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Cablegate: Return to Fukushima: Reform Not Resonating at Japan's

VZCZCXRO5112
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #1113/01 1132252
ZNR UUUUU ZZH
R 222252Z APR 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3678
INFO RUEAWJA/JUSTICE DEPT WASHDC
RUEHNAG/AMCONSUL NAGOYA 5803
RUEHKSO/AMCONSUL SAPPORO 8012
RUEHFK/AMCONSUL FUKUOKA 7416
RUEHOK/AMCONSUL OSAKA KOBE 1090
RUEHNH/AMCONSUL NAHA 9795
RUEHBJ/AMEMBASSY BEIJING 2955
RUEHFR/AMEMBASSY PARIS 6059
RUEHGH/AMCONSUL SHANGHAI 0390
RUEHUL/AMEMBASSY SEOUL 8974
RUEHHK/AMCONSUL HONG KONG 6488
RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 TOKYO 001113

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR BEEMAN
STATE ALSO PASS FEDERAL TRADE COMMISSION - DSHANAHAN
JUSTICE FOR INTERNATIONAL ANTITRUST - CHEMTOB
TREASURY FOR IA - POGGI
COMMERCE FOR 4410/ITA/MAC/OJ

E.O. 12958: N/A
TAGS: ECON EINV EAIR PGOV PREL JA OECD
SUBJECT: Return to Fukushima: Reform Not Resonating at Japan's
Grassroots

Ref: 07 Tokyo 1522

(U) Sensitive but unclassified. Not for internet distribution.

1. (SBU) Summary: Despite shrinking populations and fiscal
shortfalls, local authorities in one northern Japan jurisdiction
remain fixated on developing manufacturing and on maintaining
socio-economic equality. During recent meetings in Fukushima
Prefecture -- to the extent our interlocutors could represent their
counterparts elsewhere in Japan -- USG efforts to promote
growth-oriented regulatory reform seemed to have had little
resonance in the localities. End summary.

--------------------------------------------- -
Industrial Sector Strong but Credit Demand Low
--------------------------------------------- -

2. (SBU) Industry remains the focus of Fukushima's economy,
according to the head of the local Bank of Japan branch. The BOJ
official told visiting econoff Fukushima's FY06 manufactured goods
shipments reached JPY5.8 trillion, 32 percent of the total
manufacturing output of Japan's Tohoku Area (Fukushima, Miyagi,
Yamagata, Iwate, Aomori and Akita Prefectures). Plans by Denso, a
Toyota affiliate producing auto parts, to establish a plant in
Fukushima this year will add to the prefecture's manufacturing
strength, the BOJ official observed. Fukushima also benefited from
some electrical component manufacturers' decisions to shift
production to Japan's north for more efficient shipment to Russia,
China, and Korea. Fukushima's role as an electricity supplier to
Tokyo also boosts the percentage of "manufacturing." The BOJ
official said nuclear plants in Fukushima generate 105.3 billion kWh
of electricity annually, 30 percent of which is used in Fukushima;
Tokyo consumes the remainder.

3. (SBU) On the financial side, the BOJ official indicated the
amount of bad loans in Fukushima's three main local banks has shrunk
and asset quality has improved. In addition, the banks' operations
have stabilized, and because the deposit interest rate has risen,
they want to increase their lending. However, local demand for loans
remains weak. As a result, the banks have turned to syndicated
lending with five percent of their total loans lent in Tokyo in
packages organized by the capital's "megabanks."

----------------------------------
Not Even Ultraman Can Save the Day
----------------------------------

4. (SBU) Fukushima Prefectural Government (FPG) officials stressed
the current governor's efforts to attract new businesses. The
former governor -- a strong proponent of local autonomy who ran the
prefecture for 18 years until he was forced to resign in a 2006
bid-rigging scandal -- was an "idealist, very much interested in
environmental protection," in the words of the FPG officials. The
current incumbent, they stated, is far more "realistic" and labels
himself the "marketing manager" for Fukushima, even putting that
title ahead of "governor" on his official name card.

5. (SBU) Fukushima, the officials observed, has subsequently
attracted more than 100 investments -- the best performance in
Tohoku Area -- and has improved employment over the last two years.
(Note: As the Tohoku prefectures closest to Tokyo, Fukushima has an
advantage in attracting businesses over its more northerly
neighbors. End note.) The FPG officials acknowledged, however, the
prefecture's population (2,091,319 in 2005) has been decreasing
since 1995. As a result, the current governor's aggressive business
promotion efforts are needed to attract companies in hopes of
maintaining or increasing the number of residents.

6. (SBU) Fukushima's fiscal condition also continues to tighten.
The FY08 budget outlays will decline 1.2 percent (JPY10.5 billion),
with personnel expenses taking a cut of JPY8.0 billion.
Consequently, the FPG will reduce civil service salaries -- five

TOKYO 00001113 002 OF 003


percent for bureaucrats in managerial positions and three percent
for non-managerial personnel. The FPG officials stated FY08 public
works will center on road construction and not on other "public
facilities" (i.e., buildings).

7. (SBU) The fate of Fukushima's underutilized airport and the
partially completed expressway to the facility exemplify the
challenges the prefecture's declining population pose, according to
local officials. Japan's national media spotlighted an effort to
increase use of Fukushima Airport through an exhibition of
paraphernalia from the popular children's program "Ultraman" at the
airport's terminal.

8. (SBU) The FPG officials explained the purpose of the Ultraman
exhibition at the airport is less to attract customers than to honor
Ultraman's creator, a native of Fukushima's Sukagawa City. A local
non-profit organization took the lead in setting up the exhibition
in cooperation with the Fukushima Airport Building Corporation
(controlled by the prefectural government).

9. (SBU) Regarding press reports that the Fukushima Airport
expressway is one of Japan's most underutilized toll road, the
problem centers on the fact the project remains incomplete, the FPG
officials asserted. The airport road, which runs east to west, was
planned to connect to two adjacent north-south expressways. At
present, it intersects with only one of those highways,
substantially limiting access for potential customers. The FPG
officials expected both road and airport usage would increase once
the remaining portion of the road connecting it to the second
expressway is completed.

10. (SBU) The executive director of the Fukushima Chamber of
Commerce and Industry (FCCI) was more critical of the problems with
Fukushima Airport, tying them to bad policy and demographic decline.
The GOJ has invested an enormous amount building airports all over
Japan without taking economic factors into account, the FCCI
official observed. He cited the GOJ's decision to construct a new
airport on an Air Self-Defense Force base in nearby Ibaraki
Prefecture despite declining usage in the region's other airports as
an example of continued misguided policy. The official believed
Fukushima Airport should increase its international connections to
boost traffic and felt a prospective tie-up with Kansai
International Airport in Osaka/Kobe will yield good results.

--------------------------------------------- -------
Concern over Reform's Social Impact and Slower Global Economy
--------------------------------------------- -------

11. (SBU) The FCCI official strongly supported protecting small
and medium enterprises and praised the GOJ decision to amend the
Inheritance Tax Law to postpone 80 percent of the tax for small and
medium enterprises. He opposed USG recommendations on the
Large-Scale Retail Stores Location Law. Large-scale retail stores
should be community-based and aim for a harmonious relationship with
others -- not act like "black ships," the official stressed
(referring to the U.S. fleet that ended Japan's seclusion in the
mid-19th century). The FCCI official also supported the prospect of
the Japan Fair Trade Commission applying punitive surcharges (in
effect, fines) against companies engaged in "excessive competition"
such as aggressive price cutting, set out in recent proposed
amendments to Japan's main competition law.

12. (SBU) In the wake of the 2006 scandal, the FPG is promoting
revision of local government public works procurement procedures to
prevent bid rigging, though the results have not been positive, the
FCCI official observed. Because of "excessive competition" with the
expansion of open bidding, winning bidders have been losing money.
Also, as the ceiling for bids on public works projects has become
lower, there have been cases where no company can make a successful
bid, he said, because none can reduce their costs adequately.

13. (SBU) According to the FCCI official, the labor structure in

TOKYO 00001113 003 OF 003


Fukushima has changed from regular (i.e., permanent) to non-regular
(i.e., based on time-limited contracts) employment. As a result,
people have moved from Fukushima to Tokyo because of the limited
number of openings for regular employment in the prefecture. The
labor structure should return, by law, to the old form where regular
positions dominated employment offerings, the FCCI official
insisted. In addition, the GOJ should seriously look at addressing
the general decrease in the working population and how to make the
best use of housewives, part-time workers, and even "NEETs" (i.e.,
individuals "not in employment, education, or training" who have
opted out of the labor force).

14. (SBU) Fukushima also feels the pinch of rising international
commodity prices and the prospect of a slower global economy. Forty
percent of the prefecture's businesses find it difficult to pass the
additional oil and raw material costs on to their customers,
according to hearings FCCI conducted with 70 local companies in
February. Furthermore, if the yen continues to rise, plants
manufacturing export goods may close, with a recession to follow,
the official argued. He raised the possibility that corporate
headquarters in Tokyo might find it easier to shut plants outside
the capital area first, leaving localities like Fukushima to take
the brunt of any slowdown.

-------
Comment
-------

15. (SBU) We initially visited Fukushima -- a jurisdiction that
falls at or near the median of most of Japan's statistical indices
-- a year ago following the 2006 bid-rigging incident (reftel). The
two greatest impressions at that time were the relative dynamism of
firms and industries (like electronics) with international
connections and the general lack of enthusiasm toward economic
reform as advocated by former PM Koizumi.

16. (SBU) This year's visit revealed Fukushima's focus remains on
manufacturing, with scarcely any mention of services or other
sectors. The problems surrounding Fukushima's underutilized airport
also highlight the chronic dilemma of a steadily shrinking
population and the problems of the GOJ's policies and tactics for
capital development. As concerns over a slowing international
economy have increased, resistance to further domestic reform seems
to have strengthened. Most notably, the FCCI official, a 2007
interlocutor, was fairly open in his opposition to positions taken
by the USG in the bilateral regulatory reform initiative. If his
views are widely shared among opinion leaders in Japan's hinterland
-- and we suspect they are -- convincing the GOJ as a whole to adopt
these reforms is likely to remain an uphill battle.

Schieffer

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