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Cablegate: The Japan Economic Scope--December 21, 2007

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INFO RUEHFR/AMEMBASSY PARIS 5897
RUEHFK/AMCONSUL FUKUOKA 5113
RUEHNAG/AMCONSUL NAGOYA 3817
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UNCLAS SECTION 01 OF 07 TOKYO 005641

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PARIS PLEASE PASS TO USOECD
STATE PLEASE PASS TO USTR

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SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope--December 21, 2007

1. (U) This cable contains the Japan Economic Scope from
December 21, 2007.

2. (SBU) Table of Contents

International Assistance
3. Japan to Provide Humanitarian Protection Assistance in Chad
4. Japan Increases Donation to International Development
Association

Taxation
5. Ruling Parties Announce Limited FY 08 Tax Proposals
6. Aichi Asked to Give Up 40 Billion Yen of Corporate Tax
Revenue

Medical Issues
7. CPRR Backs Down on Medical Mixed Treatments

Planes and Trains
8. International Airfare Liberalization in Japan?
9. Kitakyushu Airport to Expand Cargo Services
10. Japan Central Rail Touts Eco-Friendly Trains

Investment Issues and Corporate Concerns
11. Lawyers More Cautious Than Execs on Invoking Defensive
Measures
12. Citigroup Completes First Cross-border "Triangular" Stock
Deal
13. BOJ "Tankan" Survey: Deterioration in Large Firms' Business
Sentiment
14. Eco Products Trade Show Hits Record High Number of Visitors

Energy
15. No Oil Refinery Project in Libya
16. Iraq to Purchase Electrical Transformers from Toyoda Tsusho

Reforming Regulations
17. TSE's Saito Calls for Better Corporate Governance,
Oversight
18. Insurance Advocacy Pays Off for U.S. Companies

Economic Impact
19. Economic Policy Under a Divided Diet
20. FSA Measures Good Start to Improved Financial Market

Competitiveness
21. Hokkaido City Pleased With Economic Impact of Kitty Hawk
Port Call

Sports
22.Dodgers Sign Kuroda to Three-Year Deal

23. This Week's Cables

------------------------
INTERNATIONAL ASSISTANCE
------------------------

3. (U) Japan to Provide Humanitarian Protection Assistance in
Chad

Japan will grant some $2.2 million to launch the Chadian Police
for Humanitarian Protection (PTPH) according to a MOFA official.
The monies will be used to provide facilities and equipment for
a PTPH headquarters in N'Djamena and an academy to train
Chadian police.

Once trained, personnel will protect refugees in eastern Chad
under the supervision of UN police officers. UNSC resolution
1778 endorses the concept of the PTPH as part of
multidimensional peacekeeping efforts in Chad and the Central
African Republic (ECON: Sally Behrhorst/Eriko Marks)

4. (U) Japan Increases Donation to International Development

Japan will donate $3.2 billion to the International Development
Association (IDA) over a three-year period, according to a
December 14 MOF press release. This represents a 30 percent
increase over current levels. Japan's total share of IDA
funding will nevertheless drop to 10 percent from the present
12.2 percent.


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The IDA had asked the GOJ for $4.0 billion, but the government
demurred citing fiscal constraints. According to the IDA, 45
nations, including six first-time donors, pledged a record
$25.1 billion to the World Bank affiliate to help fight poverty
over the upcoming three-year term. (ECON: Sally Behrhorst)

--------
TAXATION
--------

5. (U) Ruling Parties Announce Limited FY 08 Tax Proposals

The ruling coalition--the Liberal Democratic and New Komeito
parties--announced its FY08 tax reform proposals on December
13. The package calls for extending the present provisional
cuts in the tax rates on both capital gains from share sales
and limited dividend income for another two years. The
coalition parties also proposed measures to narrow tax revenue
disparities between local governments, and extend surcharge
rates on road-related taxes for ten years.

As widely anticipated, the coalition party proposals represent
only minor changes in Japan's tax system. The proposals do not
call for an imminent hike in the consumption tax from the
present five percent, or a cut in the effective income tax rate
for companies from the current 40 percent. The proposed tax
changes are estimated to result in a net tax cut of six billion
yen ($54.5 million) in combined national and local tax revenues
once fully in place.

The Cabinet is set to approve the outline of legislation to
implement the coalition's proposed tax changes around December
19. However, it is uncertain whether the government-proposed
tax bills will become law in a timely fashion without amendment,
due to the present Diet situation in which the opposition has a
majority in the Upper House. Please see the attachment for
more information. (FINATT: Shuya Sakurai/Maureen Grewe)

6. (SBU) Aichi Asked to Give Up 40 Billion Yen of Corporate
Tax Revenue

Aichi prefecture is, not surprisingly, unhappy with the ruling
coalition taxation committee's December 13 proposal to transfer
a portion of its corporate tax revenue to help decrease
regional economic disparity. Aichi has been asked to give up
about 40 billion yen (approx. $354 million). In 2006 Aichi's
corporate tax revenues totaled about 487 billion yen (approx.
$4.3 billion), of which some 20 percent came from Toyota and
its affiliated companies.

Although the amount Aichi is asked to give up was reduced to
half of the 80 billion yen originally suggested by the
committee, Aichi continues to negotiate to minimize the amount
it will give up and/or to get corresponding compensation from
the central government in other areas -- for example, GOJ
support to build a second runway at Nagoya's Centrair
International Airport. Aichi Prefecture Financial Section
staff told us on December 18 that, among other complaints, they
feel the proposal goes against the government's
decentralization policy in that it takes back funds from a
prefecture to redistribute according to central government
priorities.

The Metropolitan Tokyo Government has reached a separate
agreement with the central government on returning some of its
tax revenues. Osaka is reportedly the only other prefecture on
the hit list. (Nagoya: Tamiki Mizuno)

--------------
MEDICAL ISSUES
--------------

7. (U) CPRR Backs Down on Medical Mixed Treatments

The Council for the Promotion of Regulatory Reform (CPRR) will
not include a recommendation to fully lift restrictions on
mixed medical treatments (kongo shinryo) in its interim report,
according to Japanese press reports.

Under the current system, patients bear the entire cost of
medical treatment if a portion of that treatment is not covered
by Japan's national health insurance. The Tokyo District Court

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ruled this policy illegal on November 7.

The CPRR has long supported kongo shinryo but backed down on
calling for the lifting of restrictions in the face of fierce
opposition from the Ministry of Health, Labor and Welfare
(MHLW) and others.

Some media reports claim the final decision was left to PM
Fukuda who demurred citing the issue's complexity. The lack of
Kantei support could be further evidence of the CPRR's waning
influence. (ECON: Sally Behrhorst)

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PLANES AND TRAINS
-----------------

8. (U) International Airfare Liberalization in Japan?

On December 5, Japan's Fair Trade Commission (FTC) formally
requested the transportation ministry, MLIT, to review the
current Aviation Law which exempts price cartels by the
International Air Transport Association (IATA) from antitrust
law, saying there is no rationale to maintain the current
practice.

FTC issued same request in 1999, but MLIT rejected the request
at that time arguing other countries practices are in line with
Japan's on IATA pricing laws. However, this time FTC says
there is no rationale for continuing the practice as active
movements are taking place to abandon IATA cartels in the EU,
U.S., and Australia.

According to Sankei Shinbun, IATA fares are applied to all
first-class tickets and 90 percent of business-class tickets
for flights in and out of Japan.

MLIT's Vice Minister Minehisa as well as the Director-General
of the Civil Aviation Bureau said they will thoroughly study
the matter and will not rush to any conclusion. However,
comments from MLIT officials indicate they believe the current
system is working fine and a decision by Japan to abolish the
current system might invite confusion in Asia's aviation market.
(ECON: Junko Nagahama)

9. (SBU) Kitakyushu Airport to Expand Cargo Services

Galaxy Airlines, a new Tokyo-based cargo airline, announced
December 14 plans to begin regular service (six roundtrips
weekly) between Kitakyushu and Kansai International Airport
(KIX) starting December 21. The decision was based on the
success of the firm's Kitakyushu-Haneda operations, which began
in October 2006. The airline delivered 4,800 tons of cargo
over the past year, most home delivery services and mail-order
sales. Galaxy expects similar demand for the Kitakyushu-KIX
services.

Kitakyushu Airport began operations in March 2006 and its
future course is unclear until the long-standing debate over
whether to build a new airport for Fukuoka is settled. The
president of Kitakyushu Air Terminal told post that, for
Kitakyushu Airport to achieve long-term success, it must 1)
expand its cargo services by taking advantage of the airport's
24-hour operations, and 2) cultivate niche markets untapped by
Fukuoka Airport. In an effort to promote Kitakyushu's cargo
business, Fukuoka Governor Wataru Aso recently told the
prefectural assembly he welcomed the August 2007 Japan-Korea
Aviation Agreement and would work to cultivate the Kitakyushu-
Korea cargo market. (Fukuoka: Yuko Nagatomo/James Crow)

10. (U) Japan Central Rail Touts Eco-Friendly Trains

With Lord Nicholas Stern as a keynote speaker, Japan Central
Railway--together with the Institute for Transportation Policy
Studies--held a day-long symposium December 14 on climate
change and the transport strategy. The symposium looked at
what actions Japan can take and the benefits of rail over other
forms of transportation, particularly air, in terms of lowering
greenhouse gases (GHG).

Lord Stern, currently professor at the London School of
Economics, stressed the importance of cost effectiveness in
reducing GHG. To date many policies chosen have been high cost,

TOKYO 00005641 004 OF 007


but without correspondingly high effectiveness. Policies such
as maintaining correct tire inflation and eco-driving can have
strong, positive impacts. Other key points made at the
conference include encouraging policy makers in the EU, US,
China, and India as well as in Japan to look at rail as a means
of moving people and goods with lower per-mile emissions,
particularly if nuclear power is used to generate the
electricity to run the trains.

A number of the speakers participated in the next day's
inaugural meeting of a Japanese committee to study
transportation and the global environment. The group will
report its findings in about a year. (ECON: Robert
Cekuta/Keiko Kandachi)

----------------------------------------
INVESTMENT ISSUES AND CORPORATE CONCERNS
----------------------------------------

11. (U) Lawyers More Cautious than Execs on Invoking Defensive
Measures

According to a Nikkei survey, lawyers and company executives
have differing views of the necessary procedures to invoke
defensive measures against hostile takeover bids. 35.3 percent
of responding lawyers said a shareholders' resolution is
necessary to activate the measures, while only 11 percent of
executives agreed. An August Supreme Court decision in the
Bull-Dog Sauce case that confirmed the legality of that
company's poison pill defensive measure - in large part because
the company had won shareholder approval - seems to have
influenced the thinking of the lawyers. 62.8 percent of
corporate respondents, meanwhile, said the decision could be
made by a third-party committee or board of directors.

Similarly, 39.3 percent of lawyers said it is necessary to give
financial compensation to the acquirer when invoking defensive
measures, while only 12.8 percent of company officials thought
likewise. (ECON: Satoshi Hattori)

12. (SBU) Citigroup Completes First Cross-border "Triangular"
Stock Deal

Nikko-Cordial Corporation shareholders at a December 19
extraordinary general meeting approved Citigroup's plans to
acquire the remaining 23 percent of the troubled brokerage in a
cross border stock deal. This will be the first use of the
triangular transaction provisions of Japan's new Company Law,
which took effect May 1. The deal is technically not a
triangular "merger" since Nikko Cordial will continue to exist
as a separate 100 percent-owned subsidiary of the U.S.
financial giant.

Nikko's remaining 31,000 shareholders will receive Citigroup
shares in place of their current Nikko-Cordial stock.
NikkoCitigroup equity analyst Tsutomu Fujita recently told the
Embassy Citigroup could have used cash to complete the
transaction, as it did in acquiring its initial 68 percent
share of the company in a February tender offer. However,
since Citigroup relisted its shares on the Tokyo Stock Exchange
in June 2007, it wanted to use this deal, in part, to expand
its Japanese shareholder base. (ECON: David DiGiovanna)

13. (U) BOJ "Tankan" Survey: Deterioration in Large Firms'
Business Sentiment

The Bank of Japan's quarterly "tankan" survey of business
sentiment, a closely watched business cycle indicator and a
principal input in the central bank's monetary policy
deliberations, reported a notable deterioration in business
sentiment among large firms, largely reflecting concerns about
high crude oil prices and volatile financial markets. The
survey's "headline" business sentiment diffusion index (DI) for
large manufacturers was well below market expectations. The
survey revealed mixed sentiment among small and medium-sized
firms. The survey also reported an upward revision of capital
spending plans for all sizes of firms, and a slight tightening
of labor market conditions. The BOJ Policy Board will hold its
first post-"tankan" meeting on December 19/20. Many market
observers are expecting the BOJ to maintain the present
monetary policy stance for the time being. See attached paper
for details. (FINATT: Shuya Sakurai)

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14. (U) Eco Products Trade Show Hit Record High Number of
Visitors

Due to emerging consumer interest in choosing environmental-
friendly commodities, the "Eco Products 2007" trade show in
Tokyo saw the largest number of visitors (164,903 persons)
since the annual event began in 1999. According to the Nihon
Keizai Shimbun newspaper (Nikkei), a co-organizer of the show
along with the Japan Environmental Management Association for
Industry (JEMAI), about half the visitors were consumers and
the rest came for business purposes. On December 15, the final
day of the three-day occurrence, PM Fukuda attended the show.

Among the 632 exhibitors, Japanese automobile manufacturers
attracted particular attention. Honda showcased a concept fuel
cell car, which the company plans to lease to a limited number
of clients beginning late 2008. Nissan displayed an array of
technologies to help reach its goal of reducing CO2 emissions
of its fleet by approximately 70 percent from its 2000 level by
2050. The Narita International Airport publicized its "eco-
airport" initiatives, such as reusing restaurant-emitting water
for toilets in terminals, and composting garbage for flower
gardens.

At a side event held by the Ministry of the Environment, Dr.
Mitsumasa Okada, professor of green process engineering at
Hiroshima University, stressed that Japan should introduce
stricter environmental regulations in response to the rising
public ecological awareness. (ECON: Keiko Kandachi)

------
ENERGY
------

15. (U) No Oil Refinery Project in Libya

On December 14, Nikkei reported five Japanese companies will
build an oil refinery in Libya at a cost of nearly 500 billion
yen. However, at a press conference later that morning,
Economy, Trade and Industry Minister Amari denied the report.
"The deal did not come through because Libya does not allow
Japanese companies to be involved in upstream development
rights. Japanese companies were only asked to invest in a
refinery, which was not very profitable," he said.

Koji Yamaguchi of IPEX Corporation, one of Japan's leading oil
developers and reported investor in the Libyan refinery project,
confirmed Minister Amari's statement. The project is currently
on hold and there is no prospect of restarting the negotiations,
Yamaguchi stated. He said he was surprised by the news report,
as were the other four companies cited in the article. In fact,
the project was only in its infancy and had not even undergone
a feasibility study, he added. Company representatives
wondered where Nikkei had gotten its information, particularly
with regards to the reported 500 billion yen price tag. "The
deal has been standing still since February or March, and why
this news report appears now on the front page of Nikkei is a
mystery," Yamaguchi marveled. (ECON: Eriko Marks)

16. (U) Iraq to Purchase Electrical Transformers from Toyoda
Tsusho

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Japanese trading house Toyoda Tsusho Corporation announced on
December 6 it has received an order for 30 electrical
transformers and peripheral devices from Iraq's Electricity
Ministry. The contract is valued at approximately 4.4 billion
yen ($ 38.9 million). The project will replace old,
deteriorated transformers with new ones in order to ensure a
stable supply of electricity in and around Baghdad.

The project also includes training for Iraqi engineers who will
maintain the transformers. According to Mr. Yusuke Chino of
Toyoda Tsusho's public relations office, the training will be
done in Japan, as the security situation in Iraq will not allow
company personnel to travel to Baghdad. (ECON: Eriko Marks)

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REFORMING REGULATIONS
---------------------

17. (SBU) TSE's Saito Calls for Better Corporate Governance,

TOKYO 00005641 006 OF 007


Oversight

Tokyo Stock Exchange (TSE) President Atsushi Saito in a
December 13 speech to the Foreign Correspondents Club of Japan
said Japan had to address serious problems in its corporate
governance if Tokyo is to become a leading global financial
center. Saito, the former head of the Industrial
Reconstruction Corporation of Japan and, before that, a senior
executive with Nomura Securities, has long been a voice for
liberalization of Japan's financial markets and a critic of the
closed nature of Japan's business elites.

In his FCCJ remarks, Saito called on government agencies such
as the FSA to do more to police abuses by Japanese corporate
boards that put shareholders interests below those of other
"stakeholders." He was especially critical of the use of
private placement of shares to third parties and cross-
shareholding by Japanese firms as defenses against unwanted
takeover bids.

Unfortunately, Saito was pessimistic about the ability of the
TSE, as a quasi-private corporation, to effectively address the

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problem. Unless there is criminal activity, he said, "the most
(the TSE) can do is issue a warning." This contrasts with the
views of other observers, such as Pension Fund Association
Executive Director Tomomi Yano, who told us recently he
believes the best way to force changes in Japan's corporate
governance include requiring more independent directors on
Japanese corporate boards through stronger TSE rules.
Although, international outlets such as The Wall Street Journal
and the Financial Times covered Saito's remarks, there was no
coverage in the leading Japanese dailies. (ECON: David
DiGiovanna)

18. (SBU) Insurance Advocacy Pays Off for U.S. Companies

Over the past several months, U.S. insurers have struck deals
to market products through Japan's extensive postal network,
taking advantage of Japan Post's privatization. They are also
poised to capitalize on deregulation measures, set to go into
effect December 22, which will allow banks to sell a full range
of insurance products. One U.S. industry official estimated
liberalization of bank sales alone will generate hundreds of
millions of dollars in revenue for U.S. companies. The U.S.
government has been working closely with U.S. industry in a
multi-year push for these opportunities. Please see the
attached cable for details. (ECON: Marc Dillard)

---------------
ECONOMIC IMPACT
---------------

19. Economic Policy Under a Divided Diet

The ruling Liberal Democratic Party's loss in July 2007's Upper
House election resulted in a divided Diet and legislative
gridlock, which has undercut economic reform advocates and
pushed economic policymaking away from the prime minister's
office. The result is a tougher environment for regulatory
reform. Please see the attached cable for details. (ECON:
Marc Dillard)

20. (U) FSA Measures Good Start to Improved Financial Market
Competitiveness

On December 14, Financial Services Minister Watanabe submitted
to the Council on Economic and Fiscal Policy a one-page rough
outline of the Financial Supervision Agency's (FSA) plan for
enhancing the competitiveness of Japan's financial and capital
markets.

The plan consists of measures in four areas: (1) Creation of
energetic and reliable markets; (2) Improvement of systems to
promote various and advanced financial services; (3) Building a
better regulatory environment; and (4) Improvement of the
circumstances surrounding markets (see attachment for the
listing of measures in each area). A more fully fleshed out
report will be released by FSA next week.

The response of foreign financial firms has been generally
positive, particularly for proposals to ease firewall
restrictions on sharing information and staff among affiliated

TOKYO 00005641 007 OF 007


entities.

The outline provides no indication of the timing of
implementation of the recommended measures. A number of the
proposals would require legislation, which makes the timing of
implementation uncertain and opens up the possibilities of
debate between the political parties. Please see the
attachment for more information. (FINATT: Shuya
Sakurai/Maureen Grewe)

21. (U)Hokkaido City Pleased With Economic Impact of Kitty
Hawk Port Call

In early December, the Muroran Chamber of Commerce and Industry
(CCI) released its official report on the economic impact of
the October 26-30 port visit by the American aircraft carrier
USS Kitty Hawk and the destroyer USS Fitzgerald. The Hokkaido
port city estimates it received a $2.9 million (323 million
yen) economic boost from the visit. Sales of food, beverages
and commodity goods generated by 5,800 sailors on the two ships
and by 23,300 visitors during two days of public visitation
accounted for $1.15 million (126 million yen) of the total.
Port-related revenues came to about $1 million (110 million
yen). Benefits realized by Muroran's service sector (bus, taxi,
gasoline stations, etc.) also topped $790,000 (87 million yen).
Furthermore, the Muroran CCI says there were other positive
spill-over effects difficult to calculate at this time.

Muroran officials decided early on that a visit by U.S. Navy
ships was an opportunity to promote local businesses. They
worked closely with ConGen Sapporo and the Navy to help make
businesses more accessible to visiting sailors. During the
visit, Muroran-based media also highlighted the economic boost
experienced during the port call by publishing interviews with
several happy business owners. (Sapporo: Ian Hillman/Yumi Baba)

------
SPORTS
------

22. (U) Dodgers Sign Kuroda to Three-Year Deal

The Los Angeles Dodgers scored the biggest prize of the current
crop of Japanese baseball transplants with the December 15
signing of right-hander Hiroki Kuroda to a three-year, $35.2
million deal. Kuroda, an 11-year veteran of the beloved but
basement-dwelling Hiroshima Carp, is a multi-year All-Star in
Japan with an overall 103-89 record and career 3.69 ERA.
Combined with closer Takashi Saito, Kuroda should provide a
powerful boost to the Dodger pitching staff similar to what the
Matsuzaka-Okajima pairing did for Boston last year. With new
manager Joe Torre at the helm, the Dodgers have to be
considered a strong favorite to take the NL West Division next
year. (ECON: David DiGiovanna)

23. (SBU) THIS WEEK'S CABLES

5621 Takeover Defense Measures
5620 Union Leader on Ozawa, Pensions, Base Strikes
5613 Fukuda and Pensions
5610 Insurance Advocacy Pays Off for U.S. Companies
5609 Japan and Iran
5608 Japan and APEC
5559 Defense Reform
5571 Host Nation Support
5569 OEF Refueling Bill
5568 Japan and Iran
5553 HNS Agreement
5552 Economic Policy and Diet

24. (U) This SENSITIVE BUT UNCLASSIFIED e-newsletter from U.S.
Embassy Tokyo's Economic Section, with contributions from the
consulates, is for internal USG use only. Please do not
forward in whole or in part outside of the government. The
Scope is edited this week by Charlotte Crouch
(CrouchCA@state.gov) and Joy Progar (ProgarJ@state.gov).
Please visit the Tokyo Econ Intranet webpage for back issues of
the Scope. Apologies, this option is only available to State
users. Please contact Joy Progar if you are from a different
agency and are interested in a back issue.
DONOVAN

© Scoop Media

 
 
 
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