Cablegate: The Japan Economic Scope - June 14, 2007 Part 2

DE RUEHKO #2721/01 1660815
R 150815Z JUN 07






E.O. 12958: N/A
SUBJECT: The Japan Economic Scope - June 14, 2007 Part 2

Sensitive but unclassified. Please protect accordingly.

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

2.(SBU) Table of Contents

3. Citigroup Assumes Full Control of Nikko Cordial Brokerage
4. New Earthquake Insurance Policy Process Raises Concern among
5. MLIT Postpones Downgrade of Itami Airport
6. MLIT to Consider Helping KIAC's Debt
7. DHL to Make Large Investment in KIX, But Not a Hub Candidate
8. MHI Plans Regional Jet Production
9. Roads: Infrastructure, Safety, Environment Improvements
10. Maersk Minami Honmoku Terminal and Yokohama Customs
11. Manufacturers: Profits Up But Salaries Flat
12. New Leader Takes Helm at Kansai Economic Federation
13. Big Money for Toyota Executives
14. Flash Fab Four to Hit Central Japan Six Months Ahead of
15. Prefecture, City Politicians and Elite Police Arrested in
Bid-Rigging Case in Hirakata City
16. Japanese Baseball Legend Joins Pirates Roster
17. Bad News Bears?

3. (U) Citigroup Assumes Full Control of Nikko Cordial

Citigroup's extended courtship of Nikko Cordial wrapped up
earlier this month when Citi's ownership of Nikko voting rights
rose from 61 percent to 68.2 percent. This proportion effectively
gives Citi control of Japan's beleaguered third largest
securities brokerage, and comes at a price tag of 117 billion yen
($975 million). Reaching this threshold further permits Citi to
mandate any manner of strategy or reform without fear of veto
from the minimum required third of shareholders.

In light of previous bottom-line and reputation damage to Citi's
Private Banking and consumer finance arms, this acquisition
indicates that Citi's commitment to the Japanese financial
services market remains steady. Despite the lingering unease
among top Japanese business leaders toward foreign takeovers, as
evidenced by the current "debate" over the need for defensive
measures, this deal went remarkably smooth. Nikko's extremely
vulnerable market position, as a result of a major accounting
scandal, and its previously established business relationship
with Citigroup made it particularly welcoming to Citi's "rescue"
offer. (FINATT: Mateo Ayala/ECON: David DiGiovanna)

4. (SBU) New Earthquake Insurance Policy Process Raises Concern
among U.S. Companies

U.S. industry recently became aware that the Ministry of Finance
has been considering, since fall 2006, revisions to a public-
private liability sharing mechanism for use in the event of a
catastrophic earthquake.

As new regulations could significantly affect foreign non-life
insurers-- Japan operations, U.S. insurers have shared their
concerns with us about the transparency of the process and its
potential effects.

Subsequently, we were in contact with the Ministry of Finance,
which indicated its intent to address the transparency problems
and include foreign representatives as the process moves forward.
We continue to monitor developments.
Further background can be found in the linked Financial Times
article: (ECON: Marc Dillard)

5. (SBU) MLIT Postpones Downgrade of Itami Airport

The Ministry of Land, Infrastructure and Transportation (MLIT) is
delaying the downgrade of Itami Airport from a Class I to a Class
IIA airport this year due to strong local opposition.

TOKYO 00002721 002 OF 006

Itami Airport is currently categorized as a Class I airport along
with Narita, Centrair, and KIX. In 2006, MLIT stated they were
planning to downgrade Itami to a Class IIA airport that would be
managed by the national government and receive one-third of its
funding from local governments.

Despite having no international flights, Itami remains fully
funded and managed by the national government. Local governments,
including Osaka Prefecture and 11 neighboring cities, as well as
the local business community, opposed the downgrade because of
the additional financial burden and fear of further shrinkage of
air service at Itami.

A Kansai International Airport Co. (KIAC) official said he was
unhappy with MLIT's policy of giving Itami the same support as an
International Hub Airport, and not sufficiently backing KIX, the
second largest airport in Japan. He is concerned that the GOJ's
aviation policy will weaken the Japanese aviation industry as
global competition heats up.

A manager for the Aviation and Airport Promotion Group of Osaka
prefecture, one of the main stockholders of KIX, however,
believes Itami deserves national government funding because of
the airport's high volume of flights. (Osaka-Kobe: Phil
Cummings/Scott Ravenhill/Naomi Shibui)

6. (SBU) MLIT to Consider Helping KIAC's Debt

Sources at KIAC say that MLIT's Aviation Subcommittee is
considering using public funds to offset the 1.2 trillion yen ($1
billion) debt of Kansai International Airport Co. (KIAC).

The debt mostly consists of reclamation costs for the airport
island incurred when the facility opened in 1994. KIAC, which
shoulders an annual 20 billion yen ($16.4 million) in accrued
interest, insists the debt should be held by the GOJ because the
offshore construction of Kansai International Airport (KIX) was
based on a central government plan.

KIAC officials also argue that as a private company, KIAC should
resemble the company operating Narita Airport and only be held
responsible for the management and operation of KIX. Airport
officials blame KIAC's high level of debt for the airport's high
operation costs and difficulty in competing for a larger share of
Asian air travel.

KIAC President Murayama stated his company, local business
communities, and local governments welcomed recognition of their
concerns in MLIT's report. A contact in the KIAC Aviation Sales
Department added that while the amount of debt relief and the
timing has not been finalized, this is a welcome big first step
in improving KIX's competitiveness.

Local newspapers report that MLIT is considering a proposal to
finance part of KIAC's debt with money raised from the future
sale of shares of Narita Airport. Another KIAC official hoped
the GOJ would pay off its bad debt and let the firm handle its
Aaa-rated debt. (Osaka-Kobe: Phil Cummings/Scott Ravenhill/Naomi

7. (U) DHL to Make Large Investment in KIX, But Not a Hub

DHL, the world's largest air cargo business, built a new 10,000
m2 loading facility and increased its sorting equipment at KIX to
meet the increase in demand for freight to/from China. The
investment totals five billion yen ($41 million), creating the
largest cargo facility at KIX, five times larger than its
previous facility.

The new DHL sorting equipment is being used for the first time in
Asia and can sort 7500 pieces of freight per hour. KIAC
President Atsushi Murayama believes this is a good start for the
opening of KIX's second runway on August 2.

At the same time, DHL Express Asia-Pacific Region CEO Scott Price
said in an Asahi Shimbun interview on June 8 that the company
dropped KIX this year from a list of three airports (KIX, Incheon,
and Pudong) as a potential second hub in Asia to supplement its

TOKYO 00002721 003 OF 006

operations in Hong Kong.

Price pointed out that Japanese airports have to be more
deregulated, available for 24 hour of operations, and be less
expensive and more spacious in order to function as a hub airport.

He added that while KIX cleared several of the conditions, Narita
did not.

A manager of KIAC's Aviation Sales Division said that the GOJ has
to understand that airports in Japan are losing their
competitiveness vis--vis other Asian airports. (Osaka-Kobe: Phil
Cummings/Scott Ravenhill/Naomi Shibui)

8. (SBU) MHI Plans Regional Jet Production

This week, Mitsubishi Heavy Industries (MHI) provided new details
on its Mitsubishi Regional Jet (MRJ) project currently under
development with METI. The 117-foot long MRJ is designed to
carry 70 to 90 passengers up to about 1,875 miles. About 30
percent of the plane is to be made of carbon fiber composite
materials, resulting in 20 percent better fuel efficiency against
comparable planes. Rolls Royce, GE, and Pratt and Whitney are
reportedly competing to supply engines.

Total development cost is estimated at approximately 120 billion
yen ($1 billion) with METI to cover one third, with production
potentially to begin in 2012 near existing MHI facilities in the
Nagoya area.

MHI will display a full-scale mockup of the cabin at the Paris
Air Show June 18 to 24, and METI and MHI are to decide jointly
whether to go ahead with the project by next March, depending
largely on the reaction from potential customers. According to
press reports, MHI would need orders for at least 350 MRJ's to
make the project feasible.

Aerospace industry contacts tell us MHI has the requisite
technology and manufacturing skills to make the project a success,
noting that similar Japanese efforts in the past produced
technically strong planes that failed because of marketplace
issues. Our contacts note that even though MHI's aerospace
production capacity is currently stretched to the limit by its
high volume of orders from Boeing and others, the company could
handle a massive project like the MRJ, depending on where it
sourced major components -- most likely China. (Nagoya: Dan
Rochman/Tamiki Mizuno)

9. (U) Roads: Infrastructure, Safety, Environment Improvements

The Japanese Automobile Manufacturer's Association (JAMA)
recently placed an English language summary of its report on how
to enhance Japan's road transportation infrastructure. (Click
here for JAMA's website and more details.)

JAMA calls for meeting near-term government targets such as
reducing the number of Japan's road fatalities to under 5,000 by
2012 and achieving its first-period commitments under the Kyoto
Protocol in the 2008-2012.

JAMA says that the declining population and graying society
creates a number of serious challenges for the transport sector,
including achieving greater road safety, reducing the
environmental impact of road transport through improved traffic
flow, revitalizing local communities, and advancing the overall
status of the nation's road infrastructure.

Ten measures in the following four areas are proposed: more
comfortable mobility for road users; greater road safety; reduced
congestion and environmental impact; and road network
improvements that contribute to economic development.

JAMA's recommendations are made with an eye towards influencing
the next Priority Infrastructure Development Plan (for fiscal
2008 through fiscal 2012) and the Mid-Term Road Network
Development Plan, which the Japanese government is now

TOKYO 00002721 004 OF 006

On a related note, the Asahi Shimbun reports that reinforced
expressways in western Japan designed to last 60 years are
deteriorating faster than expected mainly due to overloaded
trucks and rainwater damage.

The Asahi writes that the level of truck overloading differs
between the west and Japan, with European and U.S. drivers
loading cargo at an average of 20 percent over the legal limit
while Japanese truckers, astoundingly, load at an average of two
to three times the limit.

The faster aging of the roads is leading to more extensive
repairs, which result in substantial slowdowns in traffic.
(ECON: Josh Handler)

10. (SBU) Maersk Minami Honmoku Terminal and Yokohama Customs --

In late May, we accompanied a DOE/DHS delegation to observe
operations at Maersk Line's Minami Honmoku No. 1 Pier in Yokohama
and visit the Yokohama Customs container X-ray facility.

The Minami Honmoku Pier No. 1 began operation in April 2001 for
Maersk as an Asian hub for cargo for eastern Japan. It has two
terminals, MC1 and MC2, with five gantry cranes, and is the
busiest container terminal in Japan, handling 945,400 containers
in 2006, some 2,000 -- 2,500 TEUs a day, of which 862,000 were for

The wharf has a depth of 16 meters, a combined frontage of 700
meters, and a land-side storage capacity of 21,300 TEUs. A
second pier area is planned which will be across a small inlet
from Pier No. 1.

The visit provided an interesting view on the organization of a
Japanese container pier, confirming earlier reports about complex,
and so costly, stevedoring arrangements.

Maersk rents the pier space from the Yokohama city port
authorities. The offloading of the containers and their movement
around the terminals, however, is organized by Mitsubishi
Logistics Corporation. Mitsubishi in turn subcontracts to five
or six stevedoring and warehousing firms, such as Fujiki Kigyo
and Nisshin, to do the actual logistical work.

The visit included a tour of the nearby Yokohama customs
container X-ray facility that scans some 50-70 selected
containers a day for contraband as well as checking for
radioactive materials.

The facility supports the Honmoku piers. The piers operated
24/7, but the facility is closed on weekends, raising questions
about how it keeps up with the container terminal's work. (ECON:
Josh Handler)

11. (U) Manufacturers: Profits Up But Salaries Flat

Amid declining unemployment rates nationwide, major electronics
manufacturers in the Kansai region have started a hiring spree of
college graduates and mid-career professionals. In addition to
full-time "regular" employees, these firms continue to hire a
growing proportion of part-time workers and contractors.

The large number of baby boomers retiring has led to a drop in
personnel costs at many large Japanese companies. However, most
companies are not raising the salaries of younger and mid-career
workers. Consequently, revenue from corporate taxes in 2006 has
increased in the Kansai region, but salaries have remained at
last year's levels.

A researcher at Kansai Institute for Social and Economic Research
said that booming major manufacturers in Kansai, such as
Matsushita and Sharp, earned large profits by increasing low cost
employment in order to remain competitive in global markets.
Other manufacturers have adopted the same strategy. The
researcher expects this trend of corporate profit growth coupled
with minimal wage increases to continue for the foreseeable
future. (Osaka-Kobe: Phil Cummings/Scott Ravenhill/Naomi Shibui)

12. (U) New Leader Takes Helm at Kansai Economic Federation

TOKYO 00002721 005 OF 006


Mr. Hiroshi Shimotsuma, Chairman of Sumitomo Metals, was
officially appointed as the 13th Chairman of the Kansai Economic
Federation (Kankeiren) last week. He successfully restructured
Sumitomo Metals in the late 90s, and is the third Kankeiren
Chairman to be chosen from Sumitomo. At his press conference he
announced he would further promote governmental decentralization
through introduction of "doshusei" (ceding more national
government functions to redistricted states/provinces).

The goal of decentralization is to reduce barriers among local
governments in order to strengthen the economy and make Kansai a
hub for transportation and new businesses. Also Mr. Shimotsuma
laid out his "Hundred Day Plan" for Kankeiren to shore up its
role, mission, and concrete tasks over the next 100 days. Mr.
Shimotsuma is considered to be an active leader with a clear
vision, but the Osaka business community is concerned that his
residency in Tokyo and his work at Sumitomo Metals will hamper
his work for Kankeiren. (Osaka-Kobe: Phil Cummings/Naomi Shibui)

13. (SBU) Big Money for Toyota Executives

Toyota Motors plans to raise its executive board members'
compensation by as much as 40 percent over last year, pending a
shareholders' vote on June 22. The 32 executives on the board
stand to receive a total of over $20 million (over $27 million
including stock options) or an average of about $638,000 each.

The pay increase reflects Toyota's widely publicized recent
outstanding results. Toyota ranks first among all Japanese
companies in terms of both sales and profits. In FY06, Toyota's
ordinary profit exceeded two trillion yen (over $16 billion), a
first for a Japanese company. Six out of the top nine Toyota
group companies, including Denso and Aisin, also had record
profits in FY06, and all nine companies had record sales.

Contacts close to Toyota's board tell us that while part of the
increase in pay is accounted for by bonuses related to the
company's record profits, much of the jump in pay is actually a
result of Toyota doing away with "retirement bonuses" and moving
that compensation to an annual basis. (Nagoya: Tamiki Mizuno)

14. (U) Flash Fab Four to Hit Central Japan Six Months Ahead of

Toshiba and SanDisk will ratchet up their joint venture
production of flash memory chips by 70 percent at their Yokkaichi,
Mie factory just outside Nagoya.

In order to do so, the firms plan to start operations of the
Yokkaichi plant's huge fourth fabrication facility six months
ahead of the original schedule by speeding completion of "Fab 4"
facility at an additional cost of about 80 billion yen ($660
million) on the estimated 600 billion yen ($4.9 billion) facility.
One measure of the industry's concentration and scale of
production at Yokkaichi is that industry analysts estimate, if it
were considered a country, once complete, Fab 4 alone (not
counting the three other production facilities on the site) will
rank eighth in the world in flash memory production capacity,
behind France but ahead of Ireland.

Toshiba currently holds slightly over 30 percent of global flash
market share (behind Samsung's 44 percent) but expects increased
production capacity to help it capture as much as an additional
10 percent of the market, since current demand for flash memory
far outstrips the world-wide production capacity of all makers.
Market share is key to profitability as flash memory prices
dropped by as much as 70 percent last year. Growing demand
spurred by products such as Apple's iPod and iPhone has caused
prices to stabilize somewhat lately, however. (Nagoya: Dan
Rochman/Tamiki Mizuno)

15. (SBU) Prefecture, City Politicians and Elite Police Arrested
in Bid-Rigging Case in Hirakata City

The Osaka District Public Prosecutors Office announced it has
been investigating a suspected large bid rigging (dango)

TOKYO 00002721 006 OF 006

operation related to the construction of a garbage processing
plant ordered by Hirakata City of Osaka in 2004.

The contracted bid price of 5.56 billion yen ($45.6 million) by
the joint venture (JV) of Obayashi Corporation and Asanuma
Corporation was 98.4 percent of the estimated price provided by
the city. Hirakata Vice Mayor Takatsune Kohori and three
executives from Obayashi Corporation and Asanuma Corporation were
arrested at the end of May. Osaka Prefectural Assembly (and
former Hirakata City Assembly) Member Toyozaburo Hatsuda and
Osaka Prefectural Police Lieutenant Koshiro Hirahara, a member of
the elite unit investigating bid-rigging, were also arrested on
suspicion of accepting bribes.

Obayashi Corporation President Norio Wakimura resigned and
Chairman Takeo Obayashi, the great-grandson of the founder,
stepped down from the board of directors. The company was also
banned from receiving public works projects for several months.
The Osaka Office Director of the Japan Center for Economic
Research, part of Nihon Keizai Shimbun, believes the next target
will be the Mayor of Hirakata. We expect more news about the
bid-rigging investigation to emerge next week. (Osaka-Kobe: Phil
Cummings/Scott Ravenhill/Naomi Shibui)

16. (U) Japanese Baseball Legend Joins Pirates Roster

The Pittsburgh Pirates promoted Masumi Kuwata, the 39 year-old
former hurler for the Yomiuri Giants, on June 9, in time to pitch
against the New York Yankees in the final game of their three-
game set at Yankee Stadium last weekend.

Kuwata gave up two runs in two innings. The right hander was not
expected to make the Pirates' roster until the All Star break in
July, but had been throwing well in triple A Indianapolis.

Kuwata won 168 games for the Yomiuri Giants before retiring after
the 2005 season. He is a big favorite of star pitchers Hideki
Okajima and Daisuke Matsuzaka of the MLB-best Boston Red Sox.

Meanwhile, Kei Igawa is beginning to throw better in the minor
leagues for Scranton-Wilkes Barre, the Big Apple of southeastern
Pennsylvania. The Yankees $46-million pick up hopes to return to
the majors soon.

He is 1-2, with a 3.32 earned run average. (ECON: Nicholas Hill)

17. (U) Bad News Bears?

Dear Sirs/Madams: I noticed the absence of the weekly Matsuzaka
report in last week's Scope. Is it right to only report "good
news?", i.e. when he wins a game.
David DiGiovanna, Tokyo
Back to Top

Editor-in-Chief's Reply: Matsuzaka has pitched brilliantly in his
last two outings and could well win 20 games before the season is
over. This is an opportunity to underscore that we welcome our
readers' comments, even when they are unfounded.

© Scoop Media

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