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Cablegate: The Japan Economic Scope--July 12, 2007 Part 1

VZCZCXRO4131
RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #3236/01 1980003
ZNR UUUUU ZZH
R 170003Z JUL 07 ZDK
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 5524
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5623
RUEHFK/AMCONSUL FUKUOKA 2068
RUEHNAG/AMCONSUL NAGOYA 1149
RUEHNH/AMCONSUL NAHA 4487
RUEHOK/AMCONSUL OSAKA KOBE 5656
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 07 TOKYO 003236

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PARIS PLEASE PASS TO USOECD
STATE PLEASE PASS TO USTR

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SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope--July 12, 2007 Part 1

Sensitive but unclassified. Please protect accordingly.

1. (U) This cable contains the part one of the Japan Economic
Scope from July 12, 2007.

2.(SBU) Table of Contents

3. Informal Civ Air Talks in Tokyo (SBU)
4. Star Flyer to Open KIX -- HND Flight (U)
5. Centrair Strongly Supports USG Cargo Position (SBU)
6. Nuclear Fusion Research Center Opens in Aomori Prefecture (U)
Ag Akagi, Doha, Agriculture
7. Akagi Faces Corruption Allegations over Office Expenses (SBU)
8. Akagi in Europe to Press Japan's Doha Stance (SBU)
9. Ag Reform Proposals Proliferating? (U)
10. NAMA 6: New Block is Born? (U)
11. Gate Price System Under Scrutiny (U)
12. Chinese Food Exporters Primary Reason for Japan's Stricter
Food Import Rules (SBU)
13. EMS: Competitive and Expanding (SBU)
14. METI White Paper to Push Service Sector Development: Greater
Regional Integration (U)
15. METI's Leading Director for WTO Negotiations Will Head EPA
Division (U)
16. TSE to Revise Technical Listing System to Encourage the
Triangular Merger (U)
17. Citigroup Plans Japan Expansion (U)
18. High Court Hammers Another Nail in Steel Partners' Coffin (U)

3. (SBU) Informal Civ Air Talks in Tokyo
------------------------------

EB DAS John Byerly and DOT's Paul Gretch held mostly successful
informal, government-only talks in Tokyo with their counterparts
in the Japan Civil Aviation Bureau (JCAB) on July10-11.

JCAB largely accepted U.S. proposals for treating the issue of
Narita slots in an eventual agreement, which would center on
U.S.-supported references to the IATA Worldwide Scheduling
Guidelines and avoid U.S. acceptance of the Japanese view that
U.S. carriers hold an "inappropriate" percentage of slots at
Narita.

In addition, the Japanese accepted the U.S. proposal to defer
discussion until late 2008 of "whether and under what conditions"
scheduled service would be authorized between close-in Haneda
airport (HND) and points in the United States.

Several U.S. passenger carriers fear that Japan's plans for a
very limited nighttime opening of HND for scheduled service to
points outside a narrow "perimeter" would allow Japanese carriers
an unfair competitive advantage. The carriers had urged that no
flights be authorized if a broader opening was not allowed.
The two sides agreed to resume formal talks in early September in
either Tokyo or Washington.

A successful outcome is not guaranteed; however, as Japan is
still balking at granting some additional rights for a U.S. cargo
carrier and additional charter flights between HND and U.S.
points, including Guam, may be an issue. (ECON: Josh Handler)

4. (U) Star Flyer to Open KIX -- HND Flight
------------------------------

The evening Asahi Newspaper (Osaka edition) reported that the
Kitakyushu-based Star Flyer Inc., a newly established commercial
airline in Japan, is planning to add a Kansai International
Airport (KIX) -- Haneda Airport (HND) flight this fall. It will
be the second route operated by Star Flyer besides its Kitakyushu
-- HND service.

According to the sales department of Kansai International Airport
Co. (KIAC), there are currently 15 flights a day between KIX and
HND from 6am to 10am, but there are no flights between 10am and
3pm. The airport hopes that Sky Flier will fill its dearth of
HND connector service between 10am and 3pm. KIAC expects Sky
Flyer to operate during this time period.

KIAC welcomes the news, but believes Star Flyer will be unable to
start this route immediately given that Haneda has maxed out its
slots. KIAC thinks that the KIX -- Haneda flight will not begin
until the fourth runway at Haneda is completed in 2009.

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Skymarks Airlines previously operated a KIX -- HND flight, but
discontinued the route after a year due to low demand. In
contrast to Skymarks, Star Flyer will use a smaller aircraft (the
144-seat Airbus 320) to ensure 70 percent of its seats are full
at all times. (Osaka-Kobe: Phil Cummings/ Scott Ravenhill/ Naomi
Shibui)

5. (SBU) Centrair Strongly Supports USG Cargo Position
------------------------------

Officials of Nagoya's Central Japan International Airport
told visiting Tokyo Ecouns Fantozzi that, heading into the July
10-11 informal bilateral civair talks, they were in complete
agreement with the USG's position on allowing new cargo service
by UPS, Evergreen and Polar Air to Nagoya and beyond.

The officals said they would stress this to MLIT Deputy DG
Maeda in advance of the talks. Inaba noted his other top
priorities include a second runway and a new Nagoya-Los Angeles
passenger route, although our contacts among the three American
passenger carriers currently serving Nagoya are dubious about
the prospects for both. See the attached cable for additional
details. (Nagoya: Dan Rochman)

6. (U)Nuclear Fusion Research Center Opens in Aomori Prefecture
------------------------------

On July 3, the International Fusion Energy Research Center
(IFERC) opened its temporary office in Rokkasho, Aomori
Prefecture. IFERC's main facility, to be completed in 2009, is
one of two key components of the $12.1 billion ITER international
nuclear fusion project, which are to be built in Rokkasho.
(Note: ITER has dropped its original title, International
Thermonuclear Experimental Reactor, and now is known only by its
acronym-ITER.)

IFERC and its sister organization will coordinate their research
with ITER's primary reactor in France. Future components at the
Rokkasho site will also include a powerful supercomputer used for
plasma research.

Attendees at the opening ceremony included Aomori Governor Shingo
Mimura, Lower House Diet member Oshima Tadamori, and Toshio
Okazaki, president of the Japan Atomic Energy Agency. In
addition, 13 ITER researchers attended, including 12 Japanese
researchers and ITER official Pascal Garin. The number of
researchers will increase to 30 by fall, and the entire ITER site
will eventually employ several hundred.

ITER is only one component of the sprawling Mutsu-Ogawara
industrial complex. Generous GOJ subsidies are available for
companies wishing to settle in the complex, and government
officials appear committed to providing a welcoming environment
for foreign researchers and professionals. (Sapporo: Michael
Ivey/Ian Hillman/Yumi Baba)

7. (SBU) Akagi Faces Corruption Allegations over Office Expenses
------------------------------

There has been a blizzard of stories in the Japanese media
covering allegations that Agriculture Minister Akagi "mishandled"
office expenses, recalling problems that his predecessor faced
before committing suicide in May.

His parents' home in Ibaraki Prefecture has been registered as an
office for his political organization and received over 90
million yen to cover expenses in the ten years up to 2005.
Similarly, his wife's parents' home in Tokyo's Setagaya Ward was
registered and received 15 million yen in the same ten year
period.

Akagi's father initially denied any political activity was
conducted in his home, and then changed his story as the media
pressure built. The agriculture minister told reporters that his
father's earlier statement was based on a "simple
misunderstanding."

The political fall out is still uncertain at this stage. PM Abe
stood by his embattled minister, saying that Akagi did not need
to provide further explanations. Akagi himself dealt with the
issue in an hour-long press conference on July 10.


TOKYO 00003236 003 OF 007


Editorials in Japan's major dailies have called for Akagi to come
clean and provide all the information available on the
allegations. Nikkei and Sankei said the minister should provide
actual receipts. Mainichi called the episode a "big blow" for
the Abe government.

A MAFF official we talked to predicted that the Agriculture
Minister would survive the media storm and continue in office.
(ECON: Nicholas Hill/Ryoko Nakano)

8. (SBU) Akagi in Europe to Press Japan's Doha Stance
------------------------------

After addressing awkward corruption charges during an hour-long
press conference in Tokyo (see separate story), Agriculture
Minister Akagi flew to Europe to discuss Doha.

A MOFA official told us that Akagi, in meetings in Geneva on July
11 and 12 with WTO Director General Lamy and Agriculture Chair
Falconer, wanted to restate Japan's views on tariff capping and
sensitive products before Falconer issues his draft text on July
16.

In addition, Akagi plans to travel to Paris to meet with his new
French counterpart, Agriculture Minister Michel Barnier. A MOFA
contact told us the visit would be primarily a courtesy call.
The two have never met before.

A MAFF official indicated to us that Akagi also plans to hold a
meeting of ambassadors assigned to the WTO representing
developing countries. Meanwhile, Chairman Isami Miyata of Japan
Agriculture (JA), Japan's protectionist farmers' organization,
met with Chief Cabinet Secretary Shiozaki on July 10 to restate
the organization's opposition to substantial market opening.
Miyata had just returned from Europe where he met Lamy in Geneva
last week and officials from the French government in Paris.
(ECON: Nicholas Hill)

9. (U) Ag Reform Proposals Proliferating?
------------------------------

While talking about agricultural reform is different from
actually implementing agricultural reform, it is something. And
now the Japan Business Federation (Keidanren) is getting into the
act of looking at farm sector reform.

A Keidanren source told us on July 10 that the organization's
Agriculture Committee has met several times and plans to issue a
report on agricultural reform sometime in the latter half of
September. The source told us the report will be comprehensive.
Keidanren's Agriculture Committee is soliciting input from the
private sector and academics.

The Agriculture Ministry (MAFF) has already been tasked by the
government to produce a report this fall on comprehensive
agricultural reform.

In addition, a source on the Council for Economic and Fiscal
Policy (CEFP) working group responsible for looking at
agricultural reform told us that the group will issue a second
report in November. (ECON: Nicholas Hill/Ryoko Nakano)

10. (U) NAMA 6: New Block is Born?
------------------------------

Japan's role in the Doha talks could be in "forging the
differences" between developed and developing countries. That
was what Trade Minister Amari told a press conference on July 10
in Tokyo.

Just back from a visit to India to cover largely energy-related
bilateral issues and an APEC trade ministers meeting in Australia
July 5-6, Amari said that a meeting with his counterparts from
Mexico, Indonesia, Thailand, the Philippines, and China went well.
He said that the ministers agreed to keep meeting and quipped
that the group could call itself the "NAMA 6." For Amari's full
statement in Japanese, click here.

Meanwhile, Nikkei reported on July 9 that one of Amari's deputies
at METI, Takao Kitabata, the Vice Minister for Economic Trade and
Industry, is still holding out hope for a Doha deal.


TOKYO 00003236 004 OF 007


The Vice Minister said he hoped countries would get interested in
the talks once the chairs for the NAMA and Agriculture
negotiations present their draft texts. (ECON: Nicholas
Hill/Ryoko Nakano)

11. (U) Gate Price System Under Scrutiny
------------------------------

Japan's importers and users of pork are stepping up their efforts
to change the gate price system for assessing duties on imported
pork products.

The gate price mechanism was negotiated in the Uruguay Round and
effectively puts a floor on the price of pork imported to Japan.
When the system functions, cheaper pork products result in a
higher tariff.

Conversely, the system encourages fraud and traders regularly
over-invoice to exaggerate the price of products and thus avoid
paying import duties. Last year Japan's major meat wholesaler,
Kyochiku, was indicted for its attempt to avoid $111 million in
duties.

Embassy sources say that other very well known importers have
been under investigation. Japan is the largest market for U.S.
pork, with exports topping $1 billion last year.

Over the past two weeks, the Embassy has been approached by the
Japan Meat Importers Association, an umbrella group of meat
importers; the Japan Ham and Sausage Processors Association;
Japan's biggest users of pork; and an industry supported non-
profit called "The Group on Import Regulations and Distribution
of Meat."

The latter runs a web page and has a slick DVD arguing against
the Gate Price System. They are asking for the USG's help in
trying to convince the Japanese government to do away with the
system.

The gate price system has been on the government's radar for a
while. In May the sub- committee under the CEFP, charged with
identifying ways to promote Japan's trade liberalization efforts
-- particularly with respect to FTA and agricultural policies --
recommended that the government abolish the system.

In June, the full CEFP, which is more in tune with the political
realities and vested interests, rejected the recommendation in
its Basic Polices Report, saying only that the gate price system
should be "reconsidered." (ECON: Nicholas Hill/Ryoko Nakano)

12. (SBU) Chinese Food Exporters Primary Reason for Japan's
Stricter Food Import Rules
--------------------------

Japan's stricter rules on minimum residue levels (MRLs),
implemented over the last year, were put in place primarily in
reaction to concerns about Chinese food exporters, a senior
Health Ministry (MHLW) official told us on July 10.

Press coverage in Japan has been intense since scandals came to
light involving Chinese food exporters and the country's
regulatory regime for food and other products.

According to a Mainichi story on July 9, the number of food
products banned for exceeding limits on agricultural chemicals
increased eight- fold between June 2006 and May 2007, a period
when the government was implementing a tighter regulatory
framework.

According to the story, of 761 products banned during the period,
250 involved Chinese products.

"The increased number of banned products shows that the positive
list is effective in maintaining the safety of food products from
China," Mitsuru Ando, a professor at Toyama University, told
Mainichi.

The MHLW official told us that the tighter rules in place in
Japan since last year -- involving a positive list which punishes
all exporters from the same country -- is in place because of
conditions in China.


TOKYO 00003236 005 OF 007


Japanese officials have told us that it is difficult to punish
companies on an individual basis because in China they tend to
disappear and then reemerge under a different name.

Because of WTO requirements, however, all countries are subject
to the same onerous rules. The United States has been addressing
concerns about Japan's system in our bilateral regulatory reform
process with the Japanese government. (ECON: Nicholas Hill)

13. (SBU) EMS: Competitive and Expanding
------------------------------

Contacts at Japan Federal Trade Commission (JFTC) reaffirmed the
commission's position that Japan Post's Express Mail Service
(EMS) is competitive with international express mail delivery
services (FedEx and UPS) as detailed in the commission's July
2006 report during a July 6 meeting with Ecouns.

They specifically called out the report's discussion of the
accounting procedures that should be used to ensure proper
costing to account for EMS' use of the Japan Post infrastructure.
Failing to do so could constitute dumping, they suggested.

However, they also stated that JFTC could only issue its opinion
on the matter and had little enforcement capabilities unless
there was a clear violation of Japan's Anti-Monopoly Act.
The commission also has no ability to take action against another
government agency, the sources said. The best way to resolve the
issue of EMS' unfair competitive advantage would be for industry
to bring suit in a Japanese court, they said. Stay tuned for
more reporting on this issue.

Separately, news reports state that Japan Post will seal a
"comprehensive" deal with China Post. Plans are to expand the
areas of next-day delivery from exclusively Shanghai at present
to Beijing and other major cities.

Japan Post will also accelerate customs clearance procedures so
that delivery times for mail bound for Shanghai will be reduced
by up to five hours.

Finally, it plans to launch a packing and container cargo
delivery business for Japanese businesses shipping to Chinese
destinations. (ECON: Sally Behrhorst)

14. (U) METI White Paper to Push Service Sector Development:
Greater Regional Integration
------------------------------

On July 10, METI Minister Akira Amari submitted to the Cabinet
the 2007 White Paper on International Economy and Trade.

This year's report advocates steps to invigorate Japan's
underdeveloped service sector as well as steps toward creating an
"open and seamless architecture for the economic system" through
greater regional economic integration via bilateral and
multilateral agreements.

It also provides detailed analysis on the present global economic
climate, with special attention to the rapidly expanding
economies of China and India, and notes the expansion and
deepening of regional business networks. On July 17, METI will
brief the diplomatic corps in Tokyo on the white paper's
conclusions.

An English summary will be available shortly with a full
translation of the report ready later in the year. Click here
for the Japanese summary. (ECON: Chris Wurzel)

15. (U) METI's Leading Director for WTO Negotiations Will Head
EPA Division
------------

On July 10, METI announced that Shigehiro Tanaka will leave his
WTO negotiations post to head the Ministry's Economic Partnership
Division.

Naoshi Hirose will succeed Tanaka as the Principal Director in
the Multilateral Trade System Department. Hirose was previously
responsible for WTO dispute settlements in the same division.
(ECON: Ryoko Nakano)


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16. (U) TSE to Revise Technical Listing System to Encourage
Triangular Mergers
------------------

The Tokyo Stock Exchange (TSE) has announced it will implement a
revised "technical listing system" that will allow expedited
listings of foreign companies involved in cross-border triangular
mergers. The new system may take effect during this month.

Under the existing system, when a listed company merges with an
unlisted company, TSE will approve facilitated listing of the
surviving company (as long as it meets TSE's liquidity standards).

The revised system will be applied to cross-border triangular
mergers, where the shares of foreign parent companies will be
offered as merger considerations to the shareholders of the
domestic target company.

TSE will examine whether the company can ensure appropriate

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liquidity and settlement of its shares under the regulations of
its home country. In the case of the cross-border triangular
merger, applicants will be requested to make prior consultations
so that TSE can enhance its assessment. With this new system,
TSE seeks increased cross-border triangular mergers, and

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therefore, further inward investment, while maintaining
shareholders protection.

In a seminar, NikkoCitigroup analyst Tsutomu Fujita said
recognizes this system as one of Japan's efforts to make the
triangular merger scheme accessible and workable, though he does
not expect many cross-border triangular mergers to occur due to
various disadvantages of the scheme. (ECON: Satoshi Hattori)

17. (U) Citigroup Plans Japan Expansion
------------------------------

Citigroup CEO Charles Prince announced on July 9 that not only
has his firm invested $10 billion in Japan over the past two
months, but would also expand its reach from 137 to 200 locations
over the "next couple of years."

Prince cited Citi's ability to differentiate, promising that "we
can offer the most advanced products to Japanese customers by
leveraging our global network," including developing-market
mutual funds and private equity funds.

Citi's expansion plans include doubling the current 32 banking
branches, as well as further proliferation of the brokerage
business of recently purchased Nikko Cordial Securities, with
Prince emphasizing, "the primary focus for business expansion is
organic growth; acquisitions are complementary."

At an ACCJ breakfast in Tokyo on July 12, Prince also signaled
Citi's intent to list Citigroup stock on the TSE, a measure that
had been rumored but unconfirmed until now. Prince told the Wall
Street Journal that when Citi's stock is listed on the TSE, "I
want to come back [to Tokyo] and ring the bell."

Additionally, Prince has asked Howard Baker, former U.S.
Ambassador to Japan, and Masajuro Shiokawa, former Finance
Minister to join the advisory board of Citi's financial holding
company in Japan. Citi's Japan financial holding company would
manage Citigroup Japan's banking, securities- including Nikko
Cordial, credit cards, and consumer finance arms. (FINATT: Mateo
Ayala)

18. (U) High Court Hammers Another Nail in Steel Partners'
Coffin
------

On July 9, the Tokyo High Court upheld a June 28 lower court
ruling rejecting a suit by U.S. hedge fund Steel Partners, which
sought a temporary injunction against implementation of takeover
defenses by Osaka-based Bull-Dog Sauce Company. The fund has
announced it will appeal to the Supreme Court, but few expect it
to prevail there.

The ruling opens the way for Bull-Dog to implement its "poison
pill" which will dilute Steel Partners' holdings by 75 percent
and compensate the fund with a cash payout.

The High Court's decision was expected but the vehemence of its

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ruling surprised many observers. The Court justified Bull-Dog's
defensive measures on the grounds that Steel Partners was an
"abusive acquirer."

In contrast, the lower court dismissed Steel Partners' request by
deferring to the shareholders' will as expressed at the company's
annual meeting last month.

The court's description of Steel Partners as "abusive" is now
likely to embolden future targets of the fund to adopt their own
takeover defenses and widens the scope of allowable defenses
under Japanese corporate law. The Embassy is working on an
analysis of the outcome of the corporate meeting season including
the impact of the Steel Partners case. (ECON: David DiGiovanna)
SCHIEFFER

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