limits for defined
contribution plans, as requested by a number of domestic and foreign
firms. On the issue of monetary settlements for disputed
dismissals, MHLW said the issue had been too divisive to include in
the new Labor Contracts Law, but that study of the issue continues.

Study Group on the International Investment Climate in a Globalized
Economy
--------------------------------------------- ---------

16. (SBU) The U.S. requested a report on the outcome of discussion
within the METI Study Group on International Investment Climate in a
Globalized Economy which METI established in December 2006 to
recommend changes to the Foreign Exchange Control Law (Ref B)
restrictions on foreign investment for national security reasons.
According to METI, the group has met several times but has made no
final recommendations. METI assured the IWG that the objective of
the study was to make Japan's regulations consistent with other
countries' rules and, whatever the group recommended, METI would
"try very hard to ensure the rules do not impede inward foreign
direct investment." The U.S. welcomed further discussion of the
study group's recommendations at a future IWG meeting.

Japan Concerns
--------------

17. (SBU) Visas: Japan reiterated its concerns regarding U.S. visa
policy, specifically its request for resumption of domestic
revalidation of work visas, expanding the ability to revalidate such
visas in third countries, consideration of the extension of the
validity of such visas and expanding the number of visa-issuing
posts in Japan. The United States responded it was currently making
technical preparations for resumption of visa services at U.S.
Consulate Fukuoka under a similar process to that used at U.S.
Consulate Sapporo. There were no new developments in other areas of
concern.

18. (SBU) Secure Trade: The United States and Japan have agreed to
discuss secure trade issues in a joint task force as part of the
sub-cabinet process. The task force held its first meeting in early
March. Japan said it found the March meeting very fruitful and
agreed to continue discussion of secure trade issues in that forum.
But it asked to retain the option of raising these issues at future
IWG meetings if there were specific issues relevant to the IWG's
work.

19. (SBU) Exon-Florio: Japan asked for an update on recent moves by
the Congress to amend the Exon Florio amendment. Embassy's
Financial Attach reported that the House of Representatives passed
the National Security Foreign Investment Reform and Strengthened
Transparency Act of 2007 on February 28, 2007 by unanimous vote.
The Senate plans to take up the bill soon. As the legislative
process continues, the Administration intended to work with the
House and Senate to update the CFIUS process based upon the
following principles: further integration of national and homeland
security interests in a post 9/11 environment; continuing to welcome
foreign investments in the United States; and preserving what works
about CFIUS, while making improvements where needed and maintaining
the integrity of the decision-making process. The U.S. further
noted that in addressing potential threats to our national security
that may be posed by a specific transaction, the U.S. has taken
great care to avoid unnecessary impediments to foreign investment.


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20. (SBU) Japan warmly welcomed the announcement and briefing by the
Commerce's Office of Japan on the USG's new "Invest in America"
Initiative.

Future Program of Work
----------------------

21. (SBU) The IWG agreed to complete its annual report to leaders
in time for submission at the annual G-8 summit in June. Japan
requested that the report contain strong wording on both countries'
continued commitment to promoting FDI and combating "investment
protectionism." The two sides also agreed to highlight the expert
review of investment chapters and agreements in this year's report.

22. (U) METI announced that the next JETRO Investment Outreach
Seminar for 2007 will be held in Osaka on September 12. JETRO has
invited the participation by a number of U.S. Governors who will be
visiting Japan at that time to participate for the Japan-Midwest
Governors Forum.

23. (SBU) The IWG agreed to continue its examination of investment
climate in both countries by reaching out to the private sector
starting with international business chambers in both countries.
One possibly is to begin this process during the next scheduled
visit of the U.S. IWG co-chair to Japan the end of May. Another
possibility is utilizing the November 2007 meeting of the U.S.-Japan
Business Council in Washington. USTR agreed to reach out to that
agency's Investment Trade Advisory Committee (ITAC) to discuss ways
the U.S. and Japan can effectively cooperate in promoting investment
in multilateral economic fora. The U.S. Embassy agreed to meet with
the former head of the Industrial Reconstruction Corporation of
Japan (IRCJ) to see if the IWG can learn from IRCJ's experience in
promoting corporate restructuring and investment in distressed
assets.

Delegation Lists
----------------

24. (U) U.S. Participants:

In Washington:
Ambassador Michael Michalak, U.S. Senior Official for APEC,
Department of State
Mr. Eric Kennedy, Office of Japan, Department of Commerce
Ms. Jessica Webster, Chief, Economic Unit, Office of Japanese
Affairs, Department of State
Mr. David Weiner, Office of Services and Investment, USTR
Mr. Robert Winship, Economic Officer, Office of Japanese Affairs,
Department of State.

In Tokyo:

Mr. Daniel Fantozzi, Economic Counselor, U.S. Embassy
Mr. Christopher Wurzel, First Secretary, Economic Section
Ms. Maureen Grewe, Financial Attach
Mr. David DiGiovanna, First Secretary, Economic Section
Mr. Robert Thommen, U.S. Customs and Border Protection Attach
Mr. Marc Dillard, First Secretary, Economic Section
Mr. Satoshi Hattori, Economic Specialist, U.S. Embassy
Mr. Ritsu Yamashiro, Economic Specialist, U.S. Embassy

25. (U) Japanese Participants:

In Tokyo:

Ministry of Economy, Trade and Industry:
Mr. Noriyuki Mita, Director, Americas Division, Trade Policy Bureau

Mr. Shinichi Kihara, Deputy-Director, Americas Division, Trade
Policy Bureau
Mr. Takeo Ijuin, Deputy-Director, Americas Division, Trade Policy
Bureau
Ms. Yuko Chikazoe, Chief, Americas Division, Trade Policy Bureau
Mr. Kenji Goto, Director, Industrial Organization Division, Economic
and Industrial Policy Bureau
Mr. Masakazu Ichikawa, Director, Trade Finance and Economic
Cooperation Division, Trade and Economic Cooperation Bureau
Mr. Keiichi Kawakami, Director, Trade and Investment Facilitation
Division, Trade and Economic Cooperation Bureau

Ministry of Foreign Affairs:

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Mr. Junichi Takahashi, Second North America Division,
North American Affairs Bureau

Ministry of Justice:
Mr. Shin Matsumoto, Attorney, Civil Affairs Bureau
Mr. Tsuyoshi Shimizu, Attorney, Civil Affairs Bureau
Mr. Takeshi Komatsu, Attorney, Civil Affairs Bureau

Ministry of Education, Culture, Sports, Science and Technology:
Mr. Kazuhiro Kotani, Deputy-Director, Higher Education Policy
Planning Division, Higher Education Bureau
Mr. Ryoei Chijiiwa, Unit Chief, Higher Education Policy Planning
Division, Higher Education Bureau
Ms. Akiko Tozawa, Official, Office of Director-General for
International Affairs

Ministry of Health, Labor and Welfare:
Mr. Atsushi Kawai, Chief, Inspection Division, Labor Standards
Bureau
Ms. Kosaku Sano, Chief, Private Employment Service Division,
Employment and Security Bureau
Mr. Chiaki Miyazaki, Chief of Planning Section, Corporate Pension
and National Pension Fund Division
Mr. Tadaaki Hanatani, Assistant Director, International Affairs
Division, Minister's Secretariat

In Washington:

Mr. Atsushi Taketani, Counselor, Embassy of Japan

DONOVAN

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