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Cablegate: The Japan Economic Scope--August 2, 2007

VZCZCXRO0149
RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #3560/01 2150658
ZNR UUUUU ZZH
R 030658Z AUG 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 6117
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5661
RUEHFK/AMCONSUL FUKUOKA 2390
RUEHNAG/AMCONSUL NAGOYA 1432
RUEHNH/AMCONSUL NAHA 4817
RUEHOK/AMCONSUL OSAKA KOBE 5990
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 05 TOKYO 003560

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--August 2, 2007

1. (U) This cable contains the Japan Economic Scope from August 2,
2007.

2.(SBU) Table of Contents

3. LDP Crushed By DPJ in Upper House Election
4. Agriculture Minister Steps Down
5. Expert Level Beef Talks Resume in Tokyo
6. METI Urged to Play More Assertive Role on FTA Policy
7. Corporate Value Study Group Recommendations for Fair MBO
8. U.S. Participation in Kita Yard Redevelopment: Osaka City's
Disappointing Response
10. Core Consumer Prices Down in June, 5th Consecutive Monthly
Drop
11. Revised Labor Laws Enacted
12. U.S.-Japan Aviation Negotiations in September
13. Kansai Leaders Fete Opening of KIX Second Runway
14. MOF Nixes Additional Financial Support for KIX
15. New KIX -- HND Flights Awarded to Star Flyer
16. Earthquake Dents Japan's Auto Industry -- More
17. Honda Motors on DHS's CBP Advance Trade Data Elements and C-
TPAT
18. Back to the Minors for Keigawa

3. (SBU) LDP Crushed By DPJ in Upper House Election
--------------------------------------------- -------

Prime Minister Abe's Liberal Democratic Party (LDP) suffered a
crushing defeat in the July 29 Upper House elections, returning
only 37 of 64 incumbent seats and in the process losing control
of the chamber.

The main opposition Democratic Party of Japan (DPJ) was the big
winner, garnering 60 seats to make it the largest party in the
Upper House. Prime Minister Abe has said repeatedly since the
election that he intends to remain in office despite the party's
losses but public opinion polls show that support for his
administration is very low.

For a complete readout of the election results see Tokyo 3475.
For a look at the August schedule refer to Tokyo 3491. (ECON:
Joan Siegel)

4. (SBU) Agriculture Minister Steps Down
--------------------------------------------- -------

Just hours before he was scheduled to get on a flight bound for
Washington for meetings with Agriculture Secretary Johanns and
U.S. Trade Representative Schwab, Japan's beleaguered Agriculture
Minister, Norihiko Akagi, resigned August 1.

Since assuming the post after his predecessor committed suicide
May 28 over corruption allegations, Akagi has been hounded by his
own financial scandals. After the ruling Liberal Democratic
Party's (LDP) stinging defeat in upper house elections on July 29,
PM Abe promised a cabinet reshuffle and pointedly singled out the
Agriculture Minister.

Akagi was called to the Prime Minister's office on August 1 and
announced afterwards to reporters that he had tendered his
resignation. This came two days after he asserted he had no
plans to step down.

According to a Mainichi report, Abe had him sign a resignation
letter on the spot. The Prime Minister reportedly reassured
Akagi that he was still a young man, only 48, and would have time
to resurrect his career.

The resignation may have come too late to calm PM Abe's
detractors. According to press reports after the announcement,
many in the LDP's leadership were critical that the decision did
not come sooner.

Meanwhile, the opposition says it will pursue an investigation of
the Prime Minister's role in hiring Akagi in the first place and
sticking by him after corruption allegations came to light.
"The Prime Minister demonstrated a lack of ability to manage the
cabinet," said Naoto Kan, acting president of the opposition
Democratic Party of Japan, to reporters. He and other opposition
leaders are calling on Abe to step down.

Said one unidentified former cabinet member quoted in the Tokyo

TOKYO 00003560 002 OF 005


Shimbun of PM Abe, "Everything he does is too late and a halfway
measure." (ECON: Nicholas Hill)

5. (SBU) Expert Level Beef Talks Resume in Tokyo
--------------------------------------------- -------

A delegation of experts from several different agencies arrived
in Tokyo for a second round of talks to discuss Japan's policies
on U.S. beef trade August 2-3.

John Clifford, Deputy Administrator of Veterinary Services at
APHIS, is heading a delegation that includes others from USDA,
USTR, FDA, FAS, and the Embassy.

Prior to the talks, a DVC took place between senior level
officials to discuss a general outline of what the two sides hope
the dialogue would produce in coming weeks.
The United States has insisted that, with a World Animal Health
Organization decision in May pronouncing U.S. beef safe, or in a
"controlled risk" category, that Japan would adopt science-based,
international standards and not place onerous restrictions on
trade.

Owing to the political sensitivities of the beef issue, the
United States has not yet received assurances that Japan is
prepared to align its polices with the OIE.
We will report the results of our bilateral discussions in more
detail by cable. (ECON: Nicholas Hill)

6. (SBU) METI Urged to Play More Assertive Role on FTA Policy --
--------------------------------------------- -------

An advisory body the Trade Ministry (METI) convenes to advise it
on economic policy wants the Ministry to be more assertive in
promoting a more aggressive FTA stance.

A METI official told us that the Industrial Structure Council,
chaired by Japan Business Federation head Fujio Miterai,
expressed concern August 1 that Japan was falling behind Korea
and others in pushing an FTA agenda.

It encouraged Japan to pursue FTAs with "large" partners, e.g.
the European Union or United States.

The Council, consisting of 24 members from business and the
academic community, meets only once a year to discuss the
direction it would like to see the government take on economic
policy. (Econ: Nicholas Hill/Ryoko Nakano)

7. (U) Corporate Value Study Group Recommendations for Fair MBO
--------------------------------------------- -------

On July 31, the Trade Ministry's (METI) Corporate Value Study
Group, chaired by Professor Hideki Kanda of the University of
Tokyo, compiled a report on measures to ensure fair treatment of
minority shareholders during management buyouts (MBOs).

Some of the recommendations included in the report are:
- Avoiding arbitrary pricing and MBO conditions by consulting
external directors or a third party committee before conducting
the MBO;
- Providing written explanations to shareholders if the MBO is
conducted after management announces the downward revision of
company performance or earnings;
- Recommending that the takeover bid (TOB) period under the MBO
be relatively long, so that a third person can conduct a counter
bid against management, and the shareholders have opportunities
to consider several alternatives; and
- In case of a successful MBO, recommending that all shares be
acquired and the target company become a subsidiary, so that
opposing shareholders can be provided a chance to liquidate their
shares after the TOB period.

Based on the recommendations in this report, METI will establish
the guidelines for MBOs in mid September. (ECON: Satoshi
Hattori)

8. (SBU) U.S. Participation in Kita Yard Redevelopment: Osaka
City's Disappointing Response
--------------------------------------------- -------

ConGen and ACCJ Kansai held joint meetings last week with Osaka

TOKYO 00003560 003 OF 005


City regarding the Kita Yard urban redevelopment project in the
center of the Umeda business district.

The project, similar to Tokyo's Shiodome redevelopment, involves
turning a large rail yard into a multi-purpose commercial,
accommodation, and educational center at the largest rail
terminal in western Japan in two multi-year phases.

The purpose of the meetings was to increase U.S. corporate
participation in the planning phase, to try to find more
information on export and procurement opportunities, and to
stress to local Japanese officials the U.S. interest in the local
economy.

Despite the stacks of glossy brochures and otherwise positive
signals by civic leaders, the city's lackluster and overly
bureaucratic response to the possibility of foreign investment
promotion was disappointing.

The ACCJ is taking further corporate soundings, however. For a
PowerPoint presentation on the project contact Phil Cummings.
(Osaka-Kobe: Phil Cummings)

9. (U) Core Consumer Prices Down in June, 5th Consecutive
Monthly Drop
--------------------------------------------- -------

Japan's nationwide core CPI, which excludes perishable food items,
fell 0.1 percent in June from the year before, the same rate of
decline as in each of the previous two months and the fifth
consecutive monthly decline, the Ministry of Internal Affairs and
Communications (MIC) announced July 27.

This result was in line with the market consensus forecast.
Overall, CPI was down 0.2 percent in June from a year earlier.
(FINATT: Shuya Sakurai)

10. Revised Labor Laws Enacted
--------------------------------------------- -------

Various labor-related laws were passed during the 166th Ordinary
Diet session on July 5, including the revised Part-Time Work Law
and the Employment Measure Law.

The revised Part-Time Work law provides that part-time workers
receive similar treatment to that of regular workers to create a
so-called "balance of treatment" for both categories of workers.
The revised Employment Measure Law prohibits firms from placing
age limits when recruiting and hiring, and obliges them to report
on the employment of foreign workers.

Bills related to the revised Minimum Wage Law and Labor Standards
Law were postponed due to the Diet's preoccupation with the loss
of 50 million pension records.

The Japanese Trade Union Confederation (Rengo) criticized the
opposition and ruling parties for carrying these bills over to
the next Diet session, blaming it on party politics. (ECON:
Virsa Hurt)

11. (SBU) U.S.-Japan Aviation Negotiations in September
--------------------------------------------- -------

The next round of U.S.-Japan civil aviation negotiations will
take place in Tokyo on September 11-13. EEB Transport DAS John
Byerly will lead the U.S. delegation. (ECON: Josh Handler)
Back to Top

12. (U) Kansai Leaders Fete Opening of KIX Second Runway
--------------------------------------------- -------

Political leaders from western Japan, including Ministry of Land,
Infrastructure and Transportation (MLIT) Minister Fuyushiba, and
other dignitaries attended the celebration in honor of the August
2 opening of the second runway at KIX, which, when fully
operational, will make KIX the first Japanese airport with true
round-the-clock operations.

For further details see the attached readout. (Osaka-Kobe: Phil
Cummings/Hideo Shibuya)

13. (SBU) MOF Nixes Additional Financial Support for KIX

TOKYO 00003560 004 OF 005


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

Despite Kansai International Airport Co.'s (KIAC) heavy lobbying,
Ministry of Finance (MOF) Administrative Vice-Minister Hiroki
Tsuda announced in a recent press conference that MOF will not

SIPDIS
authorize additional financial support for KIAC.

KIAC's 1.18 trillion yen debt from construction fees is forcing
the island airport to charge higher landing fees, which is
hurting its competitiveness. KIAC insists it is receiving
unequal treatment by the GOJ in comparison to Narita airport,
which was initially owned and financed by the government before
being privatized.

GOJ has previously been requesting local governments and
businesses to help support KIAC; however, Nikkei Shimbun-Kansai
reported this week that the recent reduction in international
flights by American and Northwest Airlines has caused local
governments to question the utility of their continued support.
(Osaka-Kobe: Phil Cummings/Scott Ravenhill/Naomi Shibui)

14. (U) New KIX -- HND Flights Awarded to Star Flyer
--------------------------------------------- -------

According to Kansai International Airport Co., Ltd. (KIAC), the
Ministry of Land, Infrastructure and Transportation (MLIT) has
decided to allot the four new Kansai International Airport (KIX)
-- Haneda (HND) flights to Kitakyushu based Star Flyer Inc. Star
Flyer intends to begin operating the service on September 14.
A KIAC official said they would like to use the new KIX -- HND
flights to get more international passengers from the Tokyo
metropolitan area to fly out of KIX when flights from Narita are
sold out. He added that the new flights between KIX and HND will
hopefully contribute to an increase in U.S. routes from KIX.
On a side note, in a recent Sankei Shimbun-Osaka article, KIAC
President Atsushi Murayama stated his intent to approach Asian
airline carriers to discuss the creation of new flights to the
U.S. via KIX since U.S. and Japanese airlines are currently mired
in economic difficulties. (Osaka-Kobe: Phil Cummings/Scott
Ravenhill/Naomi Shibui)

15. (SBU) Earthquake Dents Japan's Auto Industry -- More
--------------------------------------------- -------

Tokyo 3507 elaborates on last week's Scope piece covering the
effect of the Niigata quake on the Japanese auto industry. Of
note are the auto industry and the Trade Ministry's (METI)
defense of the just-in-time lean production system.

To critics who claim the earthquake has revealed a major weakness
in the concept, the auto companies and METI assert the opposite:
a flexible workforce not inventory stockpiles is the best way to
balance risk and costs.

The impact of a major disaster in Japan on manufacturing globally,
however, remains a matter of concern. (ECON: Josh Handler)

16. (SBU) Honda Motors on DHS's CBP Advance Trade Data Elements
and C-TPAT
--------------------------------------------- -------

Honda Motor Company recently visited the Embassy to provide
feedback on U.S. Custom and Border Protection's (CBP) proposed
Advance Trade Data Elements (ATDE) requirement.

Honda also outlined some of the company's experiences with the C-
TPAT program.

While supportive of U.S. port security programs, Honda is
concerned that security requirements have lengthened its supply
chain and increased its inventory requirements.

Accommodating the ATDE's new data field requirements, moreover,
will be a time-consuming and expensive process.

Honda finds the C-TPAT validation programs to be poorly
coordinated and uneven in their thoroughness.

The EU has similar requirements, but a different database format
which adds to the expense and difficulty of managing the security
programs.


TOKYO 00003560 005 OF 005


CBP may wish to do more outreach to the Japanese export community
in Japan to build goodwill and continue to encourage cooperation
with CBP programs. A cable covering the meeting will be out
shortly. (ECON: Josh Handler)

17. (U) Back to the Minors for Keigawa
--------------------------------------------- -------

Kei Igawa, the Yankees $46 million Japanese import, was slammed
for five runs against the Kansas City Royals July 27.

Immediately after the game, the Yankees announced that he was
being sent back to the minors.

Igawa's performance with the Yankees suffers in comparison to the
Red Sox' ace Japanese imports Daisuke Matsuzaka and Hideki
Okajima. In 62 innings of work, Igawa's era is 6.79. He has two
wins and three losses.

His cost to the Yankees' already bloated payroll works out to
about $742,000 per inning, more even than what Roger Clemens will
end up making this year. (ECON: Nicholas Hill)
SCHIEFFER

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