Search

 

Cablegate: Investment Working Group Targets Japan's Deteriorating

VZCZCXRO3418
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #0821/01 0850725
ZNR UUUUU ZZH
R 250725Z MAR 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 2857
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAWJA/JUSTICE DEPT WASHDC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC
RUEHFR/AMEMBASSY PARIS 6023
RUEHUL/AMEMBASSY SEOUL 8432
RUEHBJ/AMEMBASSY BEIJING 2389
RUEHOK/AMCONSUL OSAKA KOBE 0511
RUEHFK/AMCONSUL FUKUOKA 6844
RUEHKSO/AMCONSUL SAPPORO 7440
RUEHNAG/AMCONSUL NAGOYA 5318
RUEHNH/AMCONSUL NAHA 9227
RUEHGH/AMCONSUL SHANGHAI 0367
RUEHHK/AMCONSUL HONG KONG 6467
RUEHGV/USMISSION GENEVA 3272

UNCLAS SECTION 01 OF 05 TOKYO 000821

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EAP - AMBASSADOR HASLACH
DEPT ALSO FOR EAP/J AND EEB/OIA
DEPT PASS USTR FOR CUTLER, BEEMAN, KALLMER
NSC FOR TONG
TREASURY DEPT FOR DAS NOVA DALY, AND IA/CARNES
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB
USDOC FOR 4410/ITA/MAC/OJ
GENEVA FOR USTR

E.O. 12985: N/A
TAGS: EINV ECON OECD JA
SUBJECT: INVESTMENT WORKING GROUP TARGETS JAPAN'S DETERIORATING
INVESTMENT CLIMATE

Sensitive but Unclassified - Not for the Internet

1. (SBU) Summary: There is no change in Japan's policy of promoting
foreign direct investment (FDI), according to the Japanese co-chair
of the U.S.-Japan Investment Working Group (IWG), which met March 17
via digital videoconference. The GOJ will continue to showcase
Japan as an investment destination, through seminars and enhanced
outreach programs. The IWG agenda this time included two new items
-- the deteriorating global investment climate and Japan's M&A
regime. Treasury officials briefed the group on the new Foreign
Investment and National Security Act, which reformed the U.S. CFIUS
process. Japan agrees with the U.S. that investment security
reviews should be focused narrowly -- important in light of recent
discussions of a possible law to limit foreign investment in
Japanese airports. METI and MOFA officials stated, except for one
recent case, the GOJ has approved all investment applications in
sensitive sectors in under 30 days. Both sides agreed to continue
the IWG's business outreach efforts and the U.S. put forward a
proposal for a seminar to examine differing U.S. and Japanese
attitudes toward M&A. The IWG will prepare a joint report for
submission to the President and Prime Minister in time for their
expected meeting on the margins of the G-8 summit. End Summary.

2. (U) The U.S.-Japan Bilateral Investment Working Group met via
digital videoconference March 17. State Department East Asia and
Pacific Affairs Bureau Economic Coordinator, Ambassador Patricia
Haslch, chaired the U.S. side from Washington. The GOJ co-chair in
Tokyo was Ministry of Economy, Trade and Industry (METI) Deputy
Director-General for Trade and Economic Cooperation Nobuhiko Sasaki.
Paragraphs 18-19 contain full lists of the participants.

Impact of Deteriorating Global Investment Climate
--------------------------------------------- -----

3. (SBU) Ambassador Haslach acknowledged Japan increased its FDI
stock almost 20 percent in 2007, including through a record number
of inward M&A transactions targeting Japanese firms. She noted the
concerns, however, that some observers have expressed over recent
GOJ proposals to limit foreign investment in newly privatized
airport operators. Japan's challenge at this time of bearish
financial market sentiment worldwide is to retain the confidence of
the investor community, Haslach concluded, and one way to do this
would be for senior Japanese policymakers, including Prime Minister
Fukuda, to reaffirm publicly the government's pro-FDI policies.

4. (SBU) Sasaki stated there was no change in the GOJ's policies to
promote inward foreign investment. The Prime Minister had
reaffirmed the GOJ's target of raising FDI stock to the equivalent
of 5 percent of GDP by 2010 at the January World Economic Forum in
Davos, he noted. In order to accelerate progress toward that
target, the GOJ has also established an Eminent Persons Investment
Council, under the Cabinet Office, whose members includes the
president of American Chamber of Commerce (ACCJ) and the chairman of
the European Business Council, to examine concrete measures the
government can take to increase inward investment. This committee
will report to the Council on Economic and Fiscal Policy (CEFP),
chaired by the Prime Minister, and its deliberations will be
reflected in the annual Basic Economic Policy White Paper, which the
Cabinet will issue in June. The government will continue its
efforts to showcase Japan as an investment destination, through
seminars and enhanced outreach programs, and explain to investors
that Japan welcomes FDI.

Security Related Investment Reviews
-----------------------------------


TOKYO 00000821 002 OF 005


5. (SBU) Treasury's Deputy Assistant Secretary for Investment
Security Nova Daly briefed the working group on the Foreign
Investment and National Security Act (FINSA), which President Bush
signed into law in July 2007. DAS Daly also noted the President
signed an additional executive order in January 2008 strengthening
the CFIUS process and imposing new disciplines by assigning
designated responsibility to specific CFIUS agencies. The U.S. will
issue additional regulations later this spring to clarify further
the process. In the USG's view, security examinations of inward FDI
should be limited to the actual risks posed by a specific
transaction. If a transaction raises national security
sensitivities, the U.S. will try to address the problem through
effective mitigation, such as divestment of sensitive subsidiaries.
DAS Daly agreed to stay in touch with METI as FINSA implementation
proceeds. Although the public comment period on the new rules
closed in December, the USG will again solicit comments when new
implementing regulations are issued in April 2008.

6. (SBU) DAS Daly underscored the CFIUS process is explicitly
designed to avoid excessive restrictions on FDI. Such investment is
vital to the U.S. economy, with foreign owned firms accounting for 6
percent of U.S. GDP, 14 percent of U.S.-based R&D spending, and 19
percent of U.S. exports. Following the controversial Dubai Ports
case, DAS Daly noted, President Bush had issued a statement
reiterating the USG's commitment to welcoming FDI, the first
Presidential statement on investment in 19 years. In 2007, out of
nearly 2000 inward FDI cases, only 147, or about 8 percent, were
reviewed under CFIUS. Historically, the annual ratio of CFIUS cases
to total cross-border M&A transactions was even lower, running 5-6
percent.

7. (SBU) Kawakami briefed the IWG on Japan's system of security
reviews. Japan agrees a minimal level of security-related
regulation helps promote foreign investment. For that reason, he
said, Japan's 1991 Foreign Exchange and Foreign Trade Control Law,
as amended through a 2007 Cabinet Order, covers a narrow set of
sensitive sectors. Foreign investment in those sectors above a
specified level is subject to prior notification and approval. In
the past three years, investors have submitted approximately 700
prior notifications and, except for the pending application by
UK-based Children's Investment Fund to increase its stake in
electric power wholesaler J-Power, the GOJ approved all applications
in less than 30 days.

M&A Related Issues
------------------

8. (SBU) Justice Department Special Counsel for International Trade
Stuart Chemtob noted both Japanese and foreign experts have
expressed concerns that recent Japanese court cases have caused
confusion among investors about the proper use of defensive
measures. More than 400 listed companies have adopted defensive
measures in the past three years. The rise in cross-shareholdings
as a de facto takeover defense is especially worrying because,
unlike formal defense measures, company boards do not need to obtain
shareholder approval for these purchases. Consequently, there is no
effective check on board actions and no way to ensure that the
purchases enhance corporate value. The U.S., Chemtob added, is not
alone in its concerns. Tokyo Stock Exchange President Atsushi Saito
in December 2007 criticized the practice of cross-shareholdings and
non-transparent third-party allotments as a possible conflict of
interest on the part of corporate boards. Chemtob expressed hope
METI or its Corporate Value Study Group (CVSG) would examine the
impact of these developments on corporate value and Japan's climate
for M&A.


TOKYO 00000821 003 OF 005


9. (SBU) METI's Director of the Corporate Systems Division Hiroaki
Niihara explained METI does not have direct authority to control
adoption of defensive measures or cross-shareholding. Nor does the
CVSG have the competence to recommend changes to law, although it
can examine the appropriateness of defensive measures and the impact
on corporate value. With that caveat, Niihara continued, he
personally shares U.S. concerns about the confusion resulting from
recent court rulings. The CVSG's 2005 recommendations on the use of
defensive measures were based on the assumption these measures would
serve only to suspend temporarily progress on an unsolicited
takeover bids to give all parties time to determine whether they are
in the best interests of the company. However, when the Japanese
firm, Bull-Dog Sauce Co. implemented a poison pill defense in July
2007, paying out 2.1 billion yen to the U.S.-based hostile acquirer,
it raised serious concerns about the impact of such actions on
corporate value. Niihara said he hoped the Cabinet Office
investment group would take up these issues.

10. (SBU) Niihara also agreed most cross-shareholdings lack
adequate transparency. However, he attributed the rise in this
behavior by Japanese listed companies to the confusion over proper
use of formal defensive measures. He agreed on the need for greater
transparency for all defensive measures and said METI would work to
that end. He advised the USG to raise these issues in the annual
Regulatory Reform Initiative. Chemtob assured him the USG had done
so in the past and would continue to do so.

11. (SBU) Niihara noted further that, despite the rise in defensive
measures, the total value of foreign acquisitions of Japanese
companies in 2007 was 3.019 trillion yen, up 380 percent over 2006,
and the number of such cases, 308, was an all-time high for inward
M&A in Japan. He also observed only 10 percent of companies listed
in Japan have adopted defensive measures, compared to 40 percent of
U.S. listed companies. It was unlikely, he asserted, this figure
will increase significantly.

Business Outreach
-----------------

12. (SBU) Both sides expressed satisfaction with past business
outreach programs. Ambassador Haslach tabled a proposal for the IWG
to sponsor a seminar to examine differing attitudes toward M&A among
Japanese and U.S. executives. Sasaki agreed METI would discuss the
USG proposal with interested parties and suggested the IWG also
examine new outreach targets, including Tokyo-based offices of U.S.
state governments.

Bilateral Investment Treaties
-----------------------------

13. (SBU) Following up on a formal "information exchange" on
bilateral investment treaties (BITs) by an IWG experts committee in
February 2007 and a subsequent informal exchange of views, METI
Americas Division Director Noriyuki Mita briefed the IWG on changes
to Japan's BIT policy. Previously, Japan had focused on building a
network of Economic Partnership Agreements (EPAs) that covered trade
as well as investment. However, the GOJ has begun to recognize many
of its trading partners were not ready for a full EPA while Japanese
companies were pushing for greater protection of their overseas
investments. Japan, therefore, is increasing the list of countries
with which it is considering negotiating BITs.

14. (SBU) The GOJ has already initiated discussions with
Uzbekistan, where Japanese companies were increasingly making
resource sector investments, and will likely announce opening of
negotiations with Peru soon. The fourth round of negotiations

TOKYO 00000821 004 OF 005


between Japan, China, and the Republic of Korea on a trilateral BIT
took place in early March, but progress remains slow. The Japanese
side expressed interest in hearing about the U.S. experience
negotiating with China and understood that the USG experiences many
of the same challenges Japan faces.

15. (SBU) The State Department's Office of Investment Affairs BIT
Coordinator Michael Tracton briefed the IWG on recent developments
in discussions with China. The U.S. and China agreed to begin
discussions on a possible BIT at the bilateral Strategic Economic
Dialogue meetings in December 2007. Since then, two rounds of
meetings had taken place. While some progress has been made, like
Japan, the U.S. still sought to make progress with China on the
principle of national treatment. The next session of U.S.-China BIT
negotiations is scheduled for April.

16. (SBU) Deputy Assitant USTR for Investment Affairs Josh Kallmer
briefed the group on U.S. exploratory talks with Russia and India.
Both Russia and India have said they want a BIT with the U.S., but
talks have not moved beyond the exploratory phase. Meetings with
both countries took place in February, but there is no date yet for
follow-on meetings. Talks with Brazil, on the other hand, were at a
very preliminary stage. Brazil continues to have both
constitutional and political objections to a number of the
provisions on the U.S. model treaty. Mita noted Japan had initially
considered pursuing a BIT with Brazil, but had ultimately concluded
doing so would be too difficult and had abandoned the effort.

Comment
-------

17. (SBU) The most significant success of the current round of the
IWG was the discussion of Japan's deteriorating investment climate
and M&A issues. The GOJ's strong re-affirmation of its pro-FDI
policies, including the 2010 FDI target, was a positive step. While
METI admitted Japan faces negative market factors and needs to do
more to reassure investors -- and acknowledged recent court rulings
cases have sowed confusion about Japanese M&A rules -- it remains
reluctant to agree to undertake a formal study of the problem or to
take specific countermeasures. Nonetheless, with these issues on
the agenda, we have a solid basis for continued discussion both in
future IWG sessions and through business outreach programs. Pending
issues, including labor mobility, Article 821, visas and cargo
security were covered in an exchange of papers ahead of the formal
session.

Working Group Participants
--------------------------

18. (U) USG Participants:
Ambassador Patricia Haslach, Senior Economic Official, East Asian
and Pacific Affairs Bureau, State, (co-chair)
Nova Daly, Deputy Assistant Secretary for Investment Security,
Treasury
Josh Kallmer, Deputy Assistant U.S. Trade Representative for
Investment, USTR
Robert Cekuta, Economic Minister, U.S. Embassy Tokyo
James Zumwalt, Director, EAP/J, State
Stuart Chemtob, Special Counsel for International Trade, Justice
Michael Tracton, Coordinator, Bilateral Investment Treaties,
EEB/OIA, State
Jessica Webster, Economic Unit Chief, EAP/J
David DiGiovanna, Economic Officer, U.S. Embassy Tokyo
Michael Carr, Senior Policy Analyst, Open Investment Policy Group,
Treasury
Chris Winship, Deputy Director, Office of East Asia

TOKYO 00000821 005 OF 005


Matthew Poggi, Office of East Asia, Treasury
Tapio Thuomas, Office of Economic Policy, Treasury
Eric Kennedy, Office of Japan, Commerce
Eric Holloway, Director for Japan Affairs, USTR
Ted Bryan, Trade Affairs Officer, EAP/J, State
Meeta Yajnik, Financial Economist, EEB/OIA, State

19. (U) GOJ Participants:
Nobuhiko Sasaki, Deputy Director-General, Trade and Economic
Cooperation, METI (co-chair)
Kenji Goto, Commercial Minister, Embassy of Japan
Noriyuki Mita, Director, Americas Division, METI
Hiroaki Niihara, Director, Corporate System Division, METI
Keiichi Kawakami, Director, Trade and Investment Facilitation
Division, METI
Noriyuki Shikata, Director, 2nd North America, MOFA
Satoshi Miura, Economic Counselor, Embassy of Japan
Osafumi Kio, Deputy, Corporate System Division, METI
Shinichi Kihara, Deputy-Director, Americas Division, METI
Kenichi Kobayashi, Trade and Investment Facilitation Division, METI
Yuko Chikazoe, Americas Division, METI
Hiromi Otsuki, Embassy of Japan
Takayuki Kobayashi, Embassy of Japan
Koichiro Nishimatsu, Researcher, 2nd North America, MOFA

20. (U) This cable has been cleared in substance with Working Group
participants.

SCHIEFFER

© Scoop Media

 
 
 
 
 
World Headlines

 

Werewolf: Gordon Campbell On North Korea, Neo-Nazism, And Milo

With a bit of luck the planet won’t be devastated by nuclear war in the next few days. US President Donald Trump will have begun to fixate on some other way to gratify his self-esteem – maybe by invading Venezuela or starting a war with Iran. More>>

Victory Declared: New Stabilisation Funding From NZ As Mosul Is Retaken

New Zealand has congratulated the Iraqi government on the successful liberation of Mosul from ISIS after a long and hard-fought campaign. More>>

Gordon Campbell: On The Current US Moves Against North Korea

If Martians visited early last week, they’d probably be scratching their heads as to why North Korea was being treated as a potential trigger for global conflict... More>>

ALSO:

Gordon Campbell: On The Lessons From Corbyn’s Campaign

Leaving partisan politics aside – and ignoring Jeremy Corbyn’s sensational election campaign for a moment – it has to be said that Britain is now really up shit creek... More>>

ALSO:

Another US Court: Fourth Circuit Rules Muslim Ban Discriminatory

ACLU: Step by step, point by point, the court laid out what has been clear from the start: The president promised to ban Muslims from the United States, and his executive orders are an attempt to do just that. More>>

ALSO:

 
 
 
 
 
 
  • Pacific.Scoop
  • Cafe Pacific
  • PMC