Cablegate: The Japan Economic Scope June 28, 2007

DE RUEHKO #2966/01 1800801
R 290801Z JUN 07






E.O. 12958: N/A
SUBJECT: The Japan Economic Scope June 28, 2007

Sensitive but unclassified. Please protect accordingly.

1. (U) This cable contains the Japan Economic Scope
from June 28, 2007.

2.(SBU) Table of Contents

3. Economic Section's Thinning Ranks
4. Doha Stock Taking in Tokyo
5. Ag Text Delay -- Is There a Silver Lining?
6. US-Korea FTA -- Political Will Key to Deal
7. U.S. Beef: Technical Talks in Tokyo
8. Japan's First Rice Exports to China Begin
9. Japan Helps Fund WTO Training Program
10. TSE to Introduce Japan Depositary Receipts
11. Share Wars: The Company Strikes Back
12. NikkoCitigroup's Fujita on Triangular Mergers
13. Cabinet Office Releases Study Group Report: Stronger Action
Against Competition Law Offenders
14. USJ Cuts Out Osaka City from Its Management Structure
15. Ambassador at NWA 60th Anniversary of Serving Japan
16. KIX Must Wait to Become 24-Hour Airport
17. Toward "Car Electronics Island Kyushu"
18. Honda Motors on U.S.-Japan Auto Relations and Environment
19. Former Prime Minister Miyazawa Dead at 87
20. Igawa is Back and Looking Good
21. But Matsuzaka Even Better!
22. Hotdog Giant Out of Action?

3. (U) Economic Section's Thinning Ranks

It is that time of the year. This week Hans Klemm, who has been
the Embassy's Economics Minister since last August, departed post
to become Ambassador to East Timor -- although, for the record, we
only have confirmation that he departed on a flight to Bali on
June 26. Hans will be replaced by Robert Cekuta, who arrives in

Ambassador Klemm left his mark on the section by pushing for a
more robust bilateral engagement and to have an FTA on the agenda,
keeping his focus on the big picture.

Three other key figures are set to depart soon. Masumi Ono,
Economic Assistant and invaluable member of the section, will
finish her tour on June 29, before returning to New York to
resume her UN career. (Her husband, Brett Blackshaw will move
from the Political Section to the Vietnam desk.)

Ono-sama has been our reg ref specialist since arriving at post
three years ago as well as our ace on special zones, and large
scale retail development among other issues. She will be
succeeded by Eriko Marks who is already on board.

Dan Fantozzi, currently Acting EMIN, and Marilyn Ereshefsky, our
IT and telecoms point person, will be departing Tokyo July 19 and
25, respectively. Three years in the Section, Dan has proven
more than anything else that he is irreplaceable. He will be
heading back to Main State, although, we hope, not before leaving
some of his wisdom on civair and postal privatization matters
behind. He will be Director for Environmental Policy in OES.
Marilyn, who grasped some complicated portfolios that left others
flummoxed or catatonic, will be heading back to Washington as an
American Political Science Association (APSA) Congressional
Fellow. She will spend the fall at SAIS and the spring on
Capitol Hill. Marilyn will be succeeded by Scott Smith, who
arrives in late July. (ECON: Nicholas Hill)

4. (SBU) Doha Stock Taking in Tokyo

After the collapse last week of the G-4 talks in Potsdam to move
the Doha Trade Round forward, Japan's Agriculture and Trade
Ministers issued a joint statement pledging to "participate
actively" in any consultations to bring the Round to a successful

Trade Minister Amari told reporters on June 26 that he hoped to
gather a number of developing countries that can be flexible in
the NAMA talks on the margins of APEC meetings in early July in
Australia. (Before then he will be traveling to India primarily

TOKYO 00002966 002 OF 008

to discuss bilateral issues, including energy cooperation.)

In Tokyo on June 25, Vice Trade Minister Toshiaki Kitamura
expressed his disappointment with the stalled Doha talks during a
meeting with the EMIN. Other sources at the Trade Ministry and
Foreign Ministry were trying to piece together what had happened
in Potsdam.

The officials were interested in how committed the United States
remained to the Doha process and how effectively WTO Director
General Lamy could jump start negotiations after NAMA and
Agriculture Committee Chairs deliver their texts in coming weeks.

We underscored the continued priority the United States attaches
to a successful conclusion of the Doha Round, although noted that
a bad deal is worse than no deal at all. (ECON: Nicholas Hill)

5. (SBU) Ag Text Delay -- Is There a Silver Lining?

The Japan Agriculture News noted on June 27 that WTO Agriculture
Committee Chair Falconer was already running into some
difficulties with key members and the release of his draft text
would likely be delayed.

According to the article, the G-4 countries are still using the
media to blame others for the collapse of talks in Potsdam on
June 21.

An economist at a leading bank in Tokyo we talked to on June 26
told us he was surprised that the Potsdam talks failed, but
pointed to a possible silver lining. Given PM Abe's declining
popularity and the late July upper house elections, the
government would be in a better position to take difficult
decisions after the voting is over.

If Falconer's paper on modalities, he continued, is issued on
time -- which is to say as early as July 2 -- it would be difficult

for Japan, because of the elections and an inexperienced
Agriculture Minister, to make tough decisions before the voters
go to the polls.

Japan, he added, would be put in a very difficult situation if
Korea, with a similarly protectionist-minded farm lobby, suddenly
decided to compromise in the agriculture talks. (ECON: Nicholas
Hill/Ryoko Nakano)

6. (U) US-Korea FTA -- Political Will Key to Deal

Political leadership made the U.S.--Korea Free Trade Agreement
(KORUS) possible. That was the message underscored by Ahn Se-
Young, a professor at Korea's Sogan University, during a brown
bag Trade Ministry-sponsored conference in Tokyo on June 26.
Ahn described the political courage demonstrated by South Korean
president Roh Moo-hyun, who stood up against some traditional
political backers to bring the talks to a successful conclusion;
even at one point firing his Agriculture Minister over some
negative remarks the minister had made.

Moderating the METI event was Waseda University economics
Professor Shujiro Urata. Also the chair of a working group to
promote a more liberal trade regime under the Prime Minister's
Council on Economic and Fiscal Policy, Urata credited Roh for his
political leadership, but suggested it would be more difficult
for Japan, under a parliamentary system, to follow a similar

Urata conceded that Japan has not traditionally pushed for
ambitious Free Trade Agreements, including in the negotiations
that Japan launched with Korea -- talks which Korea suspended
before launching its FTA round with the United States.

When an official in the audience from Tokyo's European Commission
Office expressed concern that KORUS faces an uphill battle in the
U.S. Congress, Ahn did not seem overly concerned about
ratification. He noted that Congress tends to fixate on
environmental aspects of FTAs; CAFTA, he predicted, posed bigger
concerns for Congress than KORUS.

TOKYO 00002966 003 OF 008

A reporter for the New York Times asked what benefits would
accrue to North Korea's industrial complex in Kaesong as a result
of the deal. Ahn said that, regardless of the attention to this
issue, in reality Kaesong was of limited economic interest to
South Korean companies. For the presentation sheet, click here.
ECON: Nicholas Hill/Ryoko Nakano)

7. (SBU) U.S. Beef: Technical Talks in Tokyo

U.S. technical experts sat down with their Japanese government
counterparts in Tokyo June 27-29 in the first set of talks to
discuss BSE data that was behind the decision by the World Animal
Health Organization (OIE) to place the United States in a
"controlled risk" category that should ease tight restrictions on
U.S. beef exports to Japan.

Japanese officials have told us that the talks may require up to
two to three rounds before the government can send a
recommendation to the independent Food Safety Commission on
whether to ease the currently onerous restrictions that have
slashed dramatically U.S. beef sales in Japan.

We will have more reporting on the meetings next week after they
have concluded. (ECON: Nicholas Hill)

8. (U) Japan's First Rice Exports to China Begin

The first cargo of Japan's exports of rice to China departed on
June 24. The shipment is the first since Prime Minister Wen
Jiabao and Prime Minister Shinzo Abe agreed to resume exports in

Exports to China had been stalled since 2003 when China had
reviewed its quarantine system. According to reports, the
shipment will be directed to Beijing and Shanghai and arrive
sometime in mid-July.

The shipper of the cargo, the Japan Agriculture Cooperatives,
hopes the Chinese market will prove lucrative. Japanese rice is
considerably more expensive than locally grown Chinese rice -- or,
for that matter, virtually any rice in the world.
Agriculture Ministry officials hope that the agreement will
contribute to the government's goal of tripling food exports by

To commemorate the occasion, the Ministry of Agriculture will
hold a reception on June 29 in Tokyo. (ECON: Nicholas
Hill/Ryoko Nakano)

9. (U) Japan Helps Fund WTO Training Program

Japan just donated over $400,000 to its WTO Development Agenda
Global Trust Fund, which finances technical assistance programs
and training activities for developing and least developed
countries as well as economies in transition. (ECON: Ryoko

10. (U) TSE to Introduce Japan Depositary Receipts

The Tokyo Stock Exchange (TSE) plans to introduce a system of
Japanese Depositary Receipts (JDRs) starting in September 2007.
The new system will provide a way for foreign companies to access
the Japanese capital market without listing their shares directly.

The proposal is part of the effort to turn Tokyo into a global
financial center. Because JDRs will be domestic securities and
denominated in yen, they could be easier for Japanese
shareholders to understand and therefore may be an attractive
option for foreign firms considering a triangular merger. For more

information, see Tokyo 2946, (ECON: David DiGiovanna)

11. (U) Share Wars: The Company Strikes Back

At a June 24 general shareholders meeting, Bull-Dog Sauce co.
shareholders approved the introduction and implementation of

TOKYO 00002966 004 OF 008

defensive measures that would allow the company to issue 3:1
share warrants to existing shareholders thereby diluting the
holdings of the firm's largest shareholder, U.S. hedge fund Steel

This was the fund's third loss in three days. Inaba Denki Sangyo
and Brother Industries both dismissed Steel Partner's shareholder
proposals for large dividend hikes at shareholder meetings on
June 22. Other companies in which the fund is a leading
shareholder, including Sansei Yusoki and Chuo Warehouse, are also
considering the introduction of defensive measures at upcoming
shareholders meetings.

Steel Partners suit seeking to block Bull-Dog from going forward
with the warrant plan was rejected by Tokyo District Court on
June 28. Steel Partners is presumed to immediately appeal to
Tokyo High Court. (ECON: Satoshi Hattori)

12. (U) NikkoCitigroup's Fujita on Triangular Mergers

Top Japanese Equity Strategist and M&A Expert Tsutomu Fujita of
NikkoCitigroup, headlined a seminar on Japan's new Triangular
Merger Law on June 26.

From his study of global trends, Fujita observed that most M&A's
that use shares as consideration are large scale, high value
transactions (usually more than three trillion yen).

Since the market capitalization of most Japanese target companies
is relatively small, Fujita believes few foreign companies would
be interested in using Japan's triangular merger provisions.

Fujita also explained the difference between the Japanese and U.S.
triangular merger provisions.

Japan's Corporate Code only allows "forward" triangular mergers
in which the subsidiary of the acquiring company becomes the
surviving company.

Conversely in the United States, most triangular mergers are
"reverse" triangular mergers, in which the target company becomes
the surviving company, and the exchange agent mediates by issuing
American Depository Shares (ADS) to the target shareholders
(which Fujita referred to as a "rectangular merger"). This
allows the surviving company to retain all approvals and licenses
held before the merger.

In addition, the presence of the exchange agent enables European
companies to conduct cross-border triangular mergers, since
European commercial law, in principle, does not allow the
subsidiary to hold the shares of its parent company (although
exceptions do exist). Fujita therefore believes the Japanese
triangular merger is not suitable for European companies and will
be used entirely by U.S. companies.

Furthermore, he pointed out that in the United States the
subsidiary vehicle company is normally a Special Purpose Vehicle
company established simply for the purpose of the merger.
Japanese triangular merger provisions, on the other hand, require
the acquiring company subsidiary to engage in business operations
in order for the transaction to receive tax deferral. This is an
additional burden for foreign companies conducting triangular
mergers in Japan.

In Fujita's conclusion, he stated that the Japanese triangular
merger scheme is significantly inconvenient, and believes cross-
border triangular merger transactions will not occur frequently
in Japan. Such transactions, if any, would be conducted mainly
by United States companies. (ECON: Satoshi Hattori)

13. (SBU) Cabinet Office Releases Study Group Report: Stronger
Action Against Competition Law Offenders

On June 26, the Cabinet Office released a report by the Study
Group on Basic Issues in the Antimonopoly Act, calling for
increased punitive surcharges on companies found to have engaged
in cartels or bid-rigging conspiracies, particularly those firms
with a leading role in the illegal action. The report, however,
avoided designating a specific surcharge level.

TOKYO 00002966 005 OF 008

The Study Group also recommended maintaining both administrative
surcharges and criminal penalties for violations of the
Antimonopoly Act, a situation the Japan Business Federation
(Keidanren) had characterized as contradictory to the prohibition
on "double jeopardy" in the Japanese Constitution.

Similarly, the Study Group rejected Keidanren's request to
eliminate the system under which the Japan Fair Trade Commission
(JFTC) hears the appeals of companies contesting surcharge orders
levied by the JFTC itself instead of referring the case directly
to the judicial system for review.

The release of the Study Group report -- the product of 35
meetings held over the past two years-- sets the political stage
for possible new amendments to the Antimonopoly Act when it is
reviewed by the Diet at the session beginning in January 2008.
(ECON: Chris Wurzel)

14. (U) USJ Cuts Out Osaka City from Its Management Structure

Universal Studios Japan (USJ) unofficially announced that their
board of directors would no longer contain any Osaka city
government officials. A formal statement will be made after the
general meeting of stockholders on June 27.

USJ was established as a third sector organization by the Osaka
city government in 1996, and this marks the first time city
officials will not occupy any executive director positions.
Executives from Universal Studios U.S., Goldman Sachs, Japanese
private companies, and financial institutions will make up the
new management structure.

A USJ sales manager pointed out that after Glenn Gumpel replaced
an Osaka city government official as the president of USJ, the
city's influence over management issues has declined.

In addition, USJ has acted more independently since being listed
as a private company on the "Mothers"section of the Tokyo Stock
Exchange in March 2007.

No longer obligated to confer with the Osaka city government, the
sales manager predicts that USJ will be able to accelerate its
decision-making process. (Osaka-Kobe: Phil Cummings/Scott
Ravenhill/Naomi Shibui)

15. (U) Ambassador at NWA 60th Anniversary of Serving Japan (U)
On June 26, Ambassador Schieffer made the kampai toast and broke
open the sake barrel with several Northwest Airlines senior
executives at a large reception in Tokyo commemorating NWA 60
years of scheduled service to Japan.

Northwest executives told the crowd, which included industry
leaders, such as the President of Boeing Japan, that the airline
had been a leader in Pacific aviation and had worked hard to
strengthen its connections to Japan.

On Sunday, July 20, 1947, a Northwest Airlines Douglas DC-4
touched down at Haneda Airport after some 50 hours of travel.
Originating in La Guardia in New York City, the flight
inaugurated Northwest's regular service to Japan.

It also marked the start of Northwest's regular service to Asia
as many of the passengers continued on to Shanghai and Manila.
Northwest was the first U.S. airline to operate an all-jet fleet
across the Pacific. The airline helped establish Japan Airlines
in 1951 by leasing NWA aircraft and crew to the company. (ECON:
Josh Handler)

16. (SBU) KIX Must Wait to Become 24-Hour Airport

The Ministry of Land, Infrastructure, and Transportation (MLIT)
announced on June 21 that due to a delay in the construction of
the air traffic control system for the second runway at KIX,
which opens on August 2, the new runway will not be operational
during evening hours until construction can be completed in

Currently, KIX must shut down a few hours at night to perform

TOKYO 00002966 006 OF 008

daily maintenance on its sole runway. A second runway will give
KIX at least one open runway at all times.

Kansai International Airport Co., Ltd. (KIAC) was disappointed by
the MLIT statement because they had counted on the second runway
to transform KIX into a true 24-hour airport.

The delay, moreover, will jeopardize KIX's chances of attaining
its target of 130,000 flights for the year. KIX must meet this
goal to receive financial support from MLIT for the second runway
project. (Osaka-Kobe: Phil Cummings/Scott Ravenhill/Naomi

17. (U) Toward "Car Electronics Island Kyushu"(U)

As electronics play an increasingly important role in automobiles,
hybrid cars in particular, semiconductor (IC) manufacturers
operating in Kyushu (e.g., NEC, Renesas Technology, Mitsubishi
Electric, and Toshiba) are expanding production capacity to meet
this growing demand.

Kyushu currently accounts for 23 percent of Japan's IC production
and nearly 10 percent of Japan's auto production.

According to the Kyushu Branch of the Development Bank of Japan,
the potential car electronics market in Kyushu is worth about
five billion dollars.

With Toyota, Nissan, and Daihatsu's total production capacity in
Kyushu expected to reach 1.5 million units per year by 2009,
there is also an increasing demand for skilled workers to develop
these value-added car parts.

In response to this challenge and as part of a METI-funded
program, the Kitakyushu Foundation for the Advancement of
Industry Science and Technology (FAIS) plans to offer post-
graduate courses on car electronics, starting as early as 2009.
These courses will be conducted in collaboration with three
universities (Kyushu Institute of Technology, the University of
Kitakyushu, and Waseda University) as well as auto and
electronics manufactures.

FAIS expects to train about 60 car electronics specialists
annually through this program. (Fukuoka: Yuko Nagatomo/James

18. (SBU) Honda Motors on U.S.-Japan Auto Relations and

Honda motors representatives shared their views on the U.S.-Japan
auto relationship and environmental questions with us on June 25.

On the weak yen issues in the news, Honda disavowed any
connection to their production plans as Honda's consistent
philosophy is to produce in locations close to its customers.
They noted 80 percent of the Honda cars sold in the United States
are manufactured in North America.

Asked if Honda had ever considered a plant in Michigan, they had
a vague recollection that when Honda was first considering a
plant in the late 1970s and early 1980s, Michigan was not
interested, so that is one of the reasons Honda's first auto
plant was in Ohio.

After that Honda made its plant location decisions based on
Honda's production needs and the workforce, and so plants ended-
up elsewhere than Michigan. The reps spoke very highly, however,
of the governor of Michigan.

On the hot-topic of global warming and fuel efficiency, they
noted that Honda was not part of the automaker's fight against
tighter fuel efficiency standards in the United States. Honda is
pursuing several technologies for improving mileage and reducing
emissions: hybrids, fuel cells, clean-diesel, flex-fuel engines
and fuel cells.

As for gasohol and Japan, they intimated that Japan is unlikely
to have a large supply of ethanol in the near future, but if for
some reason a large supply becomes available Honda could make use

TOKYO 00002966 007 OF 008

of its flex-fuel technology engines used in Honda's Brazilian

They conceded bio-diesel fuel might hold some promise, but Honda
is not selling passenger diesels in Japan.

The Honda reps said it will take some tax incentives to introduce
clean-diesel technology as diesel has a dirty image in Japan, but
Honda is selling clean diesel vehicles in Europe. They noted
that Mercedes is selling one clean-diesel car in Japan, but that
it will probably not turn public perceptions around. (ECON:
Josh Handler/Junko Nagahama)

19. (U) Former Prime Minister Miyazawa Dead at 87

Former Prime Minister (1991-93) Kiichi Miyazawa died June 28 in
Tokyo at the age of 87.

One of Japan's longest serving statesmen, Miyazawa came from a
family of prominent politicians. His father was a member of the
Diet and his grandfather was a Cabinet minister. One brother was
a one-time governor and another ambassador. Miyazawa also was
related through marriage to two former prime ministers.

In addition to becoming Prime Minister himself, Miyazawa held a
number of Cabinet posts, including two stints as Finance Minister
(1986-88 and 1998-2001), Chief Cabinet Secretary (1980-82),
Minister of Foreign Affairs (1974-76) and Minister of
International Trade and Industry (1970-71).

First elected to the Diet Upper House in 1953, Miyazawa was a
founding member of the Liberal Democratic Party in 1955. He won a
seat in the more powerful Lower House in 1967. A great friend of
the United States, he worked as an interpreter in the General
Headquarters of the Occupation forces, attended the San Francisco
Peace Conference in 1951, and accompanied then Prime Minister
Hayato Ikeda when he met President John F. Kennedy in 1961.

Miyazawa was chosen for membership on the Trilateral Commission
in 1973. As Prime Minister, Miyazawa attended the Summit Meeting
of the U.N. Security Council in New York where he also met with
then President George Bush, Russian President Boris Yeltsin,
British Prime Minister John Major and Chinese Premier Li Peng.

Miyazawa was educated at the prestigious Tokyo University, and
later joined the Finance Ministry. An avid student of English,
he is said to have eaten an entire concise English-Japanese
dictionary, following a custom of literally eating the words once
they were memorized. Miyazawa's daughter is married to U.S.
Ambassador to Malaysia Christopher LaFleur. (ECON: Joan Siegel)

20. (U) Igawa is Back and Looking Good

New York Yankees off-season pitching upgrade, Kei Igawa, returned
to the line-up June 22 for the first time since May 5. Igawa
pitched 4 2/3 strong innings giving up two runs on five hits,
walking two and striking out five, including Barry Bonds on three
pitches before a sellout crowd of 43,500 at San Francisco's
bayside AT&T Park.

Although Igawa got into trouble in the 5th, giving up three hits
and two walks before Skipper Joe Torre pulled him, his placement
was much improved from April and he was able to keep the ball
down and inside. Clearly the work with Yankee pitching coaches
in Tampa and Scranton has paid off. If he can maintain this form
through the summer, he could make a solid contribution to the
still rickety Bronx pitching staff. (ECON: David DiGiovanna)

21. (U) But Matsuzaka Even Better!

The great Red Sox right hander captivated Japanese viewers on
nationwide television June 28 during the morning drive time.
Daisuke Matsuzaka pitched a brilliant eight innings, giving up
only one run, and struck out a lot of batters.

Regrettably, the once lowly Seattle Mariners took three straight
games from the Major League's best team, with centerfielder
Ichiro Suzuki performing brilliantly, including scoring all the

TOKYO 00002966 008 OF 008

way from first base to win the final game of the series.

Earlier in the week, Matsuzaka out-dueled future Hall of Famer
Gary Maddux to win his ninth game of the season, 2-1, over the
San Diego Padres. Reliever Hideki Okajima also continued to put
in a number of scoreless relief stints for Boston. (ECON:
Nicholas Hill)

22. (U) Hotdog Giant Out of Action?
Coney Island may not get the same attention in Japanese media
outlets this Fourth of July. The best poster boy for U.S. beef
byproducts from cows over 20 months old may be on the sidelines.

Takeru Kobayashi is to hotdog eating contests what Napoleon
Bonaparte was to the creation of the nation state -- or Franz
Kafka was to the writing of dull books -- a legend that towers
over his peers.

The sport of eating hotdogs fast used to be the domain of
corpulent American men -- men who would pour mustard and ketchup
and relish on their dogs, float them into their mouths, and savor
each bite, all with a big smile on their face.

Kobayashi, a skinny ascetic from Japan -- albeit, one who doffs
his baseball cap to one side -- changed everything when he showed
up one Fourth of July seven years ago at Nathan's on Coney Island.

From an expression of hedonism, he turned eating hotdogs into a
martial art form.

Looked on with disdain initially by his rotund rivals, Kobayashi
had no time to enjoy the hotdog. In contests, he would take the
bun, dip it in water, crunch it down with his hands into a small
pellet, then use the hotdog as a plunger to force the bread down
his throat. The hotdog followed, with breathtaking minimalism --
Kobayashi chewed only if he had to.

And the diminutive Japanese kept winning hotdog eating contests,
six in a row so far. But this year his streak on Coney Island
may be about to end. "My jaw refused to fight anymore," he said
forlornly on his website. (ECON: Nicholas Hill)


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