Cablegate: Daily Summary of Japanese Press 02/01/08

DE RUEHKO #0271/01 0320748
P 010748Z FEB 08





E.O. 12958: N/A



(1) MOFA pressures Otaru for U.S. warship's port call? (Hokkaido

(2) Stopgap bill battle ends in draw for ruling, opposition blocs
due to good offices of Lower House speaker and Upper House president

(3) Assessment of Fukuda administration on battle over 30-year-old
provisional tax rate for gasoline: Revenue sources for road projects
need to be reconsidered from a broad perspective (Yomiuri)

(4) Impact of subprime loan fiasco growing, dealing serious blow to
Japanese banks; Global stock plunges compounding situation

(5) LDP, DPJ exploring ways for settlement on appointment of Muto as
BOJ governor (Mainichi)

(6) Exports of farm products up 16 PERCENT last year, reflecting
growing demand in Asia (Nikkei)

(7) Editorial: Education Revitalization Council gone with Mr. Abe


(1) MOFA pressures Otaru for U.S. warship's port call?

February 1, 2008 (07:12)

OTARU-The USS Blue Ridge, a landing command ship of the U.S. Navy,
plans to visit the port of Otaru (in Japan's northernmost main
island of Hokkaido) on a Feb. 7-11 schedule, but the city of Otaru
rejected the U.S. Navy's request for the planned port call because a
commercial ship is also scheduled to be berthed there. Meanwhile,
the Ministry of Foreign Affairs has made a number of pressure-like
inquiries to the municipal government of Otaru City about how the
port's berth is being used. The city's senior officials are now
being bewildered and repulsed.

Otaru City, according to its municipal government officials,
rejected the request (yousei wo kotowatta) on Jan. 28. After that,
there were a total of nearly 10 telephone calls from MOFA up until
Jan. 31. The phone calls were made by an assistant division director
level official of MOFA's North American Affairs Bureau, the
officials said. Moreover, the director of MOFA's Status of U.S.
Forces Agreement Division directly called at the city's municipal
government office. "We can't say anything about specific matters,"
an official of the MOFA division said. "But," this official added,
"that was for the purpose of exchanging views in general."

According to a senior official of the city, however, MOFA asserted:
"The U.S. military informed the city of this port call on January
16, so this matter should be prioritized over the decision that the
city made on January 25 when you learned of the commercial ship's
concurrent schedule." A MOFA official even said, "Your not
coordinating (so that the Blue Ridge can enter port), shows you lack
competence as a port administrator." Another senior official of the
city said, "It's a kind of pressure."

TOKYO 00000271 002 OF 010

Until now, Otaru Mayor Katsumaro Yamada has accepted the visits of
U.S. warships, even while maintaining the city's stance of giving
priority to commercial ships. "They're even trying to chase away
commercial ships in order to let military ships in," Yamada said.
"If that is the case," the mayor added, "this is a military port."

Port authority is a matter prescribed under the Port and Harbor Law,
and local autonomy is another that falls under the jurisdiction of
the Ministry of Internal Affairs and Communications. The city's
authorities therefore wonder why MOFA is meddling in matters that
are outside its jurisdiction.

MOFA, sheltering itself behind the Japan-U.S. Status of Forces
Agreement, is acting if to say U.S. warships can enter whatever
ports they like and whenever they like. The case of Otaru will
likely become a touchstone for a tug of war between MOFA and local
public entities.

(2) Stopgap bill battle ends in draw for ruling, opposition blocs
due to good offices of Lower House speaker and Upper House

SANKEI (Page 5) (Abridged slightly)
February 1, 2008

A head-on clash between the ruling and opposition blocs over a
stopgap bill to maintain the provisional tax rates, including one on
gasoline, was narrowly averted on Jan. 30 following an agreement
between the secretaries general of the LDP and DPJ owning to the
good offices of the chiefs of the two houses of the Diet. The Diet
returned to normal yesterday. Although the two camps each declared
"victory," their agreement can be interpreted in a variety of ways.
There is no denying that they simply put off the highly
controversial issue. Did anyone win in this agreement?

Former LDP Secretary General Hidenao Nakagawa praised the agreement
at a Machimura faction meeting on Jan. 30, saying:

"Fears of a panic and Lower House dissolution in April have
completely vanished. The stage has been set for talks between the
ruling and opposition camps, so they can now freely discuss (the
opposition camp's calls for) using road-related tax revenue for
general purposes and introducing a green tax. "

Had the ruling bloc rammed the stopgap bill through the Lower House,
momentum would have built up for a Diet dissolution, with the
opposition parties boycotting deliberations and possibly submitting
a censure motion in the Upper House. Most faction leaders are now
appreciative of the agreement, sharing a sense of relief. But the
agreement includes ambiguous wording. "I wonder if that agreement is
trustworthy," former Justice Minister Mayumi Moriyama said. Many LDP
members share her view.

First, clause 1 reads, "We shall reach a certain conclusion within
the current fiscal year." Questions remain as to whether this means
to aim at taking a vote in the Upper House. Upper House President
Satsuki Eda categorically said that it meant bringing the matter to
a vote. But DPJ Upper House Caucus Chairman Azuma Koshiishi denied
Eda's interpretation, saying, "'A certain conclusion' does not
equate to taking a vote."

TOKYO 00000271 003 OF 010

In the event the opposition camp protracts Lower House deliberations
on the strength of "thorough deliberations," as is specified in the
agreement, the gasoline battle might reignite in late February.

Further, if the Diet becomes bogged down over other issues, such as
pension-record mismanagement, the opposition bloc might throw the
agreement into the wastebasket, saying the situation has changed.


The biggest concern is to what extent the phrase "revisions by the
legislative branch" applies to the matter. Given the specification
of the "tax law," the matter would become out of control if the
discussion expands to cover the overall tax system.

The situation will become even more complicated if the DPJ seeks
talks with the ruling bloc for the next year and beyond after giving
a nod to extending the provisional gasoline tax rate by only one
year instead of 10 years.

Although such an option is utterly unacceptable for the LDP
lawmakers with vested interests in roads, it might result in
internal strife, with junior and mid-level members finding it

There is also a possibility that a grand coalition plan will
reemerge as a result of talks between Prime Minister Yasuo Fukuda
and DPJ President Ichiro Ozawa, eventually escalating into political

Declaration of victory

DPJ Deputy President Naoto Kan held a press conference yesterday, in
which he declared victory, saying: "We successfully persuaded (the
ruling camp) to withdraw the bill that would have left a serious
stain on the history of the Diet."

But the DPJ's festive mood might be short-lived. The ruling bloc is
playing up the aspect that an agreement was reached to bring the
revenue-related bills to a vote in the Upper House by the end of
March when the current tax rates expire. The DPJ's refusal to take a
vote in the Upper House is certain to prompt the ruling bloc to
launch a diatribe against the largest opposition party for breaking
the promise and slighting the parliament.

New Komeito Diet Affairs Committee Chairman Yoshio Urushibara at a
Lower House members' meeting yesterday threatened the largest
opposition party, saying: "If the DPJ whines at the end of this
fiscal year, we will take the matter to the Lower House speaker and
the Upper House president." The fact that Upper House President
Satsuki Eda, who is from the DPJ, used his good offices weights
heavy on the major opposition party. A DPJ failure to abide by the
agreement would be certain to draw sharp public criticism.

As such, the DPJ intends to win public support by calling not only
for lowering gasoline prices but also criticizing the wasteful
spending of road-related tax revenues.

March showdown

The DPJ has yet to come up with any clear alternate resources for
the abolition of the provisional gasoline tax rate, which would cost

TOKYO 00000271 004 OF 010

1.7 trillion yen in revenues for the central government and 900
billion yen for local governments. Local governments are deeply
opposed to abolishing the provisional rate, which would force them
to revise their budgets. Pressure from those regions might not only
cause a schism in the DPJ but also result in a fissure in the
coalition of opposition parties, including the People's New Party.

Moreover, the DPJ, which has aimed at taking the reins of government
through a "March showdown," would be forced to choose between losing
public support as a result of breaking the agreement at the end of
March and abandoning its "March showdown" slogan.

(3) Assessment of Fukuda administration on battle over 30-year-old
provisional tax rate for gasoline: Revenue sources for road projects
need to be reconsidered from a broad perspective

YOMIURI (Page 4) (Full)
February 1, 2008

"In terms of saving resources, curbing consumption, and improving
financial resources for road construction, the government will raise
the gasoline tax from the current 24,300 yen per kiloliter to 29,200
yen as a provisional measure." During a Lower House Budget Committee
session on Feb. 27, 1974, then Finance Minister Takeo Fukuda, father
of Prime Minister Fukuda, made this explanation about why the
government proposed revising the Special Taxation Measures Law, the
revision including setting a provisional tax rate for gasoline. The
person who sat in the chair's seat was Shintaro Abe, father of
former Prime Minister Shinzo Abe.

At the time of the vote on the revision bill on March 22 (that
year), then first-term lawmaker Junichiro Koizumi took the floor and
expressed his support for revising that law this way: "Given the
current oil situation, I think hiking the gasoline tax is an
appropriate step."

The revision bill was adopted in that Diet session. The provisional
tax rate for gasoline, which began to be applied in 1974, has been
raised three times now, and the deadline for that tax rate has been
extended seven times to date.

Debate in the current session of the Diet regarding revenue sources
for road construction, as well as the provisional gasoline tax rate,
involved a political struggle between the ruling and opposition
parties over whether to lower the gasoline price. However, both
sides later accepted mediation proposed by both the chiefs of the
Diet chambers. A real debate will now start.

Revenues for road construction date back to Japan's period of high
economic growth. In 1954, when the first five-year road construction
program was set in motion, a gasoline tax was established as a
revenue source for the program. Other taxes were also established as
funding sources for road projects one after the other until 1971.

Furthermore, provisional tax rates since 1974 have been added to
taxes that are set aside exclusively for road construction. Those
additional provisional tax rates were applied because of financial
difficulties that began in 1973 in order to cover the 7th road
construction program. But the first oil shock that followed made it
difficult for the government to hike taxes and instead moved it to
establish provisional tax rates. The tax rates have remained the
same over the past three decades. One government official noted:

TOKYO 00000271 005 OF 010

"Instead of modifying the law, using the term 'provisional' was easy
for us to obtain the public's understanding."

Revenues for road construction were regarded as a "sanctuary" for
many years, but Prime Minister Koizumi initiated a review of them
and drew the public's attention. In December 2005, the government
and the ruling bloc announced a basic principle of formulating a
specific plan on the condition that (revenues for road construction)
be incorporated into general accounts. But meeting with fierce
opposition from lawmakers of the ruling Liberal Democratic Party's
(LDP) who support road construction, Koizumi was unable to come up
with a concrete plan by the time he stepped down in September 2006.

At the end of 2006, Prime Minister Abe adopted a package of specific
measures at a cabinet meeting and incorporated in the package one
item that an extra tax revenue portion exceeding the expenditures
for road projects in every year's budget would be incorporated into
the general account, but this idea was left half-finished. In fiscal
2007, the combined amount of revenues for road projects for the
central and local governments reached 5.6 trillion yen, but of that
amount, only 18.06 billion yen was incorporated into the general

What action will Prime Minister Fukuda take in this context? As far
as his past remarks are concerned, he has shown no sign of attaching
importance to reviewing revenues for road construction. An agreement
reached between the government and the ruling parties at the end of
December basically followed a set of specific measures announced by
the Abe administration.

A bill revising the Special Taxation Measures Law, which the
government has introduced in the current session of the Diet,
stipulates that the current provisional tax rate for gasoline of
48.6 yen per liter (double the tax rate shown in the law) will
remain the same over the next 10 years. The current tax rate for
gasoline was determined in 1993, and the applicable term of that
rate has been extended every five years in line with the five-year
road construction program. The revision bill this time sets the
length of an extension at 10 years, presumably envisioning the
government's plan to work out a 10-year medium-term program for road
construction in fiscal 2008.

Heated discussions are likely between the government and the ruling
and opposition parties in the weeks ahead as to whether to maintain
the provisional tax rate, whether it is appropriate to extend the
term for 10 years, whether to incorporate revenues for road
construction into general accounts, and what will be road
construction projects.

At a meeting yesterday of the Upper House Budget Committee, Prime
Minister Fukuda said: "If we fail to secure revenues for road
construction to some extent, plans for road construction in local
areas may be discarded. The central government needs to demonstrate
its determination to construct roads, or (road construction) will
dwindle away." The ruling and opposition blocs are both required to
have thorough discussion of the system of revenue for road

(4) Impact of subprime loan fiasco growing, dealing serious blow to
Japanese banks; Global stock plunges compounding situation

YOMIURI (Page 11) (Almost full)

TOKYO 00000271 006 OF 010

February 1, 2008

Six leading banks reported in their statements of accounts for the
April-December period in 2007 subprime loan-related losses totaling
530 billion yen. In particular, the Mizuho Financial Group reported
approximately 345 billion yen in losses. The total amount will reach
approximately 590 billion yen, if losses incurred by Shinsei Bank
and Aozora Bank are included. Though it has been believed that
Japanese banks have suffered relatively small losses compared with
U.S. and European banks, the revelation indicates that the damage of
the subprime loan crisis is larger than expected.

Mizuho Financial Group sustains losses worth 345 billion yen

Mizuho Financial Group Managing Director Satoru Nishihori during a
briefing to investors held yesterday evening said, "The outcome is
very regrettable. I want to complete the disposal of losses stemming
from the subprime loan issue before the end of this fiscal year."
The bank has made a major mistake in its calculation that instead of
making a change for the better, as it projected, the stock market
has lost ground since November last year, when it released an
interim settlement of accounts through September. Its losses have
snowballed while it has remained unable to sell shares.

It is hardly possible to hope for a rise in the value of subprime
loan-related financial products. Mizuho Securities has sustained
especially large losses -- nearly 180 billion yen, as it holds a
large amount of subprime loan-related securities. It will likely
incur about 50 billion yen more losses in the January-March quarter
in 2008. Accordingly, the Mizuho Financial Group now finds it
imperative to revise down its projection for performance in the term
ending in March 2008 (from April 2007 through March 2008).

Aozora Bank revealed its plan to revise downward consolidated
after-tax profits from the 62.6 billion yen as originally estimated
to 26.5 billion yen.

Monoline insurance companies

U.S. banks held a great deal of subprime loan-related securitized
products at structured investment vehicles (SIV), special asset
management companies under their wing. Japanese companies sustained
losses due to the worsened business conditions of SIV, in which they
have invested.

Mitsubishi-UFJ Financial Group reported about 55 billion yen in
losses, of which 46 billion yen is related to SIV. Investment worth
39 billion yen, which has not yet been reported as losses, could be
completely lost. Furthermore, the increased bad subprime loans
worsened the fiscal standing of monoline insurers. As a result,
their credit ratings have been degraded. Mizuho Securities is
suffering from manifold impacts of the loan fiasco, including
loan-loss reserves worth approximately 49 billion yen in trading
with monoline insurers.

Subprime loan crisis also takes toll on investment trust funds

That is not the only aftermath of the subprime loan calamity. Stock
prices have declined further due to turmoil on the global financial
market since August 2007. Approximately 1.3 trillion yen in latent
profits on stocks held by the six financial groups disappeared only
over three months from the end of September through the end of

TOKYO 00000271 007 OF 010

December 2007.

Stock trading has been sluggish. Sales of investment trusts, a major
pillar of commissions, have remained slow. Sales of investment
trusts by the Mitsubishi-UFJ Financial Group in the October-December
quarter dropped about 30 PERCENT . In the end, Mitsubishi-UFJ,
Resona Holdings and Sumitomo Trust and Banking reported lower net
operating profits, which show profits on the main line of business,
than the preceding year. Speculative money has flown into the bond
market, which is considered to be highly secure, giving rise to bond
appreciation, though their interest rates have dropped. This is the
only positive side of the loan fiasco. Sumitomo-Mitsui Financial
Group racked up profits exceeding the same term the year before by
110 billion yen in trading U.S. bonds.

Leading banks have gained net operating profits four times larger
than the losses they have incurred from the subprime loan fiasco.
The amount of losses they have sustained are small in comparison
with those incurred by European and U.S. banks, including Citigroup
of the U.S., whose losses topped 2 trillion yen. Even so, concern
about a possible expansion of losses is still simmering. The
situation is steadily taking on a more serious aspect.

(5) LDP, DPJ exploring ways for settlement on appointment of Muto as
BOJ governor

MAINICHI (Page 5) (Abridged)
February 1, 2008

Final coordination is now likely to be carried out to promote Bank
of Japan (BOJ) Vice Governor Toshiro Muto to the BOJ governorship.
This development reflects a desire by both the Liberal Democratic
Party and the Democratic Party of Japan to avoid confusion in the
Diet after they reached a compromise agreement on the stopgap bills
to extend the provisional road-related tax rates. Some are exploring
ways to bring about a settlement at party head talks.

LDP Secretary General Bunmei Ibuki said in a general meeting of the
Ibuki faction yesterday: "An end has been put (to the row over the
stopgap legislation) very smoothly. Since Diet approval is needed
for appointing a new BOJ governor, we decided on this direction,
based on a comprehensive judgment."

The incumbent BOJ governor's term of office expires on March 19.
Chief Cabinet Secretary Nobutaka Machimura has indicated his
willingness to present the name of a candidate to the Diet by
mid-February. A senior DPJ member remarked: "If the stopgap bills
had cleared the House of Representatives, our party might have
rejected all proposals made by the LDP, including the appointment of
a new BOJ governor."

In an attempt to take advantage of the cooperative mood between the
ruling and opposition parties, some LDP members have begun to
suggest reflecting the DPJ's opinion in selecting a next vice
governor in exchange for Muto's promotion.

In a press conference yesterday, DPJ Deputy President Naoto Kan
emphasized that his party will thoroughly discuss who should be
picked as new BOJ governor, saying: "The role played by the BOJ is
very heavy."

Even so, the DPJ must avoid giving an impression that the party,

TOKYO 00000271 008 OF 010

abandoning its own judgment, agreed on the government's plan.
Although it is necessary to take due procedures to reach an
agreement with the government and the ruling parties, the main
opposition party has yet to prepare any.

DPJ Secretary General Yukio Hatoyama said: "It is desirable that the
Prime Minister's Office's intention will be conveyed to President
Ichiro Ozawa in some form, but I think it would be better not to
hold party head talks, because that may lead some to speculate."

(6) Exports of farm products up 16 PERCENT last year, reflecting
growing demand in Asia

NIKKEI (Page 5) (Full)
February 1 2008

The Ministry of Agriculture, Forestry and Fisheries announced
yesterday that the value of Japan's exports of agricultural,
forestry and fisheries products increased 16 PERCENT to 433.8
billion yen in 2007. The increase is attributed to expanding demand
by wealthy persons in Asia, given remarkable economic growth in the
region, as well as to the recent popularity of Japanese food. Japan
saw exports of such products shoot up by double digits for the third
consecutive year. Improvement in domestic agricultural productivity
is the key to bolstering its price competitiveness in order to
augment exports.

By country, Hong Kong ranked first with an 18 PERCENT share of the
total, overtaking the U.S. In Hong Kong, Japanese food is becoming
popular among the wealthy class, as seen from its resumption last
April of Japanese beef imports, which had been banned following the
discovery of BSE in Japan,.

The total share of exports to Hong Kong, South Korea, China, Taiwan,
Thailand, and Singapore topped 60 PERCENT . This figure shows that
exports to Asia are becoming brisk, reflecting its sharp economic

Classified by product, fruits were in high demand, with export
values of apples and pears rising 40.2 PERCENT to 7.98 billion yen
and 74.5 PERCENT to 920 million yen, respectively.

Rice exports surged 23.6 PERCENT to 527 million yen. After a ban on
rice exports to China was lifted for the first time in four years,
Japan shipped 24 tons of rice to China on a trial basis. Its price
was set about 20 times higher than that of domestic rice, but the
Japanese rice was popular as a gift item and sold out only in one
month or so, according to the National Federation of Agricultural
Cooperative Associations. Beef exports to the U.S. and chicken
exports to Vietnam tripled over the previous year.

By sector, exports of farm products jumped 14.1 PERCENT to 222.1
billion yen, exports of marine products surged 18.2 PERCENT to
201.3 billion yen, and those of forestry products were up 15.6
PERCENT to 10.4 billion yen.

The government aims to increase total exports to one trillion yen by
2013. A MAFF official said: "Exports are steadily expanding." In
great demand, however, are high-grade goods intended for rich
consumers. Marubeni Economic Research Council Head Akio Shibata
commented: "It is necessary for Japan to strengthen its price
competitiveness in order to make Japanese agricultural products

TOKYO 00000271 009 OF 010

popular overseas."

The total value of imported agriculture, forestry and fisheries
products in 2006 was approximately 8 trillion yen, showing an excess
of imports over exports. Now that domestic demand is shrinking as
the nation ages and the population declines, it is necessary for
Japan to enhance productivity by introducing a large-scale farming
system and to promote agricultural management while focusing also on
overseas markets.

(7) Editorial: Education Revitalization Council gone with Mr. Abe

ASAHI (Page 3) (Full)
February 1, 2008

The government's Education Revitalization Council yesterday
submitted its final report to Prime Minister Yasuo Fukuda. The final
report calls for swift implementation of the proposals the council
presented three times in the past.

However since Shinzo Abe, who created the panel, has left the prime
minister's post, it is uncertain how many proposals will be come to

The government's panel was established in the fall of 2006 under the
prodding of Abe, who placed top priority on educational reform at
the time. The panel is headed by Nobel Prize winner Ryoji Noyori.
Its members are experts from various circles.

The purpose of the council was to reform the basics of education in
order to build an education system suitable for Japan in the 21st
century. Seeing the lineup of panel members, people might have
expected them to hold active discussions and to present robust

But there was a sense that the council was too close to the Abe
government. It was symbolic that the panel quoted Abe's catchphrase
"A Beautiful Country, Japan" in its first report.

At the strong request of the Prime Minister's Official Residence,
the first report incorporated such proposals as creating a system of
renewing teaching licenses and allowing the Education Ministry to
give directions to boards of education. These proposals led to
reform of three education-related laws.

We repeatedly pointed out in our editorials problematic points in
the reform of the three laws, notably whether the reform would be
able to resolve such issues as deteriorating academic ability and
bullying in school and whether teachers would be daunted by strong
control by the Education Ministry and would dampen their efforts.
There is no evidence that the panel discussed these points.

The idea of including moral education in the school curriculum,
about which Abe was enthusiastic, was included in the final report.
However, the idea will likely go nowhere, because both the Education
Ministry and the Central Education Council are reluctant.

If a panel comes under the strong influence of a government, the
panel's fate will probably follow that of the government. Soon after
the inauguration of the Fukuda government, the Education Ministry
and the Prime Minister's Official Residence began distancing
themselves from the council. Panel members expressed unhappiness

TOKYO 00000271 010 OF 010

with the move.

If proposals were appropriate, they would have gotten public support
without Abe's backup. It probably means that the proposals were not

However, it goes without saying that the current education system
needs reform. It is also necessary for various circles to come up
with new ideas.

In that case, it is important for them to build up arguments,
ignoring political and administrative intentions. It is meaningless
to support what a government wants to do.

The panel should not conduct argument based on feelings and
guesswork. It is vital for it to verify past reforms and listen to
opinions of experts.

There are many things that can be learned from the end of the
Education Revitalization Council.


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