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Cablegate: Japan Post Privatization - Committee Comments On

VZCZCXRO0116
PP RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #3179/01 1930349
ZNR UUUUU ZZH
P 120349Z JUL 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC PRIORITY 5423
INFO RUEHFR/AMEMBASSY PARIS PRIORITY 5617
RUEHFK/AMCONSUL FUKUOKA PRIORITY 2024
RUEHNAG/AMCONSUL NAGOYA PRIORITY 1111
RUEHNH/AMCONSUL NAHA PRIORITY 4444
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 5613
RUEHKSO/AMCONSUL SAPPORO PRIORITY 2821
RHEHAAA/NSC WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/TREASURY DEPT WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 TOKYO 003179

SIPDIS

SENSITIVE
SIPDIS

USTR FOR CULTER, BEEMAN, MEYERS
NSC FOR TONG
DOC FOR 4410/ITA/OJ/NMELCHER
PARIS FOR USOECD
TREASURY FOR IA/DOHNER, CARNES AND POGGI
STATE PASS TO FEDERAL RESERVE BOARD FOR JKOHLI

E.O. 12958: N/A
TAGS: ECON EFIN JA PGOV
SUBJECT: JAPAN POST PRIVATIZATION - COMMITTEE COMMENTS ON
THE IMPLAMENTATION PLAN. GOOD FOR US FINANCIAL COMPANIES;
NOT SO GOOD FOR EXPRESS CARRIERS

REF: TOKYO 02716

1. (SBU) Summary. Japan Post begins a ten-year privatization
process on October 1 releasing nearly $3 trillion in banking
and insurance assets from government control. In
preparation, the Japan Post Company on May 1 issued an
implementation plan, rumored to be over 400 thousand pages in
length, and provided a 119 page summary of the plan for
public comment to interested parties. The lack of detail in
the summary, however, and the extremely limited time allotted
for public comment (sixteen business days) makes it difficult
to evaluate whether equivalent conditions of competition will
exist after October 1. The
Postal Service Privatization Committee (PSPC), the council
charged with overseeing the privatization process,
subsequently released an opinion paper on the implementation
plan which contained language that was particularly welcomed
by the insurance and financial industries for its assurances
regarding transparency, Japan Post successor companies being
subject to the same rules and regulations as the private
sector, and the process for introducing new products. The
opinion was particularly positive when compare to the PSPC's
comments on draft implementation plan in late 2006 which
focused on "consumer convenience" rather than competition
issues. The PSPC opinion was less favorable for
international express mail delivery services. Japan Post's
Express Mail Service (EMS), which the USG contends competes
directly with international express mail companies such as
FedEx and UPS, will continue to be classified by the Ministry
of Internal Affairs and Communication (MIC) as universal
service after privatization. This allows for preferential
regulatory treatment and creates an unfair competitive
advantage that enables EMS to deliver its service at a
significantly reduced cost versus competitors. The PSPC
opinion did not challenge this situation. The USG and
industry should continue to apply pressure on the GOJ to
establish a level playing field in this sector. End Summary.

2. (SBU) As discussed reftel, Japan Post begins a ten-year
privatization process on October 1 releasing nearly $3
trillion in banking and insurance assets from government
control. In preparation, the Japan Post Company on May 1
issued an implementation plan, rumored to be over 400
thousand pages in length, and provided a 119 page summary of
the plan for public comment to interested parties. Both the
American Chamber of Commerce in Japan (ACCJ) and the U.S.
government submitted comments to the Postal Service
Privatization Committee (PSPC), the council charged with
overseeing the privatization process, during the public
comment process. Despite repeated requests from the USG and
industry, however, Japan Post Corp. never released the entire
implementation plan to interested parties.

3. (SBU) The primary concern for both domestic and
international industry in the privatization process is
ensuring that the four new Japan Post entities, the postal
banking company (Yucho), the postal insurance company
(Kampo), the postal delivery company and the postal service
company, are subject to equivalent conditions of competition
as the private sector. The lack of detail in the summary,
however, and the extremely limited time allotted for public
comment (sixteen business days) makes it difficult to
evaluate whether these equivalent conditions will exist after
October 1. Much of the discussion in both the USG's and
ACCJ's comments submitted to the PSPC focused on this lack of
detail.

4. (SBU) Subsequent to ACCJ representatives testifying before
the PSPC, the committee agreed to allow interested parties to
submit questions to Japan Post Corp. and to compel the
company to respond. Before industry was able to develop such
a list, however, PSPC issued its own opinion on the
implementation plan. Its assessment was surprisingly
laudatory. The opinion contained language that was

TOKYO 00003179 002 OF 003


particularly welcomed by the insurance and financial
industries for its assurances regarding transparency, Japan
Post successor companies being subject to the same rules and
regulations as the private sector commencing October 1 and
the process for introducing new products.

5. (SBU) With regards to insurance and banking, the opinion
states there should be "maximum effort..made to dispel the
perception of an implicit government guarantee," that the
privatized Japan Post companies should "be granted the same
treatment in the enforcement of relevant laws and
regulations" as private corporations and that "new business
operations shall be approved through the commission's
investigations and deliberations while ensuring appropriate
competitive relations." Finally, the report calls for
measures to prevent cross-subsidization and other
preferential treatment between the privatized companies
stating "At the time of succession, there will be a need to
consider...whether contracts between the succeeding companies
will comply with...the arms-length rule regulation...."
These are all issues of great concern to U.S. industry. The
commission's positive remarks are a welcome step forward,
especially compared with its remarks on the draft
implementation plan in July 2006 in which PSPC emphasized
"consumer convenience" over competitive concerns.

6. (SBU) Unfortunately, the PSPC opinion was less favorable
for international express mail delivery services.
Specifically, the opinion discusses the development of "new
business operations of the postal delivery corporation" and
calls for these new businesses to be established "under
equivalent conditions of competition with private companies."
However, when questioned about the definition of "new
business operations," Office for the Privatization of Japan
Post (OPJP - PSPC's secretariat) Counselor Akira Nishihara
told Ecouns in a June 15 meeting that international express
delivery services like those provided by FedEx and UPS are
not now provided by Japan Post. The
Japan Post product, Express Mail Service (EMS), which the
USG believes competes directly with FedEx and UPS, is defined
under universal service as put forth by the Universal Postal
Union and, as such, does not compete with the private sector,
Nishihara maintained. Equivalent conditions of competition
would only apply to new products Japan Post would develop in
the future. This is the same position that the Ministry of
Internal Affairs and Communications (MIC) which regulates EMS
held during the Regulatory Reform talks in May.

7. (U) Defining EMS as part of universal service is
significant. Under universal service, the timely and
efficient receipt of mail is a right of every Japanese
citizen and therefore, products categorized as such may
receive preferential regulatory treatment. By classifying
EMS as part of universal service, the product can enjoy
favorable treatment in such things as customs clearance and
de minimus customs declaration. This allows EMS to deliver
its product at an extremely low price. According to Japan
Post's website, a 500 gram (1.1 pound) package mailed using
EMS from Tokyo to San Diego would cost the sender Y1,500 yen
($12.19) and would arrive in "two-to-three" days. The same
package using FedEx would cost Y8,280 yen ($67.31) for
priority service (delivery by 12:30pm on the second day) or
Y12,420 yen ($100.97) for first class service (delivery by
8:30am on the second day).

8. (SBU) The matter is further complicated as the Japan
Fair Trade Commission (JFTC), which is charged with
overseeing anti-monopoly and competitive policy issues,
released a report in July 2006 giving its opinion that EMS
does compete directly with international express mail
delivery companies. The report states "(because) the EMS
network cooperation between six postal agencies including
Japan Post has been strengthened, some of the EMS services
have become similar to international express delivery

TOKYO 00003179 003 OF 003


services, creating competition between EMS and international
express mail delivery services."

9. (SBU) During a July 6 meeting with Ecouns, JFTC
Director for International Affairs Shuichi Sugahisa
reaffirmed the commission's belief that EMS does compete with
the private sector. He noted the report specifically
discusses what accounting procedures should be used to ensure
proper costing to account for EMS' use of the Japan Post
infrastructure. Failing to do so could constitute dumping,
Sugahisa suggested. However, Sugahisa also stated that JFTC
could only issue its opinion and had little enforcement
capability unless there was a clear violation of Japan's
Anti-Monopoly Act. The commission has no ability to take
action against another government entity, he said. When
pressed, Sugahisa admitted that allowing different customs
procedures for EMS could be an unfair competitive advantage
that would allow EMS to price its services below those of its
competitors. He stated that one way to resolve this issue
would be for private industry to bring suit against the
Government of Japan and let the Japanese courts decide. This
has been tried once before by a group of businesses which
believed the Tokyo metropolitan government provided unfair
competitive advantages to a city-run slaughterhouse. The
court ruled in favor of the city.

10. (U) The PSPC's opinion regarding Japan Post's plans for
the postal banking and insurance companies post privatization
is a positive development for U.S. industry particularly
given the concerns surrounding the 2006 draft implementation
plan. At that time, there was little to no mention of the
need for competitive equality in introducing new products or
about the need for transparency in financial reporting to
protect against cross-subsidization. The concerted efforts
of the USG and the ACCJ can be credited with the progress
made on this front. Unfortunately, the outlook for express
delivery is not as bright. The USG and U.S. industry should
continue to urge on the GOJ to establish a level playing
field in this sector.
SCHIEFFER

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