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Cablegate: Response To: Information Gathering Request: Summit

VZCZCXRO9738
PP RUEHRN
DE RUEHKO #3042 3050659
ZNR UUUUU ZZH
P 310659Z OCT 08
FM AMEMBASSY TOKYO
TO RUEHSS/OECD POSTS COLLECTIVE PRIORITY
RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEHC/SECSTATE WASHDC 8442
INFO RUEHFK/AMCONSUL FUKUOKA PRIORITY 0714
RUEHNH/AMCONSUL NAHA PRIORITY 3072
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 4497
RUEHKSO/AMCONSUL SAPPORO PRIORITY 1288

UNCLAS TOKYO 003042

SENSITIVE
SIPDIS

TREASURY FOR CARNES,MONROE,MURDEN; STATE EB FOR SAKAUE AND
NELSON

E.O. 12958: N/A
TAGS: ECON EFIN JA
SUBJECT: RESPONSE TO: INFORMATION GATHERING REQUEST: SUMMIT
ON FINANCIAL MARKETS AND THE WORLD ECONOMY IN WASHINGTON,
NOVEMBER 15, 2008

REF: SECSTATE 114420

Key Objectives and Priorities/ Desired Outcomes of the Summit
--------------------------------------------- ---------------
1. (SBU) Japan's key Summit objective is to matter. PM Aso
has to call a general election by September 2009 and would
like to leverage leadership in the Summit process to build
domestic support at home. Top public officials have
regularly gone on record saying that Japan's own financial
crisis experience will be valuable to the United States. FM
Nakagawa has also proposed to route a portion of Japan's
foreign exchange reserves through the IMF. PM Aso called for
the G-20 to consider three measures during a press conference
October 30: supervision and regulation of international
financial firms, the regulation of credit rating agencies,
and a review of accounting standards.

Key Concerns
------------

2. (SBU) Japan's greatest concern is the outsized impact of
the financial crisis on domestic equity markets.

Impact of Financial Market Crisis on the Financial Sector
--------------------------------------------- ------------

3. (SBU) Japanese equity markets have declined to the point
that banks must recognize unrealized market losses on their
equity holdings. This detracts from Tier 1 capital, leading
the banks to seek to raise additional capital. Japan's
financial firms have otherwise been relatively insulated.
Nomura Holdings took over Lehman's Asian, European, and
Middle Eastern operations, while MUFG took a 21% stake in
Morgan Stanley.

Actions Taken to Address the Financial Crisis
---------------------------------------------

4. (SBU) The Japanese government has undertaken a number of
measures, including: a review of capital adequacy calculation
methodology for strictly domestic financial institutions;
mark-to-market accounting reforms in measurement and
classification (apparently consistent with Europe and the
U.S.); possible public funds bank capital injection,
increased from Y2 trillion to Y10 trillion ($100 billion)
under a revived bank recapitalization law; ban on naked short
selling; investigation of possible violations
of short selling rules; and measure to allow banks to hold
equities beyond Tier 1 capital. To encourage stock
investment, the government has proposed resumption of equity
purchases by the government-backed Banks' Shareholdings
Purchase Corporation, and has extended preferential tax
treatment on capital gains and dividend income.

Current Economic Situation/Near-Term Outlook
--------------------------------------------

5. (SBU) Japan's real GDP contracted at 3.0 percent
seasonally adjusted annual rate in the second quarter. Both
the Bank of Japan and the Cabinet Office have downgraded
their growth assessments, and most analysts believe Japan is
already in recession. Though core CPI rose 2.4% y/y in
August, there is speculation that the BOJ will cut its target
rate from 0.5% to 0.25%. Japan's current account surplus
declined 53% y/y in August, shrinking for the sixth straight
month due to weak exports and high energy import costs. The
yen has also appreciated substantially against both the
dollar and the euro in recent weeks.
SCHIEFFER

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