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Cablegate: Japanese Morning Press Highlights 03/14/08

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UNCLAS SECTION 01 OF 11 TOKYO 000683

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DEPT FOR E, P, EB, EAP/J, EAP/P, EAP/PD, PA;
WHITE HOUSE/NSC/NEC; JUSTICE FOR STU CHEMTOB IN ANTI-TRUST DIVISION;
TREASURY/OASIA/IMI/JAPAN; DEPT PASS USTR/PUBLIC AFFAIRS OFFICE;
SECDEF FOR JCS-J-5/JAPAN,
DASD/ISA/EAPR/JAPAN; DEPT PASS ELECTRONICALLY TO USDA
FAS/ITP FOR SCHROETER; PACOM HONOLULU FOR PUBLIC DIPLOMACY ADVISOR;
CINCPAC FLT/PA/ COMNAVFORJAPAN/PA.

E.O. 12958: N/A
TAGS: OIIP KMDR KPAO PGOV PINR ECON ELAB JA

SUBJECT: JAPANESE MORNING PRESS HIGHLIGHTS 03/14/08

Index:

1) Top headlines
2) Editorials
3) Prime Minister's daily schedule (Nikkei)

4) Japan unshaken by "sell America" trend in the market that has the
yen now at 100 to the dollar (Asahi)

Defense and security affairs:
5) Three opposition parties agree on revising U.S.-Japan SOFA,
including handing over all personnel suspected of crime prior to
indictment (Tokyo Shimbun)
6) Democratic Party of Japan comes out against the 3-year extension
of the host-nation support agreement (Asahi)
7) 20 PERCENT of Japanese employees at U.S. bases on HNS payroll in
entertainment and food services, such as bartenders and golf course
staff (Mainichi)
8) Defense ministry vice minister and other officials to be punished
next week for the information leaks and incompetent handling of the
Aegis accident (Tokyo Shimbun)
9) Prime Minister Fukuda: Defense Minister Ishiba will be around a
long time (Nikkei)
10) Defense Ministry bureau chief links "regional contingency" to a
Taiwan emergency in an LDP committee hearing (Mainichi)
11) Defense Ministry withdraws proposed reduction in press
conferences (Asahi)

Diet furor:
12) Government lacks effective strategy to deal with the crisis over
the Bank of Japan governor's post (Mainichi)
13) Ambassador Schieffer seeks an early resolution of the Bank of
Japan situation (Mainichi)
14) Names of BOJ candidates to be resubmitted on March 17 (Asahi)
15) Joint proposal idea fades on resolving the road revenue issue in
the Diet (Asahi)
16) Fukuda hopes for revision of the tax bills in order to pass them
on time (Asahi)

17) 48.9 billion yen facility in Mexico financed by Japan's ODA
funds burned down, but the incident went unreported (Asahi)

Articles:

1) TOP HEADLINES

Asahi, Mainichi, Nikkei, Sankei & Tokyo Shimbun:
Dollar temporarily falls below 100 yen for first time in 12 years
and four months

Yomiuri:
Government eyes alternative candidate for BOJ governorship

Akahata:
Majority of residents in Tosashimizu City sign to protect Article 9

2) EDITORIALS

Asahi:
(1) China should conduct thorough investigation in tainted dumplings
prior to planned Japan visit by President Hu in May
(2) Fight rear-guard action in latter half of spring wage offensive

TOKYO 00000683 002 OF 011

Mainichi:
(1) Remain calm over sharp rise of yen to 99-yen level
(2) Defense Ministry should not reduce number of regular press
conferences by executives

Yomiuri:
(1) Strong yen could hurt Japanese economy
(2) Replies in spring wage offensive bring no hopes for boosting
consumption

Nikkei:
(1) Ruling, opposition camps urged to break impasse in Diet
(2) Pursue "Ishihara bank" executives' responsibility for fiasco

Sankei:
(1) Scrutinize China's strategy over proposal for U.S., China to
control Pacific
(2) Leading companies must give consideration to fair division of
profits in spring wage battle

Tokyo Shimbun:
(1) Strong yen and rising oil prices might cause "policy recession"
(2) In Upper House debate on budget bill, prime minister's
determination nowhere to be seen

Akahata:
(1) Responsibility for Shinginko Tokyo's concealing of defaults
heavy

3) Prime Minister's Official Residence (Kantei)

Prime Minister's schedule, March 13

NIKKEI (Page 2) (Full)
March 14, 2008

08:20
Met with Deputy Chief Cabinet Secretary Iwaki at the Kantei.

09:00
Upper House Budget Committee meeting.

12:00
Lower House plenary session.

13:00
Upper House Budget Committee meeting.

17:15
Met with Otsuji, chairman of the LDP caucus in the Upper House. Then
the Intellectual Property Strategy Headquarter meeting. Then met
with Chief Cabinet Secretary Machimura.

18:12
Met with Deputy Chief Cabinet Secretary Futahashi. Then attended a
meeting of the Council for Promoting Consumer Policy.

19:39
Arrived at the official residence.

4) "America selling": Yen breaks 100 to the dollar for first time in

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12 years; FRB unable to deal with weak dollar

ASAHI (Page 2) (Excerpts)
March 14, 2008

The yen has tested 100 yen against the dollar for the first time in
12 years. The weak-dollar trend caused by America's contracting
economy and financial instability is increasingly accelerating.
Though some companies that have overcome the current economic
difficulty have taken a bullish stance on the basis of having been
able to withstand such pressure, anxieties are mounting, following
the yen making a big 8-yen gain against the dollar over the past two
weeks. Is there a possibility of the yen reaching the 1995 level of
79 yen to the dollar?

Effective rate at 1985 level: "The present trend cannot be called a
strong-yen trend"; Japan has strengthened power of resistance

Given the strengthening yen, many exporters are increasingly
alarmed, with Toyota Motors President Watanabe noting, "It is a blow
to corporate management. We may have to think about other
approaches, such as cutting prices."

However, corporate operators are not so pessimistic about the
situation, compared with 1995, when the yen appreciated to the
90-yen level against the dollar.

Japan Business Federation (Nippon Keidanren) Chairman Fujio Mitarai
during a press conference held on the afternoon of March 13 showed
confidence in the domestic economy, noting, "It is not that the yen
is rising, but the dollar is falling. Japanese industry has been
schooled by the economic difficulties over the past decade. It is
well-muscled with stronger power of resistance." Senior fellow
Hideki Matsumura at the Japan Research Institute has pointed out,
"Most of Japan's exports were U.S.-bound 10-20 years ago. Now,
export markets for Japanese products have diversified with newly
emerging economies importing more Japanese goods."

In the mid-1990s, when Japan suffered an economic slump following
the collapse of the bubble economy, public works and foreign demand
shored up the Japanese economy. A major importer of Japanese goods
was the U.S., which was continuing massive consumption while
suffering a deficit. However, with its trade deficit with Japan
reaching an enormous level, the U.S. then called on Japan to open
its market and implement structural reforms, bringing about a view
that it would apply high-yen pressure on Japan.

A Finance Ministry official said that compared with the movements
seen in the 1990s, the present trend could not be called a high-yen
trend. The ministry is reluctant to intervene in the market. The
real effective exchange rate, which indicates the value of the yen
with the exchange rates of currencies other than the dollar, remains
on the level of around 1985, when a major strong-yen trend kicked
in, following the Plaza Accord. A weak dollar would be a boost for
industries that are suffering a setback from a rise in prices of
crude oil, iron ore and foods.

Even so, the Japanese economy is still dependent on foreign demand.
Newly emerging economies, new importers of Japanese products, are
also dependent on demand from the U.S. There is a strong possibility
that a worsening U.S. economy and weaker dollar deal could a double
punch to the economies of these countries, having an adverse effect

TOKYO 00000683 004 OF 011


on the Japanese economy.

5) 3 opposition parties concur on pre-indictment turnover from U.S.
military

TOKYO SHIMBUN (Page 2) (Full)
March 14, 2008

In response to an Okinawa junior high school girl rape case and
other incidents, the leading opposition Democratic Party of Japan
(Minshuto) and two other opposition parties, the Social Democratic
Party (Shaminto) and the People's New Party, consulted yesterday on
their joint work of drafting a plan to revise the Japan-U.S. Status
of Forces Agreement (SOFA). The three opposition parties basically
agreed there to require the U.S. military to turn over its personnel
and civilian employees to Japanese investigative authorities in
response to a request from Japanese investigative authorities even
before they are indicted.

Currently, the United States is to give "sympathetic consideration"
to a request from Japanese authorities and turn over its military
personnel suspected of serious crimes including murder. However,
there are strong calls for revising this SOFA provision. The three
parties will meet again next week to work out a joint plan for SOFA
revisions and will work on the government to revise SOFA
provisions.

6) DPJ envisages opposing three-year extension of "sympathy budget"
agreement

ASAHI (Page 4) (Full)
March 14, 2008

The government is planning to extend by three years the Japan-U.S.
Special Measures Agreement, slated to expire at the end of March, on
Japan's host-nation support (sympathy budget) defraying the expense
of stationing U.S. forces in Japan. The Democratic Party of Japan's
foreign and defense affairs department meeting decided yesterday to
study the matter, envisaging its opposition to the extension on the
grounds that the usage of the money is unclear.

In the meeting, the Ministry of Defense produced data on how the
sympathy budget has been used. Some DPJ members criticized the facts
that the jobs on U.S. bases include such occupations as
entomologists, animal handlers, and leisure boat operators, and that
the estimated costs and the contract amounts were the same in some
base facility construction projects.

After the meeting, Yoshio Hachiro, the DPJ's shadow cabinet foreign
minister, said to reporters: "Although the government says that it
will make efforts to reduce costs, (the contents) have been
terrible."

7) Sympathy budget even covers bar and golf course labor cost

MAINICHI (Page 2) (Abridged slightly)
March 14, 2008

The Ministry of Defense (MOD) produced data yesterday on Japan's
host-nation support (sympathy budget) covering the labor costs of
stationing U.S. forces in Japan, showing that of the 25,000 base
workers, over 20 PERCENT have jobs providing entertainment and food

TOKYO 00000683 005 OF 011


services, such as restaurants, bars and golf courses on the U.S.
bases.

According to the MOD data presented to the Democratic Party of
Japan's foreign and defense affairs department meeting yesterday,
the number of base workers was 24,537 as of December 31, 2006. Of
them, 5,568 who were not directly hired by the U.S. military worked
at "miscellaneous organizations," such as commissaries,
entertainment facilities, and welfare facilities on the bases.

The numbers of counter attendants and cooks serving foods were 715
and 456, respectively. Further, there were 93 bartenders, 52 golf
course workers, and 29 bowling alley workers -- jobs that are
leisure oriented.

The employment of leisure-related workers drew fire in the DPJ
meeting, one saying, "It is worse than the (wasteful spending of)
road-related tax revenues." DPJ shadow cabinet foreign minister
Yoshio Hachiro said: "The United States should pay for the
leisure-related labor cost."

The Japan-U.S. Special Measures Agreement, the basis for the
sympathy budget, expires at the end of this month. A plan for
approving a new agreement is now before the Diet. A senior DPJ
Policy Research Committee member said, "We cannot endorse it as is."
The party plans to make a decision after scrutinizing the expenses
in details.

Japan began bearing the labor cost of base workers in fiscal 1978.
The government has appropriated 208.3 billion yen for fiscal 2008,
including 146.3 billion yen for the labor cost.

Entertainment-oriented jobs on U.S. bases
(In millions of yen)
Job Number of workers Average annual salary
Bartender 76 4.31
Bar manager 3 5.48
Bar helper 2 3.89
Chief bartender 12 5.06
Banquet manager 9 4.94
Club manager 25 6.39
Cake decorator 5 3.77
Bowling alley clerk 4 3.98
Bowling alley manager 3 5.81
Bowling ball worker 4 4.61
Bowling alley mechanic 18 4.55
Golf club manager 1 5.88
Golf practice range personnel 4 3.74
Golf course maintenance personnel 47 4.25
Commercial artist 20 5.65
Vending machine personnel 48 4.88
Vending machine repairer 14 4.89
Animal caretaker 1 3.28
Cinema projectionist 9 4.30
Theater director 6 3.52
Tour guide 3 4.20
Leisure boat operator 9 4.79

8) Defense Ministry to take punitive action next week for vice
minister, others

TOKYO SHIMBUN (Page 1) (Abridged)

TOKYO 00000683 006 OF 011


March 14, 2008

The Defense Ministry decided yesterday to take action next week to
punish Administrative Vice Minister Kohei Masuda, Maritime
Self-Defense Force Chief of Staff Eiji Yoshikawa, and other senior
officials over the recent collision of an Aegis destroyer with a
fishing boat, the leakage of classified information about an Aegis
ship, and the outbreak of a fire on the destroyer Shirane. The
action is expected to affect a total of 100 persons centering on
MSDF personnel. The Defense Ministry is considering concurrent
punishment over the three cases. MSDF Chief of Staff Yoshikawa will
be replaced.

Defense Minister Shigeru Ishiba has clarified that he will not
resign until he works out preventive steps and reforms the Defense
Ministry. Ishiba has also said the top leader of an organization is
to take responsibility in principle for what happened within that
organization. In this light, Ishiba will likely be called to take
responsibility on his own for the Aegis accident.

Masuda will be punished for his clumsy responses to the Aegis
accident and his uncertain press remarks. He is expected to be
admonished or cautioned in accordance with internal regulations. The
Defense Ministry is also considering punishing the captain of the
Atago, the Aegis destroyer that collided with a fishing boat, as
well as duty officers at that time and other Atago crewmembers.
However, the Defense Ministry has yet to determine its punishment
for them because their case is related to investigations into the
cause of the accident.

Meanwhile, the MSDF's information leakage was brought to light in
January last year. In this case, the Defense Ministry is expected to
punish more than 50 MSDF personnel, including a lieutenant commander
who was an instructor at an MSDF service school and is suspected of
violating an information security law related to the mutual defense
assistance agreement between Japan and the United States. This
incident was brought up in a meeting of Japanese and U.S. defense
leaders in April last year. The Defense Ministry is taking a serious
view of the fact that the incident seriously impacted Japan-U.S.
relations. MSDF Chief of Staff Yoshikawa and other MSDF staff
officers will likely be called into question over their
responsibility for the incident in addition to the Aegis accident.

9) Prime minister: Defense minister will be around a long time

NIKKEI (Page 2) (Full)
March 14, 2008

Prime Minister Yasuo Fukuda in a meeting of the Upper House Budget
Committee stated: "It is unfortunate that defense ministers have
tended to be replaced after a short time without having gained a
good grasp of the Self-Defense Forces. The challenge is to keep one
on for a long time." His statement was meant to reject the argument
coming from the opposition camp for Defense Minister Ishiba to
resign to take responsibility for the Aegis collision with a fishing
boat. Defense Minister Ishiba, also at the Upper House Budget
Committee, denied that he gave a false reply to the Diet regarding
what he had heard from the captain of the Aegis ship. The Democratic
Party of Japan (DPJ) reacted sharply, with one lawmaker saying,
"There are contradictions in your replies." There was even a scene
in which deliberations were halted for awhile.


TOKYO 00000683 007 OF 011


10) Taiwan crisis a neighboring contingency?

MAINICHI (Page 5) (Full)
March 14, 2008

The ruling Liberal Democratic Party yesterday held a meeting of its
security panel, during which participants discussed how Japan should
respond in the event of a Taiwan crisis or an armed conflict between
China and Taiwan.

In the meeting, LDP lawmakers voiced concern about the threat of
China, based on a U.S. Department of Defense report. "In May,
President Hu Jintao is coming to Japan. We should remain cautious."
So saying, former LDP Vice President Taku Yamasaki checked them.
Yamasaki stressed his view: "This matter needs strategic ambiguity
most. This is not a matter that is left to Japan's independent
judgment alone but is a matter left to a joint judgment of Japan and
the United States."

The Defense Ministry's Defense Policy Bureau Director General
Nobushige Takamizawa dared to rebut: "It's a serious situation for
our country, so the Self-Defense Forces would have to step up its
warning and surveillance to cope with such a situation. This is not
a matter of the Japan-U.S. security alliance, but rather a problem
of Japan's national security." Takamizawa seemed to have intended to
show the Defense Ministry's stance. After the meeting, however,
Yamasaki cautioned Takamizawa. "That could cause misunderstanding,"
Yamasaki told Takamizawa.

11) MOD retracts plan to reduce press conferences

ASAHI (Page 4) (Full)
March 14, 2008

In the wake of his flip flops in explaining the recent Aegis
destroyer collision accident, Defense Minister Shigeru Ishiba had
suggested reducing the frequency of regular press conferences. In
this connection, Administrative Vice-Defense Minister Kohei Masuda
in a press conference yesterday effectively withdrew the reduction
plan, saying: "What really matters is not the number of (press)
conferences."

Masuda also revealed a plan to examine the ministry's responses
after the accident, saying: "There is a need to study the matter
based on the point that the provision of information was
inappropriate." A senior MOD official also commented on the night of
March 12: "We have never said that we would reduce the number of
press conferences."

12) Government straying off course with no strategy for nomination
of BOJ governor

MAINICHI (Page 2) (Excerpts)
March 14, 2008

The government will unprecedentedly submit early next week another
proposal naming its selections for the new Bank of Japan (OJ)
governor and the two deputy governors. The government and the ruling
coalition are still considering a resubmission of its initial plan
to promote Deputy Governor Toshiro Muto to become governor. To avoid
creating a vacancy in the position, there is also the idea of
submitting a stopgap bill to enable the incumbent governor to

TOKYO 00000683 008 OF 011


continue his duties even after his term of office expires. This
idea, however, has a number of problems. The government and the
ruling camp are straying off course, plagued by contradictions in
their response and a lack of strategy.

Speaking before reporters yesterday, Prime Minister Yasuo Fukuda
expressed his concern about the possibility that the post of the
central bank's governor might be left vacant, even though there has
been a downturn in the stock market and rapid appreciation of the
yen.

According to aides to the prime minister, Fukuda remains cautious
about the idea of replacing Muto with another candidate. He
reportedly may devise a new plan.

The proposed stopgap bill is a last-ditch measure to keep Governor
Toshihiko Fukui in office until his successor is appointed. This
idea is being discussed mainly among members of the Liberal
Democratic Party's Diet Affairs Committee. The prime minister
reportedly remains undecided about the idea.

Even so, the ruling camp held a House of Representatives plenary
session yesterday and unofficially appointed Kyoto University
Professor Masaaki Shirakawa for the post of BOJ deputy chief. The
Bank of Japan Law stipulates that a deputy governor shall serve as
acting governor when the governorship is vacant. Some observers
point out that the idea of "acting governor" by revising the said
law may be inconsistent with the provision in the law.

13) U.S. Ambassador expresses concern about delay in selecting BOJ
governor

MAINICHI (Page 2) (Full)
March 14, 2008

U.S. Ambassador to Japan J. Thomas Schieffer met Japanese reporters
at the U.S. Embassy in Tokyo yesterday. Asked about the issue of
selecting a new Bank of Japan (BOJ) governor, he expressed his hope
that a new governor would be appointed at an early date, saying:

"It is important for Japan to let the international community know
who is responsible for its monetary policy. Everybody in the world
is hopeful that this issue will be resolved as soon as possible."

The ambassador also said:

"Japan is the world's second largest economy. The issue over a new
BOJ governor is serious at a time when global financial markets are
going through a difficult phase. Japan should also take part in the
measures to be taken by other central banks in the event of a
financial crisis. I hope that Japan will maintain (international)
confidence."

14) Selection of BOJ governor: Government to resubmit nomination on
the 17th: Replacement of candidate for governor to come into focus

ASAHI (Page 1) (Excerpts)
March 14, 2008

With its proposal to promote Deputy Bank of Japan (BOJ) Governor
Toshiro Muto to governor failing to secure Diet approval, the
government yesterday decided to resubmit a nomination proposal on

TOKYO 00000683 009 OF 011


March 17. Since the opposition camp is determined to reject Muto,
the question of whether Prime Minister Fukuda will resubmit the
proposal to appoint Muto or replace him with another candidate will
take the center stage. In a bid to prevent the post of BOJ governor
from becoming vacant, a plan to incorporate in the BOJ Law a
provision allowing the incumbent governor to stay on until a
successor is designated has been floated in the government and the
ruling parties. The Lower House yesterday approved at a plenary
session the selection of Muto as governor, and Toshitaka Ito, a
professor at Tokyo University graduate school, and Masaaki
Shirakawa, a professor at Kyoto University, as deputy governors. The
appointment of Shirakawa as deputy governor has been decided.
However, while the Lower House approved the appointments of Muto and
Ito, the Upper House voted them down, nullifying the government
proposal.

Following the outcome, Liberal Democratic Party (LDP) Diet Policy
Committee Chairman Tadamori Oshima and DPJ Diet Affairs Committee
Chairman Kenji Yamaoka held talks and shared the perception that the
post of BOJ governor must not become vacant. Yamaoka sought an early
resubmission of a nomination plan by the government. Oshima replied,
"I will have the government endeavor to do so on the 17th."

Chief Cabinet Secretary Machimura told a news conference on the
afternoon of the 13th that the government plans to resubmit a
nomination plan on the 17th, noting that Oshima asked the government
to do so that day. The prime minister also told reporters, "I will
consider the matter, while hearing various views and circumstances
tomorrow and the day after tomorrow. I do not want to see the BOJ
governor's post become vacant." He thus indicated his stance of
reaching a decision on what approach to make, after determining the
movements of various parties.

In the meantime, a plan has been floated in the government and the
ruling parties for amending the BOJ Law to enable the extension of
the tenure of BOJ governor in anticipation of a possible failure to
appoint successors by the 19th, when the tenure of the incumbent
governor expires.

15) Idea fizzles for LDP, DPJ to jointly work out proposal to modify
government's bill on tax revenues for road projects

ASAHI (Page 4) (Full)
March 14, 2008

Junior lawmakers from the ruling Liberal Democratic Party (LDP) and
the major opposition Democratic Party of Japan (DPJ) yesterday held
a panel discussion at the Kensei Kaikan Hall near the Diet to
discuss what to do about tax revenues set aside for road
construction, including the question of whether to extend the
current provisional tax rate for gasoline. Another group of mainstay
and junior lawmakers from those two parties on the same day intended
to come up with a joint proposal to modify the government's bill on
the tax revenues for road projects. But the idea of jointly
hammering out such a proposal was shelved in the wake of the
continued clash between the ruling and opposition camps over the
appointment of a new Bank of Japan (BOJ) governor.

The panel discussion was sponsored by the youth bureaus of the LDP
and the DPJ. In the discussion, LDP lawmakers criticized the DPJ's
plan for lacking fiscal resources to pay for it. Meanwhile, DPJ
lawmakers rebutted that their position was to appeal to the public

TOKYO 00000683 010 OF 011


about a tax cut by scrapping the provisional tax rate for gasoline,
given that people's family budgets are shrinking.

On some subjects, both sides argued on different planes, but they
agreed on measures to eliminate lavish spending for road
construction, for instance, by making the process of selecting road
projects transparent.

Aside from the panel discussion, another group of lawmakers from the
LDP and the DPJ, including Taro Kono of the LDP and Goshi Hosono of
the DPJ, drafted a proposal to modify the government's bill by
incorporating points that could win agreement from the rest of the
members of both parties. Their draft proposal consists of thee
features: (1) The provisional tax rate for gasoline would be
maintained, but the tax based on automobile weight would be
scrapped; (2) the toll system would be maintained for expressways
with large volumes of traffic, but tolls on all other expressways
would be eliminated; and (3) one trillion yen or so would be set
aside to be used for road projects, but the local tax portion would
be incorporated into the general budget so that local municipalities
could use the funds without any restrictions.

Both sides planned to announce the draft together, but according to
an LDP source, just before the announcement, the DPJ executives told
the mainstay and junior lawmakers involved that they could not do
so. As a result, the idea of a joint declaration of the draft
proposal fizzled.

16) Prime Minister Fukuda hopeful of talks on modifying government's
bill

ASAHI (Page 4) (Excerpt)
March 14, 2008

The ruling bloc has now reversed its policy of modifying the
government's proposed legislation that contains the provisional tax
rate for gasoline. The law will expire at the end of the month. The
LDP and its junior coalition partner New Komeito will draft a
proposal to modify the government's bill and present it to the
opposition bloc possibly next week However, the ruling bloc and the
DPJ are still wide apart, with the DPJ calling for scrapping the
provisional tax rate for gasoline and incorporating dedicated tax
revenues for road projects into general budget. In the ruling camp,
calls for bold compromise (to the DPJ) are prevailing, while some
are still strongly insisting on not making broad concessions.
Coordinating views in the government and the ruling camp will be
difficult, indeed.

17) JBIC failed to report to BOA on fire at facility constructed
using ODA

ASAHI (Page 39) (Excerpts)
March 14, 2008

Miki Shikura, Naoki Kagawa

A heavy oil facility for desulfurization in Mexico, which was
constructed with funds financed by the Japan Bank for International
Cooperation (JBIC), caught fire and suspended its operation from
January 2002 through fall of that year. According to an inspection
conducted in 2002 of JBIC by the Board of Audit (BOA), the JBIC
likely did not to report the accident to the BOA. The JBIC also

TOKYO 00000683 011 OF 011


estimated the facility's capacity for desulfurization to be larger
than its actual capacity and reported this estimate to the BOA. The
JBIC explained that it had no intention of covering up the fact.

The facility in question was constructed with yen loans financed
under a Japanese government ODA project. Yen loans, which are funded
with taxes, are given by the JBIC to ODA-recipient countries at low
interest rates and for a long term. Yen loans are subject to BOA
inspections. The BOA is investigating whether there was any problem
about the way JBIC reported on yen loans, with some arguing that the
JBIC's report to the BOA might not have reflected the actual
situation, because the JBIC failed to report the accident.

The facility is intended to prevent emissions of sulfur dioxide, one
factor for air pollution, by reducing sulfur from heavy oil used by
thermal power stations. Mexico's state-owned petroleum company PEMEX
constructed the facility. JBIC lent a total of 48.9 billion yen for
the construction of the facility. The facility was completed in 1997
and went into operation, but in January 2002, it suspended operation
because of a fire that was allegedly caused by an oil leak and was
closed for six months from February that year. The facility was
unable to operate until late October 2002.

Because the facility's actual capacity was reported as some
18,000-28,000 barrels per day on average from 1999 through 2001, the
BOA concluded that the capacity was too low, compared with the
estimated capacity (of 50,000 barrels per day), and that it is
questionable that ODA was useful for that facility. In Feb. 15,
2002, the BOA conducted an on-the-spot inspection in the facility in
Mexico and asked the JBIC to report on how the facility is
operating.

SCHIEFFER

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