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Cablegate: The Japan Economic Scope--July 5, 2007 Part 1

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RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #3125/01 1900855
ZNR UUUUU ZZH
R 090855Z JUL 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 5303
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5607
RUEHFK/AMCONSUL FUKUOKA 1947
RUEHNAG/AMCONSUL NAGOYA 1047
RUEHNH/AMCONSUL NAHA 4367
RUEHOK/AMCONSUL OSAKA KOBE 5531
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 06 TOKYO 003125

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PARIS PLEASE PASS TO USOECD
STATE PLEASE PASS TO USTR

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope--July 5, 2007 Part 1

Sensitive but unclassified. Please protect accordingly.

1. (U) This cable contains part one of the Japan Economic
Scope from July 5, 2007.

2.(SBU) Table of Contents

3. G-10 Agriculture Ministers Issue Another Statement on Doha
4. An Early Glimpse at G-8 Planning
5. Advisory Councils-- Recommendations - Few Details for Concrete
Action
6. Time Approaching for Australia and Japan to Resume FTA Talks?
7. Beef Talks Conclude
8. Second Big Retailer to Sell U.S. Beef
9. Hokkaido Meat Processing Scandal Shakes Consumer Confidence
10. US Grain Council President Visits Hokkaido Farms
11. Economic Organization Gives Abe High Marks
12. METI Gets a New Vice Minister
13. Koezuka to Replace JPO Commissioner Nakajima
14. METI Requests Public Comments on Revised FDI Regulations
15. Defensive Bull-Dog Is Not Alone
16. BOJ "Tankan" Survey: No Change in Firm Business Sentiment
17. Japan's "Core" Consumer Prices Down 0.1% in May, Fourth
Consecutive Monthly Drop

3. (SBU) G-10 Agriculture Ministers Issue Another Statement on
Doha
----

The so-called G-10 agriculture ministers issued a communiqu on
July 2 calling for the "multilateral process in Geneva" to be
intensified to bring about a successful conclusion to the Doha
Round. The document was released after a teleconference among
the ministers, including Agriculture Minister Akagi.
The communiqu includes a reference to another G-10 statement
issued on June 17, in which the participants reaffirmed the G-
10's main priorities, including "no tariff capping," only limited
or "acceptable tariff cuts in the top band with flexibilities,"
and "reasonable treatment and appropriate numbers on sensitive
products."

A MOFA official told us on July 3 that Japan wanted to see the
communiqu issued before WTO Agriculture Negotiating Chair
Falconer tables his draft text on modalities. The MOFA official
said the statement contained "nothing new," but its value was
that it reaffirmed what the G-10 had called for last month. The
official said he was increasingly uncertain about what to expect
from Falconer.

Meanwhile, according to press reports, Agriculture Minister Akagi
plans to travel to Europe to meet with Falconer and WTO Director
General Pascal Lamy. The MOFA official told us that timing of
the visit was still undecided, but it would probably be sometime
next week.

Separately, the press is reporting that Japan Agriculture
Cooperative Chairman Miyata has already departed for Europe and
hopes to meet with Falconer and possibly Lamy.

For the G-10 statements, see the links to Japan's Agriculture
Ministry website: July 2 G10 statement; June 17, 2007 Proposals;
June 17, 2007 Statement. (ECON: Nicholas Hill)

4. (SBU) An Early Glimpse at G-8 Planning
------------------------------

Prime Minister Abe is very fond of his slogan "Beautiful Country"
and will likely use some version of it as the overall theme for
the 2008 G-8 summit to be held in Lake Toya Hokkaido our sources
tell us.

MOFA will announce the formation of a new division in early July
that will be responsible for the overall planning of the summit
and which will be headed by an Ambassador-level official.
In the run-up to the actual summit, a foreign ministerial will be
held June 26-27 in Kyoto, a finance ministerial on June 13-14 in
Osaka, a meeting of interior and justice ministers on June 11-13
in Tokyo, a labor ministerial on May 11-13 in Niigata, an
environmental meeting on May 25-27 in Kobe, and a climate change
meeting on March 14-16 in Chiba.


TOKYO 00003125 002 OF 006


The Embassy is proactively planning for the Hokkaido summit. The
DCM and a management team have already visited the region to see
the facilities first hand.

In addition, the Ambassador, the DCM and many members of the
Embassy, who will be involved in planning for the summit and the
ministerials, held a DVC with Embassy Berlin to hear about
lessons learned from the 2007 G-8 meetings in Germany.
Several members of the staff have established contacts with MOFA
officials that will be handling logistical issues for the Summit.
See Tokyo 3052 for more information. (ECON: Sally Behrhorst)

5. (SBU) Advisory Councils-- Recommendations - Few Details for
Concrete Action
---------------

The Council for Economic and Fiscal Policy (CEFP), the Council
for the Promotion of Regulatory Reform (CPRR), the Asia Gateway
Strategy Panel and the Innovation 25 Strategy Council all issued
reports over the past several weeks recommending structural and
administrative reform of various aspects of the Japanese
government and society.

While reform-minded members of each Council had proposed fairly
forward-leaning recommendations, fierce ministerial resistance
resulted in final reports that have been described are long on
rhetoric and short on details.

While this could reflect the Abe administration's caution in the
run-up to the July Upper House elections, it is unclear to us if
this will change after the votes are cast. See Tokyo 02964 for a
more detailed discussion. (ECON: Sally Behrhorst)

6. (SBU) Time Approaching for Australia and Japan to Resume FTA
Talks?
------

The Australian Ambassador to Japan, Murray McLean, in an
interview in the Japan Agricultural News this week, underscored
Australia's desire to see dairy products included in any Free
Trade Agreement the two countries work out in coming months. He
said that increased dairy trade would be largely "complementary,"
enabling Japanese producers to concentrate on high end drinking
milk.

Although there has been speculation that the next round of talks
with the Australians scheduled for late July will be postponed
until after the July 29 Upper House elections, there has been no
announcement yet. A MOFA official told us on July 5 there would
be no "postponement," but acknowledged there may be some
"adjustment" in the schedule.

A non-GOJ source familiar with the negotiations told us that the
Japanese government is keen to postpone the next round of
negotiations with Australia until August so that talks do not
cloud the Upper House elections.

With talks looming, the Japan Agricultural Cooperative (JA), the
country's main farm protectionist lobby, organized a protest at
Tokyo's Yoyogi Park on July 1. Mostly dairy farmers turned up to
underscore their opposition to the Doha talks and to a free trade
agreement with Australia that included substantial concessions on
agriculture. (ECON: Nicholas Hill)

7. (SBU) Beef Talks Conclude
-----------------------------

The first round of expert level BSE talks -- which the U.S. side
hopes will lead to a further market opening for U.S. beef --
ended June 29 in Tokyo.

John Clifford, the Chief Veterinary Officer of USDA's Animal and
Plant Health Inspection Service led an interagency delegation
from Washington to discuss the BSE situation in the United States
and the dossier that was behind the World Animal Health
Organization's easing of restrictions on U.S. beef.

Meeting at a MAFF conference center near Yasukuni Shrine, the two
sides held all day sessions on June 27-28, before convening a
smaller group at MOFA on June 29.


TOKYO 00003125 003 OF 006


The discussions focused on the U.S. submission to the OIE, the
feed ban, ongoing BSE surveillance, the failed Japanese mouse
assay tests and the Harvard Risk Assessment.

The next round of talks is likely to take place in early August.
The United States has made it clear that it would like to see the
Japanese government recommend to its Food Safety Commission that
beef trade with the United States be further eased in accordance
with international standards.

TV cameras and reporters were on hand for the first round at the
opening, but then left the proceeding for experts to deliver
detailed presentations. Overall, coverage was fairly muted, with
little of the bombast that has, at times, characterized the press
reporting on BSE-related issues in the past. For more details on
the visit, see Tokyo 3036. (ECON: Nicholas Hill)

8. (SBU) Second Big Retailer to Sell U.S. Beef
------------------------------

U.S. beef is gaining acceptance in the Japanese market. A senior
official at Wal-Mart Japan, which owns a majority stake in the
Seiyu Retail Store chain in Japan, told us on July 4 that sales
of U.S. beef are doing better than expected since the company
began marketing the beef in the spring.

Meanwhile, on June 30 another large retail chain, Ito Yokado,
began selling U.S. beef at 20 outlets in the Tokyo area. A sales
promotion featuring U.S. beef samples and cooking demonstrations
is helping market two featured cuts, chuck eye roll and chuck
ribs. Depending on consumer reaction, the store plans to sell
U.S. beef at more of its 180 stores nationwide before long.
The U.S. Meat Export Federation (USMEF) is supporting the
promotion, reaching out to Japanese consumers to provide
information on U.S. beef. USMEF expects Ito Yokado's decision to
ease concerns among consumers and open the way for other retail
chains to begin marketing U.S. beef.

Ito Yokado's move back into the business of selling U.S. beef was
delayed initially by fears in its corporate leadership that U.S.
beef would alarm Japanese consumers. In addition, problems its
main supplier, Cargill, was having regaining approval to sell U.S.
beef in the Japanese market had to be overcome.
The Embassy's Agricultural Trade Office and Foreign Agriculture
Service have worked with importers and U.S. exporters to promote
U.S. beef sales in Japan, including providing funds for ads in
the local media. (ECON: Nicholas Hill)


9. (U) Hokkaido Meat Processing Scandal Shakes Consumer
Confidence
----------

Sales of ground meat have plummeted across Hokkaido following the
June 20 revelations that the president of Meat Hope, a Tomakomai,
Hokkaido-based meat processing plant, approved the sale of tons
of ground pork as ground beef to cut costs. The mislabeled
ground meat was then sold directly or used to make other food
products distributed to supermarkets throughout Japan.

Subsequent police and Ministry of Agriculture, Forestry and
Fisheries (MAFF) investigations continue to discover additional
abuses at Meat Hope, including the mixing of expired meat with
fresh meat and the addition of pig and lamb hearts to ground pork
to make it look like ground beef.

Meat Hope shut down operations and laid-off its 71 employees last
week. However, the whole incident has forced Hokkaido officials
to review meat processing operations prefecture-wide. The
Hokkaido government plans to send inspectors to approximately 700
meat-processing facilities across the island to conduct DNA
testing in cases where factory meat supplies are found to be
questionable

The meat processing scandal first broke after an ex-employee of
Meat Hope provided details of meat processing operations to the
Asahi newspaper. According to media accounts, an ex-employee
first reported abuses to MAFF more than a year ago, but went to
the press after no action was taken. (Sapporo: Ian Hillman/Yumi
Baba)


TOKYO 00003125 004 OF 006


10. (U) US Grain Council President Visits Hokkaido Farms
------------------------------

On June 29, Vic Miller, an Iowa farmer who is president of the
U.S. Grain Council, visited the town of Naganuma, Hokkaido, to
discuss biotech grain usage and related grain supply issues with
local farmers. A pro-biotech Hokkaido farmer hosted a barbeque
lunch for Miller, which also included neighboring farmers,
reporters, a local politician, university students, and a former
Hokkaido University professor who now works for a local bio-
venture company.

Afterwards, Miller visited a local dairy farm to see how a local
customer is using U.S. corn as a feed source in his automated,
robotic milking operation.

Prior to visiting Naganuma, Miller in a press interview assured
Hokkaido residents that there will be a steady supply of U.S.
corn available to Hokkaido farmers but also pointed out that an
ever-growing majority of this corn will be biotech.
Concerns about biotech crops in Hokkaido remains high following a
series of consensus meetings held earlier this year on Hokkaido's
strict local regulations governing the open-air biotech
cultivation.

For more details, see the attached translated article. (Sapporo:
Ian Hillman/Yumi Baba)

11. (U) Economic Organization Gives Abe High Marks
------------------------------

Newspapers report that nine private-sector organizations weighed
in with their assessments of how well the Abe administration has
done in implementing pledges made during the House of
Representative elections in September 2005.

The Japan Association of Corporate Executives (Keizai Doyukai)
gave the Administration the top score of 65 out of a possible 100
for its efforts in revamping the bureaucracy and in
decentralizing the government.

Team Policy Watch, a group of economic experts led by former PM
Koizumi's economic policy advisor Heizo Takenaka, gave Team Abe a
score of 60.

The lowest rating of 27 was given by the Japan Initiative, a
private think-tank. The group stated that the "actions" taken on
45 of the 120 items listed in the campaign manifesto were "simple
plans and expressions of intentions to make efforts." (ECON:
Sally Behrhorst)

12. (SBU) METI Gets a New Vice Minister
------------------------------

In a move that a Ministry of Economy, Trade and Industry (METI)
official told us came as a surprise, the press reported on July 5
that Toshiaki Kitamura is stepping down as Vice Trade Minister
after only a year.

He will be replaced on July 10 by Masakazu Toyoda, METI Director
General for Trade Policy. Hiroyuki Ishige, the former head of
the Small Medium Enterprise Agency, will replace Toyoda.
Other changes at METI have Kenyu Adachi, the former Assistant
Vice-Minister, becoming the New Director General for Trade and
Economic Cooperation.

Also, Tsuneyoshi Tatsuoka, the former Director General in the
Economic and Industrial Policy Bureau, will become the new
Director General in the Trade Control Department.
Nobuhiku Sasaki, a key trade negotiator, will become the Deputy
Director General for Trade and Economic Affairs. (ECON: Ryoko
Nakano/Nicholas Hill)

13. (SBU) Koezuka to Replace JPO Commissioner Nakajima
------------------------------

Masahiko Koezuka, currently Director-General (DG) of the Commerce
and Information Policy Bureau of METI, will be the new
Commissioner of Japan's Patent Office, replacing Makoto Nakajima
on July 10.


TOKYO 00003125 005 OF 006


As DG for the Commerce and Information Policy Bureau of METI,
Koezuka was responsible for designing a wide range of measures to
promote and develop IT services, distribution industries, and to
protect consumers.

Koezuka began at METI in 1974 and since then has served in many
different bureaus. A list of the various positions he has held in
METI is attached. Nakajima's next position has not yet been
announced. (ECON: Kaoru Nakata)

14. (SBU) METI Requests Public Comments on Revised FDI
Regulations
-----------

As expected, on June 29 METI released for public comment its
draft revisions to the regulations governing inward direct
investment with national security implications.

The Ministry is proposing changes to the Cabinet Order,
Ministerial Ordinances and the Export Control Order of the
Foreign Exchange and Foreign Trade Control Law in line with the
proposals made by its "Study Group on the International
Investment Environment in the Global Economy" (see Scope Item in
February 9 issue and cables Tokyo 454 and 2688). The public
comment period closes on July 29. Click here for public comment
information.

The Study Group proposed changes to the existing legal framework
to control appropriately inward investment from emerging
economies, and make regulations consistent with international
criteria.

From the Embassy's review of the proposals, we do not believe the
proposed revisions will impede legitimate U.S. direct investment
into Japan.

On the same day as METI's announcement, the Liberal Democratic
Party (LDP)'s Research Commission on International Market
Competitiveness called for revision of the inward investment
regulations in order to appropriately prevent the outflow of
technologies important for national security.

According to METI Trade Finance and Economic Cooperation Deputy
Director Tomoshige Nambu, the Commission advised the government
to conduct a review of whether the revised regulations are
effective, and if need be, in the future establish a "Exon-
Florio-style" process that would allow government ex-post
intervention in transactions of concern.

The LDP Commission also proposed strengthening regulations on
foreign investment funds, addressing the growing concerns that
short-term investments by foreign funds could undermine corporate
value.

The Commission will compile its final recommendations sometime in
autumn. Lower House member and chairman of the LDP Commercial
Law Subcommittee, Yasufumi Tanahashi is chairing the Research
Commission. (ECON: Satoshi Hattori)

15. (U) Defensive Bull-Dog Is Not Alone
---------------------------

Japan's annual general shareholder meeting (AGM) season has just
ended and the big story of the year was corporate efforts to
strengthen takeover defenses.

With tender offers up 60 percent in the first half of 2007 and
concerns that the newly implemented triangular merger rules will
lead to what has been described as a "wave of cross-border M&A,"
some 222 firms -- or eight percent of companies holding AGMs this
month -- put forward proposals on new defensive measures for
shareholder approval.

Of those 222 companies, 47 were in the electronics, food, or
steelmaking sectors, which analysts have noted are particularly
vulnerable to takeover bids (TOBs). One major change this year
was management's seeking shareholder approval for implementation
of corporate defenses. Courts in the past have struck down some
defensive measures which had only received board approval.
U.S.-based investment fund Steel Partners, which has invested
some $4 billion dollars in Japanese firms in recent years, was in

TOKYO 00003125 006 OF 006


the spotlight this season. The fund was on the losing side of
shareholder votes in almost a dozen tender and dividend increase
proposals as company managements were able to characterize the
fund as a "green mailer" not acting in the long term interest of
shareholders.

Steel Partners' appeal to the courts regarding Japanese Bull-Dog
Sauce Company's poison-pill plan has also been making the
headlines; the plan will dilute Steel Partners' stake in the
company and foil its $260 million bid. With more than 80 percent
of shareholders already voting in favor of the poison-pill
proposal, Steel Partners' pending TOB is almost certain to fail.
Analysts expect the high court to uphold the lower court ruling
because the poison-pill will not cause Steel Partners to take a
financial loss and it will still be able to pursue a future
takeover bid, albeit more expensively. (ECON: Antonio Gonzalez)

16. (U) BOJ "Tankan" Survey: No Change in Firm Business
Sentiment
---------

The Bank of Japan's quarterly "tankan" survey of business
sentiment, a closely watched business cycle indicator and a
principal input in central bank's monetary policy deliberations,
revealed no change in firm business sentiment among large firms.
The survey's "headline" business sentiment indexes (DI) for both
large manufacturers and non-manufacturers were in line with
market expectations.

The June survey also revealed that all enterprises on average
modestly revised upward their FY07 projections for business
investment from the March survey. These solid "tankan" survey
results are likely to support the BOJ's policy decision to raise
interest rates in the near future.

The BOJ Policy Board is scheduled to hold its first post-"tankan"
meeting on July 11-12. Many market participants are expecting
that the BOJ will not raise interest rates next week, but will
hold until the August 22-23 Board meeting. (FINATT: Shuya Sakurai)

17. (U) Japan's "Core" Consumer Prices Down 0.1% in May, Fourth
Consecutive Monthly Drop
------------------------

Japan's nationwide "core" CPI, which excludes perishable food
items, fell 0.1 percent in May from the year before, the same
rate of decline as in April and the fourth consecutive monthly
decline, the Ministry of Internal Affairs and Communications
(MIC) announced June 29.

This result was in line with the market consensus forecast.
Overall CPI was unchanged in May from a year earlier.
SCHIEFFER

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