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Cablegate: U.S.-Japan Investment Working Group Calls for Positive

VZCZCXRO6868
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #3104/01 3142253
ZNR UUUUU ZZH
R 092253Z NOV 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8642
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAWJA/JUSTICE DEPT WASHDC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC
RUEHFR/AMEMBASSY PARIS 6306
RUEHUL/AMEMBASSY SEOUL 2262
RUEHBJ/AMEMBASSY BEIJING 6278
RUEHOK/AMCONSUL OSAKA KOBE 4634
RUEHFK/AMCONSUL FUKUOKA 0849
RUEHKSO/AMCONSUL SAPPORO 1421
RUEHNAG/AMCONSUL NAGOYA 8897
RUEHNH/AMCONSUL NAHA 3210
RUEHGH/AMCONSUL SHANGHAI 0494
RUEHHK/AMCONSUL HONG KONG 6619
RUEHGV/USMISSION GENEVA 3429

UNCLAS SECTION 01 OF 05 TOKYO 003104

SENSITIVE
SIPDIS

DEPT FOR EAP - AMBASSADOR HASLACH
DEPT ALSO FOR EAP/J AND EEB/OIA
DEPT PASS USTR FOR CUTLER, BEEMAN, KALLMER
NSC FOR LOI
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 PREL OECD JA
SUBJECT: U.S.-JAPAN INVESTMENT WORKING GROUP CALLS FOR POSITIVE
TRADE AND INVESTMENT AGENDA

Sensitive but Unclassified - Not for the Internet

1. (SBU) Summary: The eighth round of talks under the U.S.-Japan
Bilateral Investment Working Group (IWG) took place October 29 in
Tokyo co-chaired by U.S. Ambassador to APEC Patricia Haslach and
Ministry of Economy, Trade and Industry (METI) Deputy Director
General Makoto Shiota. The two sides exchanged views on the current
turmoil in global financial markets and its impact on cross-border
investment flows, and agreed on the need to cooperate to fight trade
and investment protectionism. The IWG continued its examination of
the each country's FDI review processes, including the U.S. FINSA
law and Japan's Foreign Trade Control Act. The GOJ provided a
clarification of the term "risk to public order", the legal
provision on which it blocked a proposed foreign investment in
J-Power Corporation in May 2008. METI presented a non-paper with
recommendations to the U.S. on implementation of enhanced marine
cargo security reporting requirements. Both sides exchanged views
on the status of bilateral investment negotiations with third
countries. At the conclusion of the talks, the co-chairs issued a
joint press release reaffirming both countries' commitment to
maintaining open investment regimes. End Summary.

Re-emphasizing the Importance of Open FDI Regimes
--------------------------------------------- ----

2. (SBU) Shiota opened the session by noting that over the eight
years of the bilateral Investment Initiative Japan's stock of
foreign direct investment (FDI) has more than doubled from 6.6
trillion yen to more than 16 trillion yen today. Nevertheless,
Japan is concerned the global economic slowdown resulting from
recent turmoil in world financial markets could reduce cross-border
investment flows and jeopardize Japan's achievement of it target of
FDI stock equivalent to five percent of GDP by FY 2010. Ambassador
Haslach agreed that because of the market turmoil this is an
excellent time to acknowledge once again the important contribution
of cross-border investment to economic prosperity in both countries.


3. (SBU) Ambassador Haslach described the decisive actions the U.S.
Government is taking to stabilize the U.S. banking system, maintain
liquidity in credit markets, and restore market confidence as
quickly as possible. The G-20 meeting set for November 15 would be
another opportunity to strengthen cooperation on policies toward
national financial market. However, the best way to restore
confidence, Haslach noted, was to maintain a robust trade and
investment agenda.

4. (SBU) Shiota agreed the current global financial turmoil
requires a global response and emphasized the GOJ continues to seek
foreign direct investment, in particular FDI from the U.S., which
accounts for 40 percent of all Japanese inward FDI and is
"indispensable" for the promotion of on-going economic and
technological development in Japan. Noriyuki Shikata, Director,
Second North Americas Division, Ministry of Foreign Affairs (MOFA),
added both countries need to cooperate to fight against trade and
investment protectionism.

5. (SBU) Ambassador Haslach proposed -- and DDG Shiota immediately
agreed -- the two governments issue a joint press release following
the IWG meeting reaffirming commitment of both countries to
maintaining an open investment regime. The text of the joint
statement is contained in paragraphs 25-29.

Implementation of Investment Expert Report
--------------------------------------------


TOKYO 00003104 002 OF 005


6. (SBU) Hiroaki Hara, Director of Foreign Investment Promotion,
Cabinet Office, briefed the Working Group on the implementation of
the May 2008 recommendations of the GOJ ad-hoc Investment Experts
Committee report. The Cabinet incorporated the recommendations into
the GOJ's annual report on the government's Basic Economic and
Fiscal policies issued in June 2008.

7. (SBU) METI had begun implementing the experts committee's
recommendation to identify and clarify Japan's M&A rules with the
July 2008 report of METI's Corporate Value Study Group. In the
meantime, the Cabinet Office will review the grounds and scope for
discriminating between domestic and foreign investors on security
grounds. The Cabinet Office plans to hold hearings on this subject
in the coming weeks with an aim of issuing a report by the end of
2008.

8. (SBU) Hara added internal discussion of the other
recommendations continues. The Cabinet and ruling coalition will
need to address the most controversial recommendation -- reducing
Japan's 40 percent corporate tax rate -- within the context of other
changes to Japan's tax system, including Japan's consumption tax
rate. However, Hara anticipated the ruling party will discuss
corporate tax rates during the review of possible FY-2009 tax
changes, a process which will be completed by December 2008.

Security Reviews Should Not Unreasonably Hinder FDI
--------------------------------------------- ------

9. (SBU) Michael Carr, Senior Policy Analyst from the U.S. Treasury
Department, told the working group that implementation of the U.S.
Foreign Investment and National Security Act of 2007 (FINSA) is in
its final stage. Issuance of final rules is imminent. At each
stage of implementation, the USG's key objective has been to
reinforce its long-standing commitment to an open investment regime.
The Treasury-led CFIUS committee, which reviews selected FDI
transactions, had hoped to have completed the final rule already,
but the need to review a large volume of public comments has
necessitated a delay. The comments have been generally positive,
Carr noted, but many emphasized the importance of greater
transparency in the CFIUS review process.

10. (SBU) Carr also discussed the concept of "control", which
governs whether CFIUS has authority to review a potential
transaction. CFIUS' definition of "control" is based on whether the
new owners would be in a position to direct corporate decisions.
The concept of control is embedded in the law and, Carr noted, is a
"functional" test and not based on a simple numerical level of
shareholding.

11. (SBU) Treasury also plans to publish guidelines and a narrative
discussion of the national security criteria set out in the FINSA to
provide greater clarity to the process. The overall aim of the
CFIUS review is to resolve concerns to the extent possible and allow
transactions to proceed, not to block transactions.

METI Clarifies Meaning of "Risk to Public Order"
--------------------------------------------- ---

12. (SBU) Yasuhito Nii, Director of METI's Trade and Investment
Facilitation Division, briefed on recent GOJ reviews under the
Foreign Exchange and Trade Act (FEFTA), specifically addressing U.S.
concern about the definition of "risk to public order", which was
the rationale used to block a proposed foreign investment in
electricity wholesaler J-Power Corporation in May 2008.

13. (SBU) Nii explained "public order" is one of three criteria for

TOKYO 00003104 003 OF 005


investment restriction contained in the OECD Code on Liberalization
of Capital Movements. The GOJ decision to block the investment in
J-Power, Nii insisted, was not taken easily or lightly. But the GOJ
decided that Japan had an overriding public interest in maintaining
the current level of operation in certain critical public
infrastructure, in this case, J-Power's power grids and the planned
Ohma Nuclear power plant. Nii added such a determination was made
on a case-by-case basis and the decision on the J-Power case does
not imply the GOJ seeks to wall off whole industrial sectors from
foreign investment.

14. (SBU) In response to a specific U.S. question, Nii confirmed
the risk to public order determination in the J-Power case was
intended to ensure that Japan maintained control of certain critical
technological infrastructure, and was not aimed at protecting that
technology from falling into foreign hands. In other words, the GOJ
did not determine the proposed foreign investment was threat to
Japan's national security.

Mitigation Strategies
---------------------

15. (SBU) Carr briefly explained the rationale behind CFIUS use of
mitigation strategies in certain cases. CFIUS views such mitigation
agreements as a "proportionality tool", which should be used in
cases where other laws are inadequate or inappropriate to achieve
the desired outcome. The number of mitigation agreements CFIUS has
entered into is low relative to the number of cases handled, has
declined in recent years. METI's Nii noted that Japan does not have
a provision for mitigation strategies in the FEFTA. In large part,
he said, this reflected the fact the Japanese law, in contrast to
the U.S. or UK, establishes a pre-notification system rather than an
ex-post facto system. Nii then asked how the U.S. enforces such
agreements and what legal authority the USG has in cases where the
agreement is breeched. Carr noted that CFIUS has authority to take
action in cases of breaches of mitigation agreements, and would look
to existing law to enforce such agreements.

16. (SBU) In response to a question, Nii added the Cabinet Office
review of the FEFTA system, as called for in the Expert Committee
report, will be focused on how to improve the transparency of the
system. The GOJ has no plans to amend the list of sectors subject
to the notification and pre-approval requirement.

FEFTA Impact on Mutual Funds
----------------------------

17. (SBU) The USG submitted a paper outlining the negative impact
of the increasing compliance burden of FEFTA on passive investors
such as mutual funds. The U.S. noted this appears to be a case of
unintended consequences of investment regulations that potentially
inhibit portfolio investment Japan says it wants to attract to make
Tokyo an international financial center. Ambassador Haslach
indicated the U.S. also plans to make specific recommendations in
this area in the Financial Services Working Group of the Regulatory
Reform Initiative.

Cargo Security
--------------

18. (SBU) Yasushi Akahoshi, Director of METI's Americas Division,
presented a non-paper outlining specific recommendations on
implementation of U.S. Customs and Border Protection (CPB) proposal
to strengthen cargo security reporting requirements (the "10 plus 2"
program.) Embassy faxed a copy of the non-paper to EAP/J.


TOKYO 00003104 004 OF 005


19. (SBU) The non-paper urges CPB to conduct a pilot project to
test the desirability and impact of the new rules and to postpone
final implementation of the rule to allow CPB to evaluate the
feasibility and impact of the new rule. The GOJ also urges the USG
to exempt companies "certified and validated" as Customs-Trade
Partnership against Terrorism (C-TPAT) participants from the
importer security filing requirement.

20. (SBU) Ambassador Haslach assured the GOJ that "the U.S. hears
your concern" about 10 plus 2. She promised to pass the non-paper
to the Embassy CPB attach. She added that release of a final rule
in this area is expected soon, but the exact date is uncertain. She
also said the USG expects there will be a phased period of
implementation, and urged the GOJ to present its non-paper as well
at the next digital video conference of the Study Group on Secure
and Efficient Trade planned for early November.

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

21. (SBU) Continuing a discussion begun in previous working group
meetings, the two sides briefed on recent developments in
negotiations of bilateral investment treaties (BIT) with third
countries. Noriyuki Mita, Director of METI's Economic Partnership
Agreement Division, reviewed the history of Japan's BIT strategy.
Since early 2007, Japan has actively pursued BITs with individual
trading partners not currently ready to enter into negotiations on
full-scale Economic Partnership Agreements. Japan will seek to
expand such agreements, especially with countries in the Middle
East, Africa, and Central Asia, where there is increased Japanese
investment in resources sectors.

22. (SBU) Ambassador Haslach explained the United States is
actively pursuing BITs with numerous economies. This year, the U.S.
formally launched BIT negotiations with China, India, and Vietnam
and held BIT-related discussions with Brazil, Gabon, Georgia, Ghana,
Indonesia, Mauritius, and Pakistan. The U.S. and Japan, she
emphasized, should cooperate to promote a global web of
high-standard international investment agreements. Such agreements
could set positive precedents for future investment agreement
negotiations worldwide. The July 2008 G8 Declaration underscored
the importance of these objectives.

23. (SBU) Ambassador Haslach explained the status of the U.S.
ongoing BIT negotiations with China, which were launched at the
fourth U.S.-China Strategic Economic Dialogue. Two negotiating
rounds have taken place, and based on the content of the talks to
date, there appears to be significant common ground with China on
core investor protections -- such as those on expropriation and
"fair and equitable treatment" -- as well as on investor-State
arbitration. However, there are fundamental differences in the area
of national treatment and exceptions to the national treatment
obligations on a negative list basis. Mita reported Japan's
negotiations on a trilateral Japan-China-Republic of Korea BIT were
meeting similar obstacles.

Looking Ahead
-------------

24. (SBU) Both sides agreed to hold the next IWG meeting in the
first quarter of 2009. Before then, the two sides will consult
internally as well as with each other on possible new items to add
to the working group agenda that might spur expanded cross-border
FDI.

Text of Joint Press Statement

TOKYO 00003104 005 OF 005


-----------------------------

25. (U) Joint Press Statement by the Co-Chairpersons of
Japan-United States Bilateral Investment Working Group

26. (U) The Japan-United States Bilateral Investment Working Group
was held on October 29, 2008 in Tokyo. The Working Group was
co-chaired by Mr. Makoto Shiota, Deputy Director-General of Trade
Policy Bureau, METI (Ministry of Economy, Trade and Industry) and
Ambassador Patricia Haslach of the U.S. Department of State.

27. (U) The two chairs expressed the common view on the importance
of continuing to promote foreign direct investment, taking careful
note of the current economic downturn caused by the recent financial
market turmoil. A positive trade and investment agenda will
contribute to rapid return to prosperity and economic growth.

28. (U) In today's meeting, both sides exchanged and updated
information and views on:

-- Our respective investment climates, including the recommendations
of the Expert Committee on FDI Promotion on the Japanese side;

-- Cargo Security issues, including "10 plus 2" rules, and 100%
scanning;

-- Security Related Investment Reviews, including updates on the
U.S. FINSA (Foreign Investment and National Security Act) and
implementation of Japan's FEFTA (Foreign Exchange and Foreign Trade
Act);

-- Negotiations toward a U.S.-China Bilateral Investment Agreement
and other Bilateral Investment Treaties as well as Japan's global
strategy on negotiating Bilateral Investment Treaties.

29. (U) The Investment Working Group is one aspect of the
Japan-U.S. Investment Initiative, which is a key component of the
cooperative framework of the Japan-U.S. Economic Partnership for
Growth. This framework was launched by then Prime Minister
Junichiro Koizumi and President George W. Bush in 2001. The
Japan-U.S. Investment Initiative is aimed at promoting bilateral
direct investment between the two countries, by holding wide-ranging
discussions related to investment climate and investment rules and
regulations. (End text)

30. (U) Ambassador Haslach cleared this cable subsequent to her
departure from Tokyo.

SCHIEFFER

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