Cablegate: The Japan Economic Scope Q Economic News At-

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RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #6140/01 2960401
ZNR UUUUU ZZH
R 230401Z OCT 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 7649
RHEHAAA/WHITE HOUSE WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5084
RUEHOK/AMCONSUL OSAKA KOBE 1911
RUEHKSO/AMCONSUL SAPPORO 9601
RUEHNAG/AMCONSUL NAGOYA 8210
RUEHFK/AMCONSUL FUKUOKA 8531
RUEHNH/AMCONSUL NAHA 1066
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UNCLAS SECTION 01 OF 07 TOKYO 006140

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E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope Q Economic News At-
A-Glance.

Sensitive but unclassified. Please protect
accordingly.

1. (SBU) Table of Contents

Paragraph 3. Japan Announces DPRK Sanctions
Paragraph 11. Abe: Council on Economic and Fiscal
Policy to be "Engine for Reform"
Paragraph 18. Japan and Vietnam Agree To Launch FTA
Negotiations
Paragraph 22. GE Facing Sanctions
Paragraph 27. U.S. Telecoms Policy Delegation Meets
Top Telecoms Leaders in GOJ and Industry
Paragraph 36. Former Japan Fair Trade Commission
Secretary- General Discusses Trends in Competition

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Policy
Paragraph 38. Wood Products: Trilateral Technical
Meetings in Nara
Paragraph 44. Greater Nagoya Initiative (GNI) Heads to
the U.S.
Paragraph 48. Universal Studios Japan May Have Turned
the Corner on Profitability
Paragraph 53. Daikin Chairman Inoue Officially Refused
the Position of Kankeiren Chairman
Paragraph 58. Fukuoka Bank Another Step Closer to
Becoming Japan's No. 1 Regional Bank?
Paragraph 65. BOJ's Tankan Q The Kansai Economy
Continued to Grow Over Last Three Months

2. (U) The Japan Economic Scope (JES) is a weekly e-
newsletter produced by Embassy Tokyo's ECON section in
collaboration with other sections and constituent
Posts and published every Friday. It provides a brief
overview of recent economic developments, insights
gleaned from contacts, summaries of the latest cables
and a list of upcoming visitors. This cable contains
the October 6, 2006, JES, minus the attachments that
accompany many of the individual stories in the e-mail
version. To be added to the e-mail list, please email
ProgarJ@state.gov.

Economic Impact Of North Korean Nuclear Test on
Western Japan
-------------

3. (SBU) Due to GOJ sanctions, cities in western Japan
with high volumes of trade with North Korea are
bracing for the economic impact, even as they support
the sanctions politically.

4. (SBU) The local economy of Sakaiminato City,
Tottori Prefecture, (pop. 37,000), which sees the
largest amount of North Korean maritime traffic among
Japanese ports, largely depends on imported fish,
crabs and matsutake mushrooms from North Korea. Fish
processing is a major industry in Sakaiminato and
there are many related businesses such as can makers,
box makers, and shipping companies. Without the North
Korean business, these industries are headed for a
crisis.

5. (SBU) According to a Sakaiminato city official,
over 50 percent of the city's economy is dependent on
fish products from North Korea. In contrast, in the
second largest market for DPRK ship traffic, the Port
of Maizuru in Kyoto Prefecture, only about 7 percent
of the local economy depends on North Korean imports.

6. (SBU) For the nation the economic impact will be
limited to a potential increase in prices for luxury
food items, but in Tottori this will be another blow
to the prefecture's economic health, already reeling
from the aging crisis, unemployment and high public
debt levels.

7. (SBU) The next problem for regional economies is
the GOJ Fishing Agency prohibition on crabbing boats
trawling for their own catch near North Korean
territorial waters. Crab from the northern edge of

TOKYO 00006140 002 OF 007

the Sea of Japan is a lucrative product during the
fall and winter seasons.

8. (SBU) Despite the economic costs, the political
mood, for the moment, is supportive of sanctions.
Sakaiminato's maritime products industry is going
along with the GOJ's DPRK policy without complaints.

9. (SBU) Sakaiminato Mayor Katsuji Nakamura announced
on October 10 that the city would dissolve its
"friendship city" relationship (the only such
relationship in Japan) with the North Korean city of
Wonsan, which was launched in 1992. The mayor
rebuffed city assembly attempts to merely "freeze"
ties to the North.

10. (SBU) A city official, however, noted that over
time opposition to sanctions would grow.

Abe: Council on Economic and Fiscal Policy to be
"Engine For Reform"
-------------------

11. (U) The Council on Economic and Fiscal Policy
(CEFP) met for the first time with its new membership
on Friday, October 13, as council chair Prime Minster
Abe urged the CEFP to "consider promptly the course of
reform so that we can achieve further economic
growth," and underscored that, "I would like the CEFP
to become the main engine for reform." Prime Minister
Abe further instructed the CEFP to finalize a five-
year reform framework by January.

12. (U) The CEFP's new non-government members -- Japan
Business Federation Chairman Fujio Mitarai, Itochu
Corp. Chairman Uichiro Niwa, University of Tokyo
graduate school professor Takatoshi Ito, and
International Christian University professor Naohiro
Yashiro -- called for "concentrated reform" for the
first two and a half years so that Japan can complete
its shift to a new growth path in about five years.

13. (U) The proposal also listed issues that need to
be addressed in seven areas, including productivity
improvement and deregulation. CEFP members agreed to
set specific topics for "intensive deliberation", such
as decentralization of the national government.

14. (U) Local press noted that the role of the
minister for economic and fiscal policy seems to have
changed from "group leader to host," suggesting that
the Abe government aims to strengthen the policy-
making capabilities of the Prime Minister's Office.

15. (U) Indeed, we've been told that Cabinet Advisor
Nemoto (one of five such advisors appointed by PM Abe
to handle key policy objectives) will participate in
council meetings in a non-voting capacity and will be
particular focused on the committee's review of growth
policies.

16. (U) During former Prime Minister Koizumi's tenure,
the CEFP addressed the final cleanup of the banking
sector's non-performing loan problem, assessed road
construction revenue, and directed cuts to public
works spending.

17. (U) Whether or not the CEFP can take on an
economic reform leadership role should bureaucrats re-
assert policy influence under the new administration
promises to be an ongoing question.

Japan and Vietnam Agree to Launch FTA Negotiations
--------------------------------------------- -----

18. (U) Following an October 19 meeting between Prime
Minister Shinzo Abe and Vietnamese Prime Nguyen Tan
Dong, the two governments announced plans to begin
negotiations on an "economic partnership agreement"

TOKYO 00006140 003 OF 007

(EPA, essentially a free trade agreement). The first
negotiating session is expected in January 2007.

19. (U) In their joint statement, Abe and Nguyen put
forward a goal of nearly doubling bilateral trade from
8.5 billion USD in 2005 to 15 billion USD by the year
2010.

20. (U) The two sides also recognized the growing
importance of intellectual property protection and
called for greater cooperation in this field in order
to attract investment and stimulate market growth.

21. (U) Although most likely regarded by the Japanese
as a way to improve the investment environment in
Vietnam for Japanese business, the EPA with Vietnam,
if successful, would mark Japan's first agreement with
a transitional economy, thus establishing a conceptual
framework for possible negotiations with China in the
future.

GE Facing Sanctions
-------------------

22. (SBU) Citing a violation of anti-harassment
Article 21 of the Money Lending Business Law, the
Financial Services Agency (FSA) is poised to impose
sanctions on GE Consumer Finance's collection
business.

23. (SBU) GE representatives reported that among 1.5
million collections calls made in April, in a case of
human error, one call was made erroneously to a
delinquent borrower's workplace, following a previous
request by the borrower not to contact him at work.
Though the GE representative left no message or return
number, the borrower surmised the nature of the call
and made an official complaint to the local finance
bureau.

24. (SBU) GE reports that in subsequent consultations,
the FSA cited Article 21's language prohibiting
"intimidation, harassment, and embarrassment,"
excessive calls, and third-party disclosure as
justification for their inquiry.

25. (SBU) Although the FSA lauded GE's compliance
practices, the FSA informed GE that "a violation is a
violation," and is reportedly planning to shut down GE
Consumer Finance's nationwide collections operations
for five days, a sanction that GE estimates will cost
them $1.5-$2 million.

26. (SBU) GE contacts noted, "this decision could be
political blowback," acknowledging GE's active role in
the debate over pending interest-rate cap legislation.

U.S. Telecoms Policy Delegation Meets Top Telecoms
Leaders in GOJ and Industry
---------------------------

27. (U) The U.S. Telecommunications Policy group,
including FCC Chairman Kevin Martin, Ambassador David
Gross, Coordinator for International Communications
and Information Policy, and John Kneuer, Assistant
Secretary and National Telecommunications and

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Information Administration, U.S. Department of
Commerce met with Ministry of Internal Affairs and
Communications (MIC) officials, including the new
Minister, Yoshihide Suga, and the leaders of Japan's
telecommunications industry in Tokyo, October 16-18.

28. (U) Bilateral consultations focused on
coordinating U.S.-Japan positions before the upcoming
annual International Telecommunications Union (ITU)
meetings (budget, elections, future role and structure
of ITU).

29. (U) The two governments also discussed their

TOKYO 00006140 004 OF 007

approaches to new regulatory issues such as VoIP
(voice over internet protocol), IPTV (internet
protocol TV), and changes in the broadband and mobile
phone markets.

30. (U) In meetings with the Presidents and CEOs of
all of Japan's major fixed and mobile phone operators
and internet providers, as well as the new entrants --
NTT, DoCoMo, KDDI, Softbank, and eAccess -- the
delegation discussed the differences in the U.S. and
Japanese telecoms markets, regulatory obstacles, and
new technologies.

31. (U) All of NTT's competitors agreed that NTT is
trying to resume its monopoly status via its control
of FTTH (fiber to the home).

32. (U) The delegation visited showrooms demonstrating
Japan's latest phones and gadgets and some ideas the
companies are working on for the future.

33. (U) ACCJ leaders told the delegation that the
strength of the dominant carriers still impedes
competition in Japan and keeps prices high.

34. (U) They also expressed concerns about the
continuing tendency of Japanese regulators and
manufacturers to develop proprietary standards, the
lack of investment in healthcare IT, and the fact that
the consumer finance industry was singled out as
ineligible to use e-notification under GOJ rules.

35. (U) Although U.S. companies are much less
concerned now about the enforcement of the GOJ's new
privacy regulations, they are worried that as each
country develops its own privacy policy, the cost will
go up for multinationals. One suggestion was to
develop a framework for a model Asian privacy policy
for countries to use.

Former Japan Fair Trade Commission Secretary-General
Discusses Trends in Competition Policy
--------------------------------------

36. (U) Former Japan Fair Trade Commission (JFTC)
Secretary-General Akinori Uesugi (now a senior

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consultant for the law firm of Freshfields, Bruckhaus,
Deringer) told EMIN Klemm October 13 that the JFTC
hoped to gain greater discretion in the use of its
authority, notably the application of punitive
surcharges, through the mandatory review of the
Antimonopoly Act (AMA) that will take place in 2008.

37. (U) Uesugi was pleased and somewhat surprised at
the efficacy to date of the amendments to the AMA that
went into effect at the beginning of this year,
particularly the leniency program that encourages
companies involved in bid rigging to inform on their
partners in crime in the hope of avoiding surcharges.

Wood Products: Trilateral Technical Meetings in Nara
--------------------------------------------- -------

38. (U) The U.S., Japan, and Canada held annual
trilateral technical meetings October 11-12 on wood
products in Nara.

39. (U) The Ministry of Land, Infrastructure and
Transport (MLIT) represented Japan in the Building
Experts Committee Meeting (BEC) and the Ministry of
Agriculture, Forestry and Fisheries led Japan's
participation in the Agricultural Standards Technical
Committee meeting (JASTC).

40. (U) The BEC meeting focused on construction and
building codes, including fire and earthquake related
standards, as they relate to building products. Among
the topics, GOJ officials explained how they were
addressing recent building code scandals.

TOKYO 00006140 005 OF 007

41. (U) The JASTC meeting focused on the JAS quality
labeling system that applies to various wood products
such as flooring, panels, glued laminated timber, and
lumber.

42. (U) The meetings, considerably less contentious
than in past years, have been held annually for 18
years and are used to share information and resolve
existing or potential trade barriers for wood
products.

43. (U) The U.S. delegation consisted of members from
FAS, FCS and industry.

Greater Nagoya Initiative (GNI) Heads to the U.S.
--------------------------------------------- ----

44. (U) The Greater Nagoya Initiative (GNI), Central
Japan's combined effort to attract FDI, will send its
first mission to the U.S. November 6 to 12 to promote
business ties and partnerships between the U.S. and
the region.

45. (U) The mission is led by Gifu Governor Hajime
Furuta and includes about a dozen others from various
local government organizations and the private sector,
including Chubu METI Director General Kiichiro Sato
and Toyota Senior Advisor (former executive vice
president) Kanji Kurioka.

46. (U) The GNI will hold a seminar and exhibition in
San Francisco November 6, with the assistance of Sun
Microsystems, which has an office at the "Softopia
Advanced Information Hub" in Gifu.

47. (U) The delegation will also participate in the
"JETRO Business Strategy Forum 2006" in Santa Clara
November 7, at which U.S. participants include APEC
Ambassador Mike Michalak before heading elsewhere in
Silicon Valley and to Washington, DC, to meet with
Greater Washington Initiative counterparts.

Universal Studios Japan May Have Turned the Corner on
Profitability
-------------

48. (U) After 5 years of operations, Universal Studio
Japan (USJ) is finally reducing its debt levels and
may move into the black.

49. (U) Although for most of its existence it was a
member of Osaka City Government's money-losing quasi-
public enterprises club, the facility experienced a
dramatic turnaround after a 25 billion yen capital
infusion by Goldman Sachs and Japanese banks last
summer and having a reorganization plan. Starting in
2004, Goldman-affiliated President Glenn Gumpel worked
on cutting costs and boosting management efficiency.
USJ is studying plans to list on the Mothers stock
market of the Tokyo Stock Exchange.

50. (U) The company posted a pretax loss of 500
million yen in FY 2005, an improvement from a loss of
3.1 billion the previous year. Also, this year, USJ
made its largest investment, 4-6 billion yen over two
years, for a new roller coaster.

51. (U) The company remains concerned over how to
increase attendance. Attendance in FY 2005 was 8.3
million people, a three percent increase from 2004,
largely attributed to special discount packages and
park annual passes.

52. (U) A USJ official said that it is hard to
increase attendance without continuing those one-time
measures. He said that, although the park's balance
sheet improved by cost cutting last year, USJ would
need to grow its visitor base in order to achieve

TOKYO 00006140 006 OF 007

sustainable profit levels in the future.

Daikin Chairman Inoue Officially Refused the Position
Of Kankeiren Chairman
---------------------

53. (SBU) Daikin Industries Ltd. Chairman Noriyuki
Inoue, Vice Chairman of Kansai Economic Federation
(Kankeiren), firmly refused to take over the helm of
the business lobbying organization after current Chair
Akiyama retires in May 2007.

54. (SBU) Mr. Inoue was the main candidate being
considered for the post. According to press accounts
and Kankeiren officials, the news came as a bombshell
to Kankeiren's secretariat. Mr. Inoue mentioned that
he would like to concentrate on his business in
Daikin.

55. (SBU) Other candidates now include Mr. Tsutomu
Okuda, Chairman of Daimaru Co., Ltd. (former Co-
Chairman of Kansai Keizai Doyukai) and Mr. Yoshio
Tateishi, Chairman of Omron. According to Kankeiren
staff, Chairman Akiyama is now considering whether to
look for other candidates or continue to urge Inoue to
reconsider.

56. (SBU) The post of Kankeiren's Chairman used to be
competitive among Kansai business leaders. Past
chairmen had strong relationships with GOJ and Diet
members, and the position was very important in
charting economic growth in the Kansai. After the
economy declined, the region's major companies turned
inward to concentrate on their own businesses at the
expense of leadership of business organizations like
Kankeiren.

57. (SBU) Ironically, many of the Osaka business
leaders who could pilot Kankeiren have moved to Tokyo
already and are involved in Keidanren in the capital-
despite the fact that Kankeiren was established 60
years ago as a foil to Keidanren in Tokyo.

Fukuoka Bank Another Step Closer to Becoming Japan's
No. 1 Regional Bank?
--------------------

58. (SBU) On October 13, Bank of Fukuoka (BOF),
Kyushu's largest bank, announced plans to become the
leading shareholder of Kyushu-Shinwa Holdings Inc.
(KSH), a midsize regional bank based in Sasebo,
Nagasaki.

59. (SBU) According to post's local banking contacts,
Tokyo-based investment fund J-Will Partners Co. (JWP),
run by a former Goldman Sachs (GS) Japan managing
director, initiated the tie-up scheme. Together, BOF
and GS will invest 30 billion yen to rehabilitate the
ailing KSH.

60. (SBU) With nonperforming loans accounting for well
over 10 percent of its portfolio, KSH had been facing
difficulty in repaying 30 billion yen in public funds
on its own. As a result, it had no choice but to seek
capital and business alliances with stronger partners
such as BOF and JWP, both of whom have a good track
record of turning Kyushu businesses around through
jointly established rehabilitation funds.

61. (SBU) Nagasaki Governor Kaneko and Sasebo Mayor
Mitsutake have welcomed the news, and are hoping that
the tie-up will contribute to greater financial and
economic stability throughout Nagasaki prefecture.

62. (SBU) The alliance with KSH is another example of
BOF's aggressive expansion strategies, which includes
BOF and Kumamoto Family Bank setting up a joint
holding company "Fukuoka Financial Group (FFG)" in
April 2007.

TOKYO 00006140 007 OF 007

63. (SBU) If KSH joins FFG in the future, their
combined assets of 11.5 trillion yen will enable them
to surpass the Bank of Yokohama as Japan's largest
regional financial group.

64. (SBU) Increasing competition from Tokyo-based mega
banks, possible future implementation of "doshusei"
(which will convert Japan's 47 prefectures into 9-13
larger regional blocs), and Japan's postal
privatization in October 2007 are among the major
factors behind BOF's campaign to pro-actively engage
in the accelerating regional bank consolidation now
taking place across prefectural borders in many parts
of Japan.

BOJ's Tankan -- The Kansai Economy Continued to Grow
Over Last Three Months
----------------------

65. (U) According to Osaka Branch of the BOJ, there
was good news from the diffusion index for all
industries in the Kansai's six prefectures, which at
an 8 percent score, beat the national average of 6
percent. However, compared to the last period (April
- June), it dropped 2 percent. Manufacturing is still
booming, but oil prices made the non-manufacturing
sector slow down.

66. (U) The director of the Osaka City Credit Union
Research Institutes predicted that in the last quarter
of CY 2006 the Kansai economy would continue to slow
due to rising interest rates stemming from the end of
the zero-interest-rate policy, which would exert
pressure on business activities, and reduce the demand
for housing purchases.

67. (U) Most of the businesses in the Kansai are
becoming increasingly cautious about expanding their
operations given talk of a potential slow down of the
U.S. economy and rising interest rates.

SCHIEFFER

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