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Cablegate: Scenesetter for Eb a/S Sullivan: Incoming

VZCZCXRO6621
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #5288/01 2570342
ZNR UUUUU ZZH
R 140342Z SEP 06 ZDS
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 6374
INFO RUEHBJ/AMEMBASSY BEIJING 4169
RUEHGP/AMEMBASSY SINGAPORE 6753
RUEHFK/AMCONSUL FUKUOKA 8058
RUEHNAG/AMCONSUL NAGOYA 7829
RUEHNH/AMCONSUL NAHA 0614
RUEHOK/AMCONSUL OSAKA KOBE 1404
RUEHKSO/AMCONSUL SAPPORO 9152
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC

UNCLAS SECTION 01 OF 03 TOKYO 005288

SIPDIS

SENSITIVE
SIPDIS

EB FOR A/S SULLIVAN
USTR FOR AUSTR CUTLER AND MBEEMAN
AGRICULTURE FOR USDA/OSEC, FAS/ITP, FAS/FAA/IO/NA
USDOC FOR 4410/ITA/MAC/OJ/NMELCHER
TREASURY FOR IA/DOHNER, HAARSAGER, AND YANG

E.O. 12958: N/A
TAGS: ECON PREL EFIN ETRD ECIN JA APECO
SUBJECT: SCENESETTER FOR EB A/S SULLIVAN: INCOMING
CABINET'S ECONOMIC POLICY OUTLOOK

REF: A. STATE 132255

B. TOKYO 4025

TOKYO 00005288 001.3 OF 003


Summary
-------
1. (SBU) With Chief Cabinet Secretary Shinzo Abe the
presumptive next prime minister, beef receding from the
economic agenda, and a summit with President Bush anticipated
in the coming months, your visit to Tokyo comes at an
important point in discussions of how to broaden and deepen
the bilateral economic relationship. The USG and GOJ raised
potential areas of cooperation, such as secure trade, IPR,
and investment initiatives, at the economic sub-cabinet
meetings in June. Meanwhile, both U.S. and Japanese business
representatives have urged our governments to take steps
toward an FTA or economic integration agreement. We suggest
that now is the time to assess how bold the next round of USG
proposals can be, given Japan's current economic policy
outlook. We believe there are three key areas on which to
evaluate the incoming leadership's economic policy: the GOJ's
commitment to growth, the orientation of its fiscal policy,
and its ability to bring strategic coherence to its trade and
regional economic relations. Your meetings will take place
as ministries are making their own assessments of how the new
leadership will proceed on IPR as well as the broader agenda.
End summary.

The GOJ's Commitment to Growth: Reform and Investment
--------------------------------------------- --------
2. (SBU) Japan has emerged from the economic slump of the
1990s, largely putting its non-performing loan crisis and
fourteen-year property market slump behind it and gradually
emerging from its decade-long struggle with deflation. A
steady stream of reforms has fostered large-scale
restructuring and recovery, and the privatization of Japan
Post, the centerpiece of PM Koizumi's reform agenda,
commences in 2007. The privatization of the post office's
banking and insurance arms, which collectively hold assets
exceeding $3 trillion, could make enormous amounts of
currently underutilized capital available to domestic and
world financial markets.

3. (SBU) PM Koizumi strongly pushed structural reform as
central to the restoration of growth, but many in Japan
remain unconvinced that the results are worth the economic
and social costs. Some have even simplistically blamed
reform and deregulation for recent high-profile scandals over
faked earthquake resistance data and insider trading,
eliciting fears in some corners that Koizumi-style structural
reform has undermined the Japanese economy. We believe,
however, that further economic reform will be a main
determinant of whether the economy can maintain robust
growth. In the short term, the new Cabinet economic lineup
and decisions on how to staff and strengthen the Committee
for the Promotion of Regulatory Reform (CPRR) will indicate
the seriousness with which the new leadership intends to
address Japan's economic challenges.

4. (SBU) We will also be watching efforts to boost economic
vitality through foreign investment. PM Koizumi's five-year
effort to double the stock of inward foreign direct
investment successfully enabled foreign companies to
revitalize struggling concerns, increase competition, and
foster improvements in goods and services for consumers.
Nonetheless, important investment incentives, such as
allowing triangular mergers, are yet to be fully implemented.
The new Cabinet's public openness to and support for FDI
will be needed to contain a potential populist backlash
against "foreign style" mergers and acquisitions and other
measures that help to advance productivity in the Japanese
corporate sector, which is necessary to maintain strong
growth.

Fiscal Policy: Resources for New Initiatives
--------------------------------------------

TOKYO 00005288 002.3 OF 003


5. (SBU) Japanese government debt stands at approximately
175% of GDP (comparatively, the U.S. debt is around 63%) and
the GOJ continues to run a deficit of almost 6% of GDP.
While the current fiscal situation is generally seen as
unsustainable, the last consumption tax increase, from 3% to
5% in 1997, is blamed for prolonging the slump of the "lost
decade." Even Finance Minister Sadakazu Tanigaki, the prime
ministerial candidate seen as most inclined to boost tax
rates, has not called for increases before 2010 (legislative
realities would prevent any candidate from effecting an
increase before 2009). That leaves the question of what
expenses the government will cut. PM Koizumi consistently
targeted pork-barrel public investment and downsized
government payrolls. Future belt-tightening will likely
involve more difficult policy trade-offs, and the current
budget framework for FY07 calls for cuts in areas of
strategic importance to the United States, such as official
development assistance (ODA) and defense spending. Cuts to
ODA, for example, could limit plans to broaden cooperation
under the Strategic Development Alliance, and the trimming of
personnel in ministries responsible for energy programs, IPR
protection, or transportation security could test the GOJ's
ability to undertake related initiatives. All parts of the
USG will need to be cognizant of the tight fiscal situation
facing Japan when considering increased Japanese financial
contributions to bilateral or multilateral activities.

6. (SBU) Significant new domestic social programs could also
compete for resources. A recent OECD report that highlighted
rising income inequality in Japan has added fuel to a
national conversation about whether there is a widening
divide between stable, career workers and part-timers, and
between large cities and outlying regions. Abe's platform
suggests he might play to this issue through new social
safety net and "family-friendly" programs targeting medical,
education, and pension benefits. With the population aging
rapidly and the pension burden already rising, we see the
incoming Cabinet's response to social inequality issues as a
potential bellwether for how it will balance the competing
needs to reform, control the budget, and address domestic
political demands.

Strategic Coherence: Regional Architecture and Trade
--------------------------------------------- -------
7. (SBU) How the incoming leadership sees its economic
relationships with China and Asia will also be a key
question. Will the incoming administration have a strategic
vision for integrating various proposals, including ASEAN 6
and the East Asian Summit, into existing regional structures?
Or will the various initiatives have little or no
consideration of their impact on existing regional
institutions like APEC or on the U.S. role in region? We
will look for substantive support for APEC, as well as
consultation on new regional proposals, in assessing the
viability of regional architecture as a focus of our
strategic economic dialogue.

8. (SBU) Similarly, sustained efforts to keep agricultural
trade issues off the political agenda and in the technical
realm following internationally accepted standards will be
needed to maintain our attention on further improving our
economic relationship. Another suspension of beef imports,
or a series of other agricultural import restrictions based
on consumer safety issues, could turn a managed irritant into
a serious impediment to progress.

Intellectual Property Rights Agenda
-----------------------------------
9. (SBU) On IPR, the USG has shifted its focus over the past
year from our (relatively minor) bilateral complaints about
the adequacy of Japan's IP protection to an emphasis on
greater cooperation, using IPR as a means for greater
U.S.-Japan economic integration and for improving the
international environment for IP protection. While both
sides agree on the potential for cooperation on IPR, the

TOKYO 00005288 003.3 OF 003


specifics have proved elusive. The most substantive progress
has been the work of the two Patent Offices in launching the
pilot "Patent Prosecution Highway" in July 2006, with the
long-term goal of mutual recognition of patents. The most
notable failure has been the GOJ's unwillingness to join USTR
in an IPR case against China at the WTO. Japanese companies,
concerned about Chinese retaliation, are strongly against it,
and the GOJ has told us it is committed to its current IPR
dialogue with China -- one of the few bright spots in
Japan-China diplomatic relations. Within the GOJ, the
Ministry of Economy, Trade, and Industry (METI), specifically
Minister Nikai, has been the primary opponent to Japan
joining the WTO case. That opposition is unlikely to change
in the next few months, even with the appointment of a new
minister.

10. (SBU) You will be meeting IP Strategy Headquarters
(IPSH) Secretary-General Hisamitsu Arai, who has used his
position in the Cabinet Secretariat to substantially improve
Japan's protection of intellectual property over the last
five years. He is a strong backer of a U.S.-Japan bilateral
IPR agreement and gave us a draft of a statement on IPR for
the next U.S.-Japan summit (ref B). The concept for a new
anti-counterfeiting agreement originated in his office two
years ago and he strongly supports USTR's proposal for an
Anti-Counterfeiting Trade Agreement (ACTA). However, he has
also warned that it would be foolish if developed countries
wasted time and effort arguing about what a Gold Standard is
while counterfeiters went about their business. Arai and the
IPSH staff will continue to be the key players on IPR policy
under the new prime minister, and this will be an early
opportunity to explore where and how far we can move forward
on a joint IPR agenda in the coming years. (Note: The
Ministry of Foreign Affairs has the lead on negotiating the
ACTA text.)

Conclusion
----------
11. (SBU) Your meetings in Tokyo provide an excellent
opportunity to energize key private sector and government
decision-makers on the need for continued reform, strategic
thinking on trade and regional economic issues, and progress
on IPR initiatives. Speculation varies about the makeup of
the new Cabinet economic team, but we sense a certain
complacency among our economic interlocutors, who seem
generally satisfied with the current path of the economy.
Moreover, Abe's policy interests appear to lean more toward a
number of high-profile security and political efforts, such
as elevating the Japan Defense Agency to ministry status and
re-examining Japan's constitutional military limits. It is
natural for the urgency felt during Japan's slump to
dissipate with the economy's recovery, but the logic of
continuing to broaden and deepen our relationship remains as
strong as ever. In engaging your interlocutors on key
economic themes, your visit will be timely in shaping
discussion of the next round of bilateral economic
initiatives, including consideration of eventually launching
negotiations toward an FTA or economic integration agreement.

SCHIEFFER

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