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Cablegate: The Japan Economic Scope - Economic News at-A-

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R 270654Z DEC 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 9384
RHEHAAA/WHITE HOUSE WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5198
RUEHOK/AMCONSUL OSAKA KOBE 2757
RUEHKSO/AMCONSUL SAPPORO 0341
RUEHNAG/AMCONSUL NAGOYA 8835
RUEHFK/AMCONSUL FUKUOKA 9316
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UNCLAS SECTION 01 OF 08 TOKYO 007139

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

Sensitive but unclassified. Please protect accordingly.

1. (SBU) Table of Contents

3. LDP Member Tatsuya Ito Reviews Regional Architecture Policy
4. Japan - Australia FTA: GOJ Will Drive Hard Bargain
5. Kagoshima Farmers: EPA with Australia, No Worries Mate?
6. Beijing Energy Ministerial Outcome: METI, MOFA Pleased
7. Transparency: GOJ Translations of Laws and Regulations
8. GOJ e-Gov Web-portal for Public Comment on Proposed Laws and
Regulations
9. Postal Privatization Committee Releases New Product Guidelines
10. FY07 Tax Reform Details Revealed
11. CEFP Member Advocates "Labor Big Bang" for Growth
12. Regional Governors Approve Haneda Airport Expansion
13. UA to Drop Osaka-Chicago Route in January
14. Air Talks: Japan-India Tripling Capacity
15. Fujio Mitarai: New Chairman of MLIT's Transportation Policy
Committee
16. Association of Asia Pacific Airlines (AAPA) Concerned Over EU's
Aviation Emissions Trading Proposal
17. Japanese Customs and Express Mail Service
18. Japan Automobile Manufacturers Association, Inc. (JAMA)
Criticizes Proposals to Revise Road Taxes
19. Maritime Policy Law Being Drafted
20. MAFF Stocks Release Hurts U.S. Rice Flour Mix Exports
21. Beef "Pipeline" Released
22. MAFF Sets Beef Safeguard Level
23. Status of U.S. Beef Sales
24. Japan Set to Ban Wagyuu Beef?
25. Trade Distortions: Pork Gate Price
26. GOJ Projects 2.0% GDP Growth in JFY '07
27. Japan's Cabinet Approves "Housekeeping" Supplemental Budget for
FY06

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 December 22, 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.

3. (U) LDP Member Tatsuya Ito Reviews Regional Architecture Policy
-------------------

Liberal Democratic Party diet member Tatsuya Ito shared his views on
a future economic regional framework for East Asia during EMIN's
December 21 courtesy call.

Ito demonstrated detailed knowledge of the FTAAP proposal in APEC,
U.S. proposals to strengthen the institution, as well as the GOJ
ASEAN plus 6 initiative.
He followed the line typically offered by METI that Japan's ASEAN
plus 6 free trade area proposal should be seen as complementary to
and supportive of U.S. efforts to strengthen APEC, and could provide
a basis for FTAAP.
Ito suggested that the United States, China and Japan should form a
joint framework in which they could discuss economic and national
security interests in the future.

Ito currently is the chairman for an LDP special committee on
Japan's official development assistance programs.

A representative of a Tokyo district in the lower house in the Diet
and very close to former Economic and Financial Policy Minster
Takenaka, Ito has spent considerable time in the United States. He
prefers to speak in Japanese, however.

4.(SBU) Japan - Australia FTA: GOJ Will Drive Hard Bargain
-------

PM Abe and his Australian counterpart, John Howard, announced the
launch of free talks last week, but interest in carrying the talks

TOKYO 00007139 002 OF 008


to a successful conclusion at the working level may not be so keen
if Australia does not agree to major concessions on agricultural
trade. For more on what we heard from two key Foreign Ministry
officials this week, please see Tokyo 7081.

5. (SBU) Kagoshima Farmers: EPA with Australia, No Worries Mate?
-------------

A senior researcher at the Kagoshima Regional Economic Research
Institute noted that Kagoshima farmers are relatively calm about the
latest discussions of an economic partnership agreement (EPA)
between Japan and Australia.

Although Kagoshima Governor Yuichiro Itoh recently stressed the need
for sensitive agricultural items to be excluded from the EPA to
minimize "catastrophic damage" to Japanese farmers, the researcher
views the statement as a typical one to placate voters.

Kagoshima ranks second in Japan in agricultural output and its
livestock industry is one of the largest in Japan.

The researcher believes that the EPA could help strengthen the local
livestock industry the same way that the 1988 U.S.-Japan trade
liberalization agreement on U.S. beef and oranges triggered an
impetus for local farmers to upgrade their products into popular
specialty brands.

While an EPA may be a big threat for farm organizations (e.g.
agricultural cooperatives) which have already been pressed to
streamline their operations, it may not be as big of a concern for
local livestock farmers who are already successfully producing
value-added products.

6. (SBU) Beijing Energy Ministerial Outcome: METI, MOFA Pleased
-------

Ministry of Foreign Affairs (MOFA) and Ministry of Economy, Trade
and Industry (METI) officials who attended the December 16 Beijing
Energy Ministerial agreed that the one-day meeting to discuss
regional energy issues had been very useful.

Proposed by China in March 2006, the gathering included energy
ministers from Japan, China, India, South Korea and the United
States, countries that collectively consume almost 50 percent of the
world's energy and contribute more than 50 percent of global carbon
dioxide emissions.

The ministers' joint statement included calls for greater energy
diversification, improved energy conservation and efficiency,
strengthened cooperation over strategic oil stocks, and better data
transparency.

7. (SBU) Transparency: GOJ Translations of Laws and Regulations
-----------

The government decided at a Cabinet meeting on December 19 to
establish a section at the Justice Ministry in fiscal year 2009 to
handle the English translations of Japanese laws and regulations
concerning businesses as part of measures to promote more foreign
investment, according to press reports.

The new section will take over this work from a task force on
judicial reform at the Cabinet Secretariat which had been doing the
translations, but will be disbanded at the end of fiscal 2008.
In fiscal 2009, the Justice Ministry will also set up a new Web site
that allows users to search for legal terms and clauses.

Translating more Japanese laws has been a long-term objective of the
Bilateral Investment Initiative.
In the Initiative's June 2006 report, the USG welcomed the GOJ
decision to begin translating some 200 laws and regulations into
English. For existing English translations on the GOJ's Cabinet
Secretariat's website click here.

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8. (U) GOJ e-Gov Web-portal for Public Comment on Proposed Laws and
Regulations
-----------------------------


TOKYO 00007139 003 OF 008


The U.S. Commercial Service Japan provides a weekly summary in
English of the titles of documents posted on Japan's online
equivalent to the Federal Register.
The English weekly summary of these translations can be found on the
Buy USA website, while the GOJ's list of laws and regulations open
for public comment is accessible via the GOJ's e-Gov web-portal.
9. (SBU) Postal Privatization Committee Releases New Product
Guidelines
------------------

The Postal Services Privatization Committee (PSPC) released a
viewpoint on December 20 concerning the conditions under which the
privatized postal insurance and banking entities will be allowed to
introduce new products. Most newspaper reporting has focused on the
decision that the entities will be allowed to introduce products
before their IPOs.

Industry contacts have expressed concern about the document,
particularly its lack of a clear pledge to ensure a level playing
field, but observers are mulling over the document's meaning, as its
language is quite vague and open to interpretation.

10. (U) FY07 Tax Reform Details Revealed
----------------------------------------

Japan's ruling coalition announced a package of tax reform proposals
on December 14, featuring the first net tax cut in four years by
lowering the corporate tax burden, particularly on depreciable
assets.

Proposals made by the coalition parties included a call for full
amortization of corporate facilities and equipment; despite the
existence of the Government Tax Committee, the coalition's holds
virtually all the power to decide tax changes.

The coalition parties also proposed extending the present temporary
measures of a cut in the tax rate on both capital gains from share
sales and dividend income by one year after their scheduled repeal
in FY07.
Despite calls from business circles, the coalition made no reference
to reducing the effective income tax rate for companies from the
present 40 percent.

These FY07 tax change proposals are limited to minor changes in
Japan's tax system, reflecting a consensus among policymakers that
deliberations on major tax reforms, including a consumption tax
hike, should be shelved until next fall, after Upper House elections
to be held in July 2007.

Refer to attached document for more analysis.

11. (SBU) CEFP Member Advocates "Labor Big Bang" for Growth
------

Council for Economic and Fiscal Policy (CEFP) private sector member
Naohiro Yashiro is promoting a "labor big bang" as a pillar of the
Abe administration's new growth strategy.

Yashiro sees many of Japan's labor market structures as out-of-step
with the world economy and he has been publicly advocating
deregulation as a way of increasing labor market mobility,
productivity, and the national growth rate.

See Tokyo 7064 for details.

12. (U) Regional Governors Approve Haneda Airport Expansion
---------

Tokyo Governor Shintaro Ishihara and Chiba Governor Akiko Domoto
visited Transportation (MLIT) Minister Tetsuzoo Fuyushiba on
December 18 and acquiesced in the ministry's request to cooperate in
building the fourth runway at Haneda airport.

Construction will require that landfill be used to displace part of
the bay area in Tokyo where the runway will be built.

Fuyushiba pledged to continue to negotiate with some 22 fishermen's
associations from Chiba prefecture to secure their cooperation.

TOKYO 00007139 004 OF 008


These talks are expected to delay the start of the project, although
MLIT announced that a drilling survey would begin on December 20.

The Ministry's target completion date for the project is the end of
2009.

13. (SBU) UA to Drop Osaka-Chicago Route in January
--------------------------------------------- ------

A senior United Airlines official in the region told us on December
19 that United will suspend its Kansai International Chicago flight
as of January 20. High fuel costs and low demand have made the
route unsustainable.

He said that United remains committed to the Kansai market and the
decision was not a criticism of Kansai International Airport or the
region. The airline will continue to offer two daily flights to the
United States, to San Francisco and Honolulu.

For more on the discussion with the United representatives about
aviation in Japan and the region see the attached.

14. (U) Air Talks: Japan-India Tripling Capacity
--------------------------------------------- ---

Japan and India agreed in bilateral aviation talks to increase air
service between the two countries by three-fold. PM Singh and PM
Abe welcomed the measures in their December 15 Joint Statement,
during PM Singh's visit to Tokyo.

The agreement allows 21 flights per week from each country,
codeshare with carriers of each country as well as third country's
carriers, and wet lease with the same country's carriers. Up to
seven cargo flights per week are permitted within the agreed
capacity.

Since Indian flights to Narita will remain at four a week, primarily
dictated by space constraints at Tokyo's main airport, the
additional capacity would have to be added at some of Japan's
regional hubs.

15. (U) Fujio Mitarai: New Chairman of MLIT's Transportation Policy
Committee
-------------------------------

On December 12, the Transportation Policy Committee (TPC) selected
Fujio Mitarai, currently Chairman of Cannon and also of the Japan
Business Federation (Keidanren), to become its chairman.

The TPC provides research and advice to the Minister of Land,
Infrastructure and Transport (MLIT). The TPC has 30 members drawn
from business leaders and academia. The previous chairman, Hiroshi
Okuda, resigned on November 25.

TPC subcommittees cover issues such as roads, rivers, city planning,
historical landscape, aviation, ports and harbors. For more
information in Japanese, click here.

16. (U) Association of Asia Pacific Airlines (AAPA) Concerned Over
EU's Aviation Emissions Trading Proposal
--------------------------------------------- ----------

The AAPA on December 21 issued a press release that criticized the
European Commission proposals to include aviation in the European
Union emissions trading scheme, particularly the EC's unilateral
approach to impose charges on international airlines operating in
international airspace outside the EU.

The AAPA is the trade association of 17 scheduled international
airlines based in the Asia-Pacific region, with a permanent
secretariat in Kuala Lumpur, Malaysia and international

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representation in Brussels and Washington, D.C.

AAPA member airlines carry 270 million passengers and 10 million
tons of cargo; approximately one-fifth of global passenger traffic
and one-third of global air cargo traffic.

17. (SBU) Japanese Customs and Express Mail Service

TOKYO 00007139 005 OF 008


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

To gain a better understanding of customs clearance processes and
how they may differ between Japan Post's express mail services
versus private industry's, Econoffs visited the recently opened
Tokyo International Post Office.

Officers viewed state-of-the-art equipment including voice activated
mail sorting and advanced barcode tracking systems.

Customs officers are co-located in the facility free-of-charge to
Japan Post to speed clearance, a fact much lamented by private
industry.

When asked, Japanese officials parried that the clearance system
used by industry (NACCS) is much more efficient by comparison and is
in fact a competitive advantage.

Tokyo International Post Office EMS volume has increased steadily
over the past three years reaching 9.3 million packages in 2005, an
increase of 3 percent, while regular mail volume has steadily
declined, reaching 39.4 million, or minus 6 percent.

China accounts for the largest inbound (34 percent) and outbound (23
percent) volume of mail compared to the U.S., which accounts for 21
percent of inbound volume and 15 percent of outbound volume.

18. (U) Japan Automobile Manufacturers Association, Inc. (JAMA)
Criticizes Proposals to Revise Road Taxes
--------------------------------------------- ---

On December 14, JAMA issued a statement on the GOJ proposal for
revisions of the national tax system for fiscal year 2007.

JAMA welcomed reform of the depreciation system and the provisions
for reduced tax rates on vehicles with a strong environmental
performance.

JAMA disparaged suggestions to modify the road tax system, which
earmarks road tax revenues for road construction, and was
disappointed that there were no provisions for reducing the
corporate effective tax rate.

19. (U) Maritime Policy Law Being Drafted
-----------------------------------------

The ruling parties have prepared a draft basic marine law for
submission to the ordinary Diet session in 2007, according to press
accounts.

The draft law would establish a marine policy panel within the
Cabinet Office chaired by the Prime Minister, and create a new
Minister of State in charge of ocean policy, integrating control of
ocean and maritime policies that are now spread among several
ministries and agencies, including management of the exclusive
economic zone, protection and preservation of the marine
environment, development of underwater resources and marine
transport and safety.

If the Diet passes the bill, it will be the first law to incorporate
all marine policies.

The press reports that the GOJ has been criticized for not having
comprehensive marine policies, noting Japan's response to
marine-problems, such as China's gas field development in the East
China Sea, has been slow.

A Defense Agency contact told us that a private study group called
"The Basic Ocean Law Study Group," headed by former Defense Agency
Director General Shigeru Ishiba and consisting of volunteer Diet
members and scholars, has been studying ocean issues and regulations
for the past year and came up with a draft of the bill.
This group also has been working with LDP's "Extraordinary Meeting
of Ocean Policy" group and held discussions with MAFF, the Defense
Agency, MLIT (Japan Coast Guard), MOFA, MOE, METI, MEXT, National
Public Safety Commission (upper structure of the National Police
Agency) and MOF.


TOKYO 00007139 006 OF 008


20. (U) MAFF Stocks Release Hurts U.S. Rice Flour Mix Exports
-------

U.S. exports to Japan of rice flour mixes dropped by 12 percent
during the January-October 2006 period despite reassurances from the
Agriculture Ministry (MAFF) that this long-standing trade would not
be displaced when MAFF introduced a new program to reduce imported
rice stocks in July 2005.

U.S. rice flour mix exporters ship roughly 30,000 mt (approx. $20
million) of rice flour mixes to Japan a year.

New information indicates that at least one Japanese bakery that
exclusively used U.S. rice flour mix imports for their product is
now planning to build facilities to produce the mixes themselves
using imported rice stocks purchased from MAFF. MAFF will reveal
neither the selling price of the rice nor the quantity sold.
The USG has raised this potential "import substitution" issue on a
number of occasions both in Tokyo and in Washington.

In the most recent meeting in Tokyo on December 20, MAFF stood
firmly behind the program.

21. (U) Beef "Pipeline" Released
--------------------------------

On December 18, Japan released 700 of the 706 tons of frozen U.S.
beef that had been held since January (the last time U.S. beef
imports were stopped).

This decision came after several months of hard negotiations
involving USDA, the Embassy, MHLW, and MAFF.

The release of this beef was timely because supplies are tight and
prices are high.

Yoshinoya, the largest user of U.S. beef in the world, has been
counting on these stocks to continue its current U.S.-beef
promotion.

This action ends several commercial disputes over losses related to
beef that were, until now, quarantined by the Japanese government
for unstated reasons.

For the remaining six tons of beef, Japan is requesting an
investigation into a single box of beef that possibly came from an
animal slaughtered on day prior to the plant being approved for
export to Japan.

22. (U) MAFF Sets Beef Safeguard Level
--------------------------------------

This week MAFF set the level of beef imports in 2007 that would
trigger additional duties under Japan's "beef safeguard" at the same
level as 2006. This recommendation will be rubber-stamped by the
Diet early next year.

This means that additional duties will not be levied unless beef
imports in 2007 exceed the average for 2002-2003 levels, or 117
percent of the most recent year's trade data, whichever is higher.

This is a good outcome but much depends on when -- and to what
extent -- Japan lifts the current age restrictions on U.S. beef,
which will lead to a surge in imports.

In previous years the Embassy's discussions with MAFF have been
contentious but this year things went smoothly, likely due to high
prices for beef and declining overall consumption.

Japan's beef safeguard was negotiated during the Uruguay Round to
afford protection to domestic producers in the event of an import
surge.

Normally, the safeguard is triggered when imports increase by more
than 17 percent from the previous Japanese fiscal year on a
cumulative quarterly basis.
Once triggered, the safeguard remains in place for the rest of the
fiscal year. If triggered, beef tariffs will rise to 50 percent

TOKYO 00007139 007 OF 008


from 38.5.

23. (U) Status of U.S. Beef Sales
---------------------------------

Revised Embassy estimates, based on trade-reported figures, show
that Japan will import about 10,000 MT of beef in CY 2006 worth
nearly $50 million. This is a fraction of the $2.4 billion level in
previous years.
Only U.S. beef from cattle 20 months and younger is allowed into
Japan and only a small percentage of the cattle slaughtered in the
Untied States meet this requirement.

A recent survey by the Japanese Food Service Industry shows that 40
percent of restaurants were not serving U.S. beef because of its
high price.

Of those that do carry U.S. beef, 70 percent said that they could
only source 30 percent of needed supplies due to high prices and low
supply.

24. (U) Japan Set to Ban Wagyuu Beef?
-------------------------------------

Japan looks set to clamp down on imports of "Wagyuu" beef,
developing onerous labeling requirements that would ban use of the
term "Wagyuu" on beef from cows not born and raised in Japan.

About a third of cattle produced in Japan is Wagyuu, producing a
high value added, heavily marbled meat.
The United States does not currently export Wagyuu to Japan, owing
to other trade restrictions already in place -- primarily the ban on
U.S. beef from cattle over 20 months old.

There is a U.S. Wagyuu industry which will feel the effects of the
new labeling requirements once -- if -- the age restrictions are
lifted, and the Embassy has been working with our Australian
counterparts in making our concerns known to GOJ authorities.

The labeling issue also may have implications for Japan's approach
to the broader geographical indicators dispute that the United
States has had with the European Union.

For more on the trade problem, please see attached report.

25. (SBU) Trade Distortions: Pork Gate Price
---------------------------------------------

Japan's "gate price" system of calculating duties for pork imports
distorts trade and is plagued with illegal schemes.

Japan has to date said that it will only reform the system as part
of the Doha negotiations.

Recent criminal indictments, however, and credible rumors that an
icon of Japanese industry -- Mitsubishi -- is being investigated,
are creating domestic pressure for reform.

There may be an opportunity soon for the United States to push for a
simplified tariff system outside of Doha.
Japan is the world's largest importer of pork and U.S. exports to
Japan topped a record $1 billion in 2005.

Under the current system, pork meat imports, priced at entry into
Japan, are valued at or above the gate price (524 yen/kilo), then
they pay a simple tariff of 4.3 percent.

If their value is lower than the gate price, the importer must pay
the difference between the import value and the gate price as a
duty.

A 4.3 percent specific duty is also applied. This system creates a
strong incentive for fraud by over-invoicing.

26. (U) GOJ Projects 2.0% GDP Growth in JFY '07

On December 19, the Abe Cabinet approved the GOJ's official economic
forecast for JFY07 (April 2007 to March 2008).

TOKYO 00007139 008 OF 008

The forecast, prepared by the Cabinet Office and used in MOF's
revenue projections for the regular budget, is in line with market
consensus in terms of nominal growth outlook, but slightly
optimistic about the real growth outlook.

The official forecast projects a 2.0 percent increase in real GDP
for next fiscal year, a 2.2 percent increase in nominal GDP, and a
0.2 percent increase in the GDP deflator.
By contrast, private analysts on average project FY07 real GDP
growth at 1.9 percent and project a 0.3 percent increase in the GDP
deflator, for 2.2 percent nominal growth.

See attached for details.

27. (U) Japan's Cabinet Approves "Housekeeping" Supplemental Budget
for FY06
----------------------------

The Cabinet approved MOF's fiscal 2006 supplemental budget proposal
on December 20, clearing the way for Diet action.

Under Japanese Government accounting rules, the supplemental adds a
net Q3.8 trillion ($33 billion or 0.7 percent of GDP) to general
account expenditures.

However, Q0.8 trillion of the supplemental budget's additional
"spending" consists of financing operations, representing an
increase in government financial assets (and a decline in net debt)
rather than spending on a national accounts basis.

Most of the remaining Q3 trillion ($26 billion or 0.6 percent of
GDP) in net additional spending consists of inter-government
transfers, disaster relief, and greater-than-projected mandatory
spending.

The increase in actual spending was more than offset by 4.8 trillion
($40 billion or 0.9 percent of GDP) in higher-than-projected
government revenues.

See attached for details.

DONOVAN

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