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Cablegate: The Japan Economic Scope - June 14, 2007 Part 1

VZCZCXRO6175
RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #2720/01 1660813
ZNR UUUUU ZZH
R 150813Z JUN 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 4561
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5559
RUEHFK/AMCONSUL FUKUOKA 1571
RUEHNAG/AMCONSUL NAGOYA 0710
RUEHNH/AMCONSUL NAHA 3993
RUEHOK/AMCONSUL OSAKA KOBE 5141
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 06 TOKYO 002720

SIPDIS

PARIS PLEASE PASS TO USOECD
STATE PLEASE PASS TO USTR

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - June 14, 2007 Part 1


Sensitive but unclassified. Please protect accordingly.

1. (U) This cable contains part one the Japan Economic Scope from
June 14,
2007.

2.(SBU) Table of Contents

3. Reform Report
4. EU -- Japan Business Dialogue Roundtable Calls for Joint FTA
Study
5. Japan Is Time-Warner's Biggest Money-Maker in Asia
6. Diet Approves Bills for Overhauling Government Financial
Institutions
7. U.S. Beef in Japan -- One Small Step Toward Larger Market
Opening
8. CEFP on Agriculture: Something Better Than Nothing?
9. An Ag Protest Against Concessions at WTO
10. A Tale of Two McTeriyakis
11. Non-tariff Barrier on Port Handling Equipment Resolved
12. First Quarter GDP Revised Substantial Upward to 3.3% Growth
13. Finally Time for Taxpayer ID Numbers?
14. Japan Postal Corporation to Introduce Employee Stock Program;
SMBC Ties Abound
15. Japanese Investment Firm Frustrated with Energy, Healthcare
Markets

3. (SBU) Reform Report
-----------------------

The Council for the Promotion of Regulatory Reform (CPRR) report
issued on May 31 was simply a re-hashed version of previous
reports, according to a source that worked on it.

Our contact said that civil aviation was one of the most
important items for the council and the report contains a "wish
list" of areas for reform. However, the final proposals in the
document went no further than what was recommended in the Asian
Gateway report at the insistence of both the Asian Gateway
committee and the Ministry of Land, Infrastructure and
Transportation (MLIT), he explained. In fact, MLIT reviewed
CPRR's report "word by word" to ensure both proposals contained
the exact same language.

CPRR has made regional income disparity an agenda item due to its
importance with Prime Minister Abe, he continued. However, the
issue received little attention in the report. The one
recommendation that was made to address this issue was to raise
the age limit for applying for a government job from 25 to 40.
This would allow more displaced workers, and particularly women
who have left the workforce to raise children, a second chance in
getting a stable government job.

Look for more reporting on this meeting in the near future.
(ECON: Sally Behrhorst/Masumi Ono)

4. (SBU) EU -- Japan Business Dialogue Roundtable Calls for Joint
FTA Study
---------

"Japan plans to launch private-sector joint studies with the
United States and the European Union as early as September aimed
at forming free trade agreements with them, sources close to the
matter said Monday."

At least that is how Kyodo news spun a story June 11. We called
a source at the Ministry of Economy, Trade, and Industry (METI),
who distanced himself from the report. He said that the EU --
Japan Business Dialogue Roundtable (BDRT) called for a joint task
force with business community support to study the feasibility of
a Japan -- EU Economic Integration Agreement at its annual meeting
June 4 in Berlin.

As for the United States and Japan launching a private sector
study as a "step toward launching inter-governmental talks," as
the Kyodo article put it, the METI source said the wire service
had gotten ahead of itself.

According to the Kyodo story, "Japan aimed to conclude the
private-sector studies with the United States and the European
Union by summer next year and then elevate the studies to an

TOKYO 00002720 002 OF 006


intergovernmental level. It would then enter intergovernmental
negotiations around the fall in 2009..." Our METI source said
this looked like recycled information from an earlier report. It
was inaccurate then and remained inaccurate.

For more on what the BDRT is calling for, please see the link
below. The organization convened its annual meeting in Berlin on
the eve of the G-8 summit.

On hand for the dialogue were Japan's Vice Trade Minister Kozo
Yamamoto and Vice Foreign Minister Hideo Shimizu, and on the EU
side, Gunter Verheugen, Vice President of the European Commision
in charge of Enterprise and Industry. See: EU- Japan Business
Round Table recommendation on a task force for FTA. (ECON:
Nicholas Hill)

5. (U) Japan Is Time-Warner's Biggest Money-Maker in Asia
-----------------------------

Time-Warner Asia's Director for International Relations and
Global Policy Alvin Lee told us recently that Japan is still
Time-Warner's biggest market in Asia by far but, with few issues
or problems in the market, he doesn't get to Japan very often.
With ownership of over 50 multiplex Mycal cinemas with more than
380 screens, movies are Time-Warner's biggest source of revenues
in Japan (Warner Bros and New Line Cinema), and Japan is the
second highest-grossing film market in the world.

As for TV, Time-Warner is doing well with CNN Japan and the
Cartoon network, and sells a fair amount of magazines (Time,
Fortune, and Sports Illustrated). They also sell a lot of DVDs
and Looney Tunes products in Japan. With such a market, Time-
Warner is considering more Japanese language productions.

Problems such as how to provide its content to customers using
what technology to view their content, how many times, and on how
many devices are Time-Warner's main global issues for the
entertainment industry in Japan.

Digital Rights Management (DRMs) and choosing technologies to
distribute content are the big open questions as Time-Warner
moves distribution online and onto mobile phones.
In general, Time-Warner is looking for more protections for
content within the law, but wants those laws to be technology-
neutral. (ECON: Marilyn Ereshefsky)

6. (U) Diet Approves Bills for Overhauling Government Financial
Institutions
------------

The Diet has enacted bills for overhauling eight government
financial institutions (GFIs), as a part of a broader program
towards a small government. After approving a bill consolidating
five GFIs into one on May 18, the Diet completed legislative
action on June 6, by finalizing the remaining bills designed to
privatize two GFIs and disband the remaining one.

However, it is not entirely clear at this stage that the approved
GFI reforms will generate substantial benefits for Japan's
economy by improving the efficient allocation of credit. Refer to
attached document for detailed analysis. (FINATT: Shuya Sakurai)

7. (SBU) U.S. Beef in Japan -- One Small Step Toward Larger
Market Opening
--------------

After intense discussions, the United States and Japan issued a
joint press statement June 13 that marks the end of the
verification period on an agreement the two countries signed in
July 2006 to resume, at least partially, U.S. beef exports to the
Japanese market.

The immediate impact of the joint statement is that Japan will no
longer insist on conducting 100 percent box inspections of U.S.
beef as it enters Japan under the tight restraints identified
last year. One hundred percent box testing has slowed down
import processing in Japan and limited -- at times severely -- the
amount of U.S. beef coming into the country.

With this verification stage completed, experts from the United
States and Japan are set to meet this month to discuss opening

TOKYO 00002720 003 OF 006


the Japanese market further to U.S. beef exports.
The United States would like to see Japanese trade regulations
for beef better reflect the international standards set by the
World Animal Health Organization (OIE).

The Japanese media have covered the story widely. The
Agriculture (MAFF) and Health (MHLW) Ministries will conduct
public hearings in Tokyo and Osaka on June 21 and 22 to review
findings from audits they conducted at U.S. slaughter facilities
in May.
For the June 13 joint statement, see the attached document.
ECON: Nicholas Hill)

8. (SBU) CEFP on Agriculture: Something Better Than Nothing?
-----------------------------

The Basic Policies Report of the Council for Economic and Fiscal
Policy (CEFP), when the Cabinet finally approves it on June 19,
will take a decidedly less ambitious approach to agricultural
reform than its private sector members initially sought.

Bowing to political reality, particularly given Upper House
elections on July 22, a series of changes to the initial draft
were adopted, removing some of the more dramatic reform
recommendations. At least that is how the Japan Agriculture News,
the media organ of the country's protectionist farm lobby,
interpreted developments.

In particular, a stock-for-land swap proposal that would have
made it easier for corporations to own farm land was removed from
the final CEFP report. The proposal would have consolidated land
and possibly accelerated the exodus of small-time farmers -- the
political base of the farm lobby -- from rural areas.

Policies designed to reduce idle farmland and promote corporate
leasing of farmland remain in the document. Significantly, the
document also calls for the Agriculture Ministry to draft an
overall agriculture reform report this fall, taking into account
the CEFP's views on the subject.

According to the Japan Agriculture News, farm sector
protectionists are satisfied that they have "won over" the CEFP
members, preventing the larger body from accepting some of the
more forward-leaning proposals of the CEFP private sector members
and the CEFP subcommittee working group.

Minister of State Hiroko Ota told reporters on June 12 that the
most important aspects of the reform proposals made by Takatoshi
Ito, the chair of the CEFP Expert Committee on Reforms Addressing
Globalization, have been reflected in the report.

Ito has indicated that he will continue to press for a reform
agenda -- a sentiment we have heard from other reform-minded
individuals familiar with the process. (ECON: Nicholas
Hill/Ryoko Nakano)

9. (SBU) An Ag Protest Against Concessions at WTO
-----------------------------

Japan's biggest farm lobbying group, Japan Agricultural
Cooperatives (JA) and its Credit Union arm, JA Zenchu, held a
national convention on June 12. Some 3000 people attended the
event, complaining about familiar trade issues.

They oppose liberalization in the Doha Round and the bilateral
deal Japan is negotiating with Australia. The convention issued
a special statement in support of the G-10, the group of
agricultural importing countries who espouse more protectionists
farm polices.

JA Zenchu chair, Isamu Miyata, according to press reports,
emphasized that the government should pay more attention to the
concerns of farmers, hinting that agricultural issues would have
a decisive impact on Upper House elections in July. He noted
that a Doha deal could make farmers "anxious."

LDP Political Research Council Chair Shoichi Nakagawa and other
influential agriculture caucus Diet members were on hand,
including Tadamori Oshima and Yoshio Yatsu.

JA Zenchu announced a joint statement with farming organizations

TOKYO 00002720 004 OF 006


from 43 other -- mostly food importing -- countries, encouraging
their governments to take a tough stand against too much
agricultural trade liberalization.

Separately, Agriculture Minister Akagi said in a Diet Upper House
session on June 12 that Japan was strongly making the case to be
included in the small group of countries, the G-4, currently
engaged in negotiations to bring the Doha round to a successful
conclusion.

Others in the LDP have been echoing the same view. (ECON:
Nicholas Hill/Ryoko Nakano)

10. (U) A Tale of Two McTeriyakis
-----------------------------

McDonald's Japan announced it will charge different prices to
rural and urban customers, marking the first time that a major
fast food chain has broken away from country-wide pricing.
McDonald's plans to raise prices in Tokyo, Osaka and other major
cities by 3-5 percent, while lowering prices in the northeastern
and central regions by 2-3 percent.

McDonald's officials cite high rents and wages as the main driver
for the divergent price approach. The price change is said to be
a trial study, and after a few months, McDonald's will evaluate
sales and consider long-term changes.

Although region-based pricing is common in America, McDonald's
announcement caught many Japanese by surprise and appeared to tap
into fears about structural economic change. The announcement
was carried widely in the media, and radio programming featured
viewer input that framed the price plan in the context of on-
going political debate about widening disparities between Japan's
urban core and outlying regions. (ECON: Virsa Hurt)

11. (U) Non-tariff Barrier on Port Handling Equipment Resolved -
----------------------------

A non-tariff trade barrier case that threatened to lock a class
of U.S. port handling products out of the market was recently
successfully concluded.

Throughout 2006, FCS Tokyo worked with Shibamoto Sangyo (the
Japanese licensee of Aston, Pennsylvania-based Slingmax)
regarding its concern about a proposed Japan Industrial Standard
(JIS) that regulated the use of slings commonly used at ports for
heavy lifting. If passed, the draft standard would have locked
out roundslings manufactured by Slingmax.

In seeking to negotiate a revised standard, FCS Tokyo
participated in a year-long series of consultations moderated by
the Ministry of Economy, Trade and Industry (METI). In the
discussions, METI assured Shibamoto that it would proceed in an
open, transparent manner in working with the JIS drafting
committee to consider requests made by them during the public
comment process.

In June 2006, METI and the JIS drafting committee subsequently
invited Shibamoto to meet and discuss the draft JIS with the
committee. In November 2006, the committee approved the new draft
standard, which included clauses accommodating U.S. made
roundslings. The new standard was implemented March 20, 2007.
(FCS: Jason Hancock)

12. (U) First Quarter GDP Revised Substantial Upward to 3.3%
Growth
------

The Cabinet Office announced on June 11 that Japan's real GDP
grew at a 3.3 percent annualized rate in the first quarter of
2007, well above the preliminary estimate of a 2.4 percent
annualized increase.

This substantial upward revision, which was almost in line with
the 3.2 percent growth expected by private analysts, was due
mainly to stronger-than-initially-estimated business investment.
See attached document for graphics and further analysis.
(FINATT: Shuya Sakurai)

13. (U) Finally Time for Taxpayer ID Numbers?

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-----------------------------

Spurred by a proposal in the Cabinet Office's 2007 honebuto basic
policies framework, the Government's Tax Commission (GTC) has
decided to deliberate the possible introduction of mandatory
taxpayer identification numbers. The GTC has been alternately
studying and recommending for a number of years the adoption of
such a system in an effort to improve tax collection efficiency
and clearly establish income liabilities (particularly in the
event of individuals holding multiple investment accounts).
Concerns regarding privacy and opposition from wealthy and self-
employed taxpayers, however, have engendered insufficient
political will to implement the recommendations. What might tip
the balance in this iteration of the debate is the call for
unique identification numbers for social welfare programs in the
basic policies framework. The GTC is likely to study the utility
of a unified identification system for tax and social welfare
programs, a notion that may gain additional traction given
ongoing scandals with public pension record-keeping. (FINATT:

14. (SBU) Japan Postal Corporation to Introduce Employee Stock
Program; SMBC Ties Abound
-------------------------

The Japan Post Corporation (JPC) will introduce an "employee
stock ownership program" to boost the morale of its employees, as
well as to secure stable and loyal shareholders after
privatization, according to a newspaper report. The program will
be administered by Daiwa Securities SMBC, a joint venture of
Daiwa Securities and Mitsui Sumitomo Financial Group.

The article speculated that since the administration of the
employee stock ownership program and the preparatory tasks
related to the initial public offering are often operated jointly,
Daiwa Securities SMBC may have a lead in the competition to be
selected as the "lead manager" of the initial public offerings of
the new postal insurance and banking companies.

We have noticed a possible trend of JPC favoring entities
belonging to the Mitsui Sumitomo Financial Group when it selects
private-sector partners. Yoshifumi Nishikawa, President of JPC,
is the former President of the Mitsui Sumitomo Bank. A credit
card company under the Mitsui Sumitomo Financial Group won the
bid to provide administrative work for credit cards the new
postal bank is planning to introduce, and the Mitsui Sumitomo
Bank was selected as one of the first banks with which the post
offices' ATMs will tie-up after privatization begins in October.
(ECON: Ai Kakeno)

15. (U) Japanese Investment Firm Frustrated with Energy,
Healthcare Markets
------------------

Hiroaki Shishido, President and CEO of the Japanese company
Vandai Investments, which invests in energy and healthcare among
other sectors, told us on June 6 that attempts to break into the
Japanese electricity market have proved very frustrating.
Despite liberalization, the market is shrinking rather than
growing, he said. The current system is highly inefficient and
the average Japanese utility bill is still much higher than in
the United States.

Japanese electricity is monopolized in all three areas --
generation, transmission and retail -- and it is extremely
difficult to compete and be profitable at the same time. Vandai
had considered investing in a power generation plant but
discovered that the high rent to transmit electricity over power
lines ate up the profits.

Shishido expressed frustration with the Japanese healthcare
system for similar reasons. The healthcare market has tremendous
potential because of changing demographics and an affluent older
generation and some medical institutions have indicated interest
in funding from investor companies but cumbersome regulations
make the market unattractive, Shishido explained. He argued that
government-provided healthcare has no place in modern Japan.
Instead, the cost efficiency and management expertise found in
the private sector would greatly improve the system.
Shishido also commented on the waning influence of the Japan
Medical Association (JMA), noting that the JMA, which
traditionally had strong ties to the Liberal Democratic Party,

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has seen its mainstream membership changed in recent years to
include more small and medium-size medical institutions with less
clout.

Shishido also reported that hospitals often finance themselves
almost entirely through bank lending -- about 99 percent
apparently -- which has contributed to inefficient management and
has forced many hospitals into the red. (ECON: Joan Siegel/Eriko
Marks)
SCHIEFFER

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