Cablegate: The Japan Economic Scope - June 7, 2007 - Part 2

DE RUEHKO #2601/01 1590756
R 080756Z JUN 07






E.O. 12958: N/A
SUBJECT: The Japan Economic Scope - June 7, 2007 - Part 2

Sensitive but unclassified. Please protect accordingly.

1. (U) This cable contains part two of the Japan Economic Scope from
June 7,

2.(SBU) Table of Contents

3. Northern Japan's Biotech Crops Regulatory Regime: an In-
depth Look
4. KIAC Chairman Welcomes Asian Open Skies Policy of GOJ
5. KIX Criticizes JAL for Cancelling LA Routes
6. NHTSA Administrator Visit on Auto Safety and Fuel Efficiency
7. Kyushu One Step Closer to "1.5 million Car Production
8. Central Japan Growth Tops Out?
9. Kansai Companies Show Record Profits
10. Rising Price of Raw Materials Hurting SMEs
11. Osaka Wins Large Greenfield Investment in Giant LCD TV
12. USJ New Investment in 2008
13. Kyushu Bank Consolidation: Largest Regional Financial Group
is Born
14. Tot Hit with $2 million Tax Bill
15 Correction

3. (U) Northern Japan's Biotech Crops Regulatory Regime: an In-
depth Look

In 2006, Japan's northernmost island of Hokkaido became the first
prefecture in the country to implement strict local regulations
governing the open-air cultivation of biotech crops.

Drafted in the aftermath of several national food safety scandals
involving Hokkaido products, the new regulations were intended to
protect local crops from criticism over biotech crop cross-
pollination concerns.

The regulations, however, also effectively ended serious attempts
at biotech farming in Hokkaido by making it prohibitively
difficult for local farmers to grow biotech crops.

Recently, the Hokkaido prefectural government hosted a series of
public forums to seek input on whether the biotech regulations
should be revised. Attendees did not reach a consensus, but it
was clear at the meetings that local anxiety about biotech crops
remains high. This anxiety will not dissipate as long as the
Japanese public remains confused by the mixed signals the
Government of Japan sends on biotech.

As local governments like Hokkaido decide to address public
concerns themselves, it is becoming even more challenging for U.S.
companies to sell biotech products in Japan. For more information,
please see Sapporo 0029. (Sapporo: Ian Hillman/Yumi Baba)

4. (SBU) KIAC Chairman Welcomes Asian Open Skies Policy of GOJ

At a lecture in Osaka on May 17, KIAC Chairman Hajime Miyamoto
welcomed the recent Asian Open Skies policy floated by PM Abe's
Asian Gateway council. The policy would open up regional
airports like KIX and Centrair to open skies-type arrangements
with Asian counterparts on a reciprocal basis.

Miyamoto noted at the International Executive Seminar of M.I.E.
Corporation that 36 percent of all KIX passenger flights and 50
percent of its cargo business was with China, with the KIX air
cargo business continuing to expand in Asia. Miyamoto expected
further growth in KIX's Asian business once its second runway
opens in August.

KIAC continues to grouse about the 1.2 trillion yen debt it was
saddled with over the expensive land reclamation and island
construction dating back to when the airport was run by the
central government.

Chairman Miyamoto said that KIAC Vice President Hirano has been
actively lobbying politicians in Tokyo to shift part of the
company's 1.1 trillion yen in debt back to the GOJ. Miyamoto
claimed that KIX could not compete with Narita due to such costs.

TOKYO 00002601 002 OF 005

The chairman asked the GOJ for support in the basic development
and maintenance of the IT infrastructure at Japanese airports.
Chairman Miyamoto said that he and President Atsushi Murayama
managed to turn around the corporate culture at the airport from
the fuzzy world of amakudari collusion with government
bureaucrats to a leaner customer service-oriented private sector

One airport manager commented that the Abe Administration's Asian
Open Skies proposal would help meet the rising demand for even
more flights to China. (Osaka-Kobe: Phil Cummings/Naomi Shibui)

5. (SBU) KIX Criticizes JAL for Cancelling LA Routes

Kansai International Airport Company (KIAC) Vice President
Tadakuni Hirano criticized JAL for cancelling the KIX route to
Los Angeles and for further disrupting KIX's international
business by offering feeder flights to Narita from nearby rival
Itami Airport, which is not supposed to compete for international
traffic, at the second meeting of the KIX Study Group. Hirano
called on JAL to restore its U.S. routes from KIX.

JAL refused to offer more than vague assurances it would resume
service someday from KIX.

The atmosphere of the meeting was unusual in the open quarreling
between the airport and the Japanese carrier.

ConGen is polling ACCJ Kansai members on their use of the airport
for travel to the United States for future discussion.

For further details on the meeting, see the attached readout.
(Osaka-Kobe: Phil Cummings/Naomi Shibui)

6. (SBU) NHTSA Administrator Visit on Auto Safety and Fuel

Nicole Nason, National Highway Transportation Safety
Administration Administrator (NHTSA), visited Japan on May 28-31
to meet with Japanese officials at the Ministry of Land
Infrastructure and Transportation (MLIT) and Japanese automakers
to discuss trends in automobile safety and fuel efficiency as
well as to confirm the status of bilateral cooperation on Global
Technical Regulations WP.29.

Nason was particularly interested in the latest crash avoidance
technologies that, if introduced, could lead to a reduction in
the annual number of traffic fatalities and injuries in the
United States.

Nason along with her Chief of Staff David Kelly, Senior Associate
Administrator for Vehicle Safety Ronald Medford, and Chief of
International Vehicle and Harmonization Ezana Wondimneh met with
Kazuyoshi Matsumoto, Director General of the Engineering Safety
Department in the Road Transport Bureau at MLIT, and made site
visits to Nissan, Toyota and Honda safety research centers.
During the meeting with DDG Matsumoto, he emphasized Japan also
has a goal to reduce the number of traffic accident fatalities.

Prime Minister Koizumi had urged creating a society with no
traffic fatalities and as a first step wished to have less than
5,500 fatalities by 2010. In 2006, there were some 6,400 traffic
accident fatalities, and MLIT is seeking to cut this number by
another 750 by 2010.

In Japan, since 30 percent of fatalities involve pedestrians and
there are an increasing number of elderly people, avoiding
accidents with pedestrians and the elderly is a policy focus.

DDG Matsumoto outlined Japan's desire to improve the fuel
efficiency of vehicles due to Japan's scarce energy resources and
worries about global warming.

He noted that Japan set standards for increasing the fuel
efficiency of gas-powered cars by 20 percent and diesels by 12
percent by 2015. Since this is hard to do through regulations,
Japan is using tax incentives to encourage consumers to buy more
fuel efficient vehicles.

TOKYO 00002601 003 OF 005

He acknowledged the widening use of bio-fuels will be difficult
in Japan. (ECON: Josh Handler)

7. (U) Kyushu One Step Closer to "1.5 million Car Production

On May 31, Toyota Kyushu, a wholly owned subsidiary of Toyota
Motor, announced plans to invest 16 billion yen ($134 million) in
a new plant for hybrid vehicle parts outside of Kitakyushu,
Fukuoka Prefecture.

The "Kokura Plant" will create 150 new jobs, and be Toyota's
third Fukuoka Prefecture production base after the Miyata Plant
for finished cars and the Kanda Plant for engine production.
Operations are scheduled to begin in the summer of 2008, and the
Miyata and Kanda plants' existing hybrid car parts production
will be consolidated.

Fukuoka Governor Aso, Committee Chairman for the Promotion of 1.5
Million Automobiles Production in Northern Kyushu, told the media
that the committee hopes the region can produce 1.5 million units
by JFY08 and expand the local content of auto parts from the
current 50 percent to 70 percent by JFY09. In JFY06, Toyota
(Fukuoka), Nissan (Fukuoka), Daihatsu (Oita) together produced
1.01 million cars, mainly for export to North America.
Their possible plans for continued expansion will play a key role
in determining whether the region's total output capacity reaches
the desired 1.5 million unit goal, which would make Northern
Kyushu's production level second only to that in the Nagoya area.
(Fukuoka: Yuko Nagatomo/Jim Crow)

8. (U) Central Japan Growth Tops Out?

Recent strong growth in the Central Japan region centered on
Nagoya may have hit a plateau. In late May, the Bank of Japan
revised its evaluation of the Tokai region economy downward for
the first time in 30 months. The BOJ now characterizes Central
Japan as "expanding moderately," down from "expanding."

BOJ Nagoya Chief Takashi Oyama cited falling U.S. demand for
autos and a shortage of labor and land for plant construction in
Nagoya's Aichi prefecture as major factors in the slowdown of
growth. Oyama, however, described Central Japan's recent growth
rate as excessive, and said the region's current slower pace of
growth is actually a healthy trend since it reduces the risk of
overheating and will be sustainable for a longer period.

Meanwhile, reflecting the BOJ's assessment on the Aichi land
shortage, METI's Chubu Bureau reported that factory construction
in Gifu prefecture, adjacent to Aichi, increased 12 percent year-
on-year, largely on the back of Aichi-based firms expanding into

Separately, the Asahi Shimbun reported May 31 that due to
uncertain global demand, the total capital investment of Nagoya-
area Yamazaki Mazak, Mori Seiki, and Okuma, all among the world's
top ten machine tool makers, will total 27 billion yen ($225
million) in FY07, down nearly 30 percent from FY06. (Nagoya:
Dan Rochman)

9. (U) Kansai Companies Show Record Profits

A majority of the listed companies in the Kansai region exceeded
profit records for 2006, according to their May financial
submissions as summarized in the local press.

These companies experienced an average of 9.4 percent growth in
sales and eight percent in profits over the previous year. In
particular, digital appliance, auto, and steel exports were

On the negative side, housing and retail lagged and domestic
consumption remained problematic for the Kansai economy.
A researcher of Mitsubishi UFJ Research and Consulting commented
that capital investment is increasing in some sectors, but some
exporters have been more reluctant to invest, citing fears of
fluctuations in overseas markets. The researcher feels this

TOKYO 00002601 004 OF 005

cautious attitude will continue despite the overall boom.
(Osaka-Kobe: Phil Cummings/Naomi Shibui)

10. (U) Rising Price of Raw Materials Hurting SMEs

In spite of the GDP growth in the first quarter of 2007,
bankruptcies in the Kansai region increased, and consumption in
retail stores fell.

According to the recent study by Tokyo Shoko Research, the
number of bankruptcies with more than 10 million yen in the
Kansai region accounted for over a quarter of all domestic
bankruptcies, almost triple the rate of central Japan around
Nagoya. Department store consumption in the three major cities
of the region fell slightly.

A senior manager in the Kansai Branch of Tokyo Shoko Research
said that 80 percent of bankruptcies in the Kansai were by SMEs,
mostly in construction, IT, and food businesses. Rising prices in
imported foodstuffs such as edible oil, oranges, and soybeans are
hurting Japanese food businesses. He added that the recent
economic growth in Japan and the Kansai region has not spread to
SMEs yet. (Osaka-Kobe: Phil Cummings/Naomi Shibui)

11. (U) Osaka Wins Large Greenfield Investment in Giant LCD TV

Japan's number two LCD TV display manufacturer Sharp chose a
former steel plant site in Sakai City, Osaka Prefecture, over a
candidate in neighboring Hyogo Prefecture, a rare investment
victory for the embattled prefecture.

Sharp will pour 500 billion yen ($4 billion) in capital
investment into the site in order to compete globally with
Samsung and Sony, the top world producers of the technology.
Sharp commanded 11.5 percent of world market share in 2006.
The new plant in Sakai is scheduled to open in 2008 and produce
30,000 -- 60,000 panels per month. Although Sharp ramped up LCD
production in its main plant in Kameyama, Mie Prefecture, it is
still unable to meet demand for its 40" flat TVs.

Business sources credit Osaka Prefecture's landing of the deal on
its five to twenty percent subsidy for high tech investments, and
Sakai's convenient transportation links. Sakai is also kicking
in a 20 percent break on property tax for the first 10 years.
Akio Nomura, Chairman of Osaka Chamber of Commerce and Industry
had high expectations that the new plant would offer new jobs and
stimulate related businesses. An official from the prefecture
expected the plant to also increase KIX and Osaka port
utilization. (Osaka-Kobe: Phil Cummings/Naomi Shibui)

12. (U) USJ New Investment in 2008

The Universal Studios Japan (USJ) President & CEO Glenn Gumpel
announced the amusement park will make a three billion yen ($25
million) investment in new attractions. The company estimates a
0.3 percent increase in visitors due to new attractions opened in
2007. USJ's strategy of large capital investment appears to be
paying off as the company will issue dividends for the first time
since opening in 2001.

According to a manager of USJ Technical Division, after the fatal
roller coaster accident at nearby Expo Land in Osaka on May 5,
USJ's new roller coaster was inspected by Osaka City. There were
no irregularities. USJ was happy to report that it has yet to
see a drop in attendance due to the heightened concern about
coaster safety. (Osaka-Kobe: Phil Cummings/Naomi Shibui)

13. (U) Kyushu Bank Consolidation: Largest Regional Financial
Group is Born

On May 24, Fukuoka Financial Group (FFG) announced it will buy
Shinwa Bank, the banking arm of Sasebo, Nagasaki prefecture-based
Kyushu-Shinwa Holdings Inc. (KSH), by October 2007.

The addition of Shinwa Bank increases FFG's combined assets to
11.7 trillion yen ($97.5 billion), enabling it to surpass the

TOKYO 00002601 005 OF 005

Bank of Yokohama as Japan's largest regional financial group.
The local financial community expects the merger to help increase
financial and economic stability in the region.
FFG, however, will continue to lag behind the Bank of Yokohama
in profitability.

KSH will disband after selling its remaining shares of Shinwa
Bank and a credit card subsidiary for 76 billion yen ($633
million). KSH president Takashige Araki attributed KSH's
dissolution to its inability to recover in the near future due to
the continued depressed state of Nagasaki's economy.

FFG was set up on April 2, 2007, following the business
integration of Fukuoka Bank and Kumamoto-based Kumamoto Family

Local financial observers anticipate more regional realignments
across prefectural borders in the future as a result of
continuing GOJ pressure for regional bank consolidation and
growing competition with major banks and Japan's postal savings
bank, which is scheduled to open for services in October 2007.
(Fukuoka: Yuko Nagatomo/Jim Crow)

14. (U) Tot Hit with $2 million Tax Bill

The Nagoya Regional Taxation Bureau this week ordered a U.S.-
citizen pre-schooler to pay 250 million yen ($2 million) in back
taxes and penalties.

The tyke tycoon, both of whose parents are Japanese, is the
grandson of the Chairman of Chuoh Publishing Co., who, on the
recommendation of financial advisors, transferred to him about
500 million yen ($4 million) worth of U.S. Treasury bonds shortly
after his birth in Los Angeles in 2003.

Since the moppet millionaire and his parents moved back to Nagoya
in 2004, the Tax Bureau determined the transaction is taxable in
Japan and assessed both fees and fines. The child's parents are
appealing the ruling. (Nagoya: Dan Rochman)

15. (U) Correction

In the May 31 edition, please note in the article on METI selling
shares of Japex, the correct conversion from 80 billion yen is
$658 million, not $658,000. (Econ: Eriko Marks)

© Scoop Media

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