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Cablegate: The Japan Economic Scope--August 9, 2007

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RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #3681/01 2220710
ZNR UUUUU ZZH
R 100710Z AUG 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 6339
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5666
RUEHFK/AMCONSUL FUKUOKA 2493
RUEHNAG/AMCONSUL NAGOYA 1522
RUEHNH/AMCONSUL NAHA 4920
RUEHOK/AMCONSUL OSAKA KOBE 6094
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 07 TOKYO 003681

SIPDIS

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--August 9, 2007

1. (U) This cable contains the Japan Economic Scope from August 9,
2007.

2.(SBU) Table of Contents

3. LDP's Political Foundation Has "Crumbled," Says One Pundit
4. Postal Privatization, Other LDP Legislative Initiatives, Up
for Review?
5. Beef Talks Grind Down, No Consensus Yet
6. Japan and China Discuss Food Safety
7. Upper House Election Complicates Economic Decision making
8. Trade Policy Limbo?
9. METI Extends Byrd Countermeasures
10. Former House Speaker Hastert Visits Nuclear Power Facilities
11. JETRO Notes Record FDI Outflow, Examines FTA Strategy:
12. Cabinet Office Calls for Higher Productivity Growth, Use of
M&As
13. Capital Investment Booming in Kansai
14. Central Japan Economy Plateaus
15. Chicago Firm Opens its First Overseas Office in Nagoya
16. JAL Stronger 1st Quarter, Flight Changes, and Cargo Tie-ups
17. KIX Plans for Future after Opening 2nd Runway
18. MLIT Preparing New Airport Legislation?
19. MLIT Studying Simplifying Port and Harbor Procedures
20. Japan Export Controls Officials to Help Other Countries'
Officials in Asia
21. Treatment of Digital Content - Public Comment Announcement

3. (SBU) LDP's Political Foundation Has "Crumbled," Says One
Pundit
----------------------------------------

The Upper House elections on July 29 represented the most severe
defeat for the LDP ever. "The party's political foundation has
crumbled."

That was how Minoru Morita, a long-time political analyst in
Tokyo, described the results during a talk at the American
Chamber of Commerce in Japan (ACCJ) on August 8 that we attended.

Morita inventoried the LDP's past defeats in Diet elections -- in
1983, 1989, 1993 (when the party slipped into the opposition for
nine months), 1996 and 1998, and asserted that no defeat was as
devastating as this one.

In the past, Morita said, the LDP found ways to hive off elements
of the opposition to hang onto power. This time the defeat was
so complete that the party is hamstrung.

Revenge of the Farmers?

Morita pointed to the profound erosion of support for the LDP in
the rural areas of Japan, where jobs are disappearing and farmers
are hurting, as the core reason for the LDP's landslide defeat.
People are blaming the structural reforms of the Abe government,
Morita said. They point to the "heartless" way the party has
written off Japan's inefficient farm sector as proof that the LDP
is out of touch.

The reforms the LDP has implemented in the farm sector, Morita
asserted, are seen as draconian, akin to something out of Thomas
More's "Utopia," or more aptly, Stalin's campaign against
Russia's private farmers.

Somewhat implausibly, Morita said that any perceived support of
rural areas for former Prime Minister Koizumi could be viewed in
hindsight as a "plea for help." (In fact, results from the 2005
Lower House elections show that Koizumi had already lost
substantial rural support.)

Next Elections

Morita suggested Lower House elections could come earlier than
expected, as early as this fall or by next summer. The biggest
question for the DPJ, he said, will be the health of party leader
Ozawa.

For the LDP's part, Morita said the party's only plausible
strategy will be to try to hive off part of the opposition to its
side.

A big worry of Morita's is that the LDP's political demise could

TOKYO 00003681 002 OF 007


come "too fast." Japan could go from a one party system under
the LDP to a one party system under the DPJ. (ECON: Nicholas
Hill)

4. (SBU) Postal Privatization, Other LDP Legislative Initiatives,
Up for Review?
----------------------------------------

The Democratic Party of Japan (DPJ) and other opposition parties
have been meeting to discuss bills they will want to submit
during an extraordinary session of the Diet set to open at the
end of August.

According to press reports, the opposition was set to submit a
postal privatization amendment bill in the Upper House on August
9 and planned to resubmit it again at the extraordinary session
later. (We have not seen the bill posted online as of yet.)
We talked to a couple of sources in the U.S. industry who were
not familiar with the details nor appeared too concerned, at
least at this stage. No bill on postal privatization could pass
in the Lower House.

Trying to slow down Japan Post privatization is a priority of the
People's New Party (PNP), a DPJ coalition partner. The party
features a coterie of former LDP dinosaurs expelled from the LDP
by former PM Koizumi.

A DPJ staff member told us that the party held a shadow cabinet
meeting on August 8, and the leadership was divided on whether to
join the PNP on the bill.

The internal DPJ debate hinged on the bad politics of backing an
effort that had been so soundly repudiated in the 2005 Lower
House elections.

The source acknowledged that the party would have to be more
careful about what bills it submits in the Upper House.

As the majority in the Upper House, the DPJ will be expected to
articulate more clearly what it is doing in crafting legislation.

Most of the party's policy heavy weights, including Takeyaki
Matsumoto, the DPJ's Policy Research Committee Chair, are Lower
House members. (ECON: Nicholas Hill)

5. (SBU) Beef Talks Grind Down, No Consensus Yet
----------------------------------------

Expert-level talks between the United States and Japan on Japan's
onerous restrictions on U.S. beef imports concluded August 3 with
no consensus yet on what the next step should be.

At an August 7 press conference, Acting Agriculture Minister
Wakabayashi indicated that Agriculture Secretary Johanns has
asked Japan to remove all age restrictions on U.S. beef imports.
The two spoke by telephone on August 6.

The Japanese side has indicated that it would recommend to its
independent Food Safety Commission that restrictions on beef from
under 30 months be lifted.

The two sides continue to discuss the issue. The United States
would like to see Japan move toward science-based international
standards for beef as identified by the World Animal Health
Organization (OIE).

According to a Jiji report, Wakabayashi indicated that Japan
would make a decision after it reviews more carefully the
information provided by the United States concerning the feed
controls it currently has in place.

In a related development, a Canadian expert-level team was in
Tokyo for talks on August 8. (ECON: Nicholas Hill)

6. (U) Japan and China Discuss Food Safety
----------------------------------------

Following up on agreement reached last month, China and Japan
held discussions on food safety in Beijing on August 6.

According to a Nikkei report, the two governments agreed to
continue an information exchange.

TOKYO 00003681 003 OF 007

In addition, Japan will transfer technology to help measure
pesticide residue levels and other toxic materials, and seek to
streamline China's quarantine procedures put in place after
China's recent food safety problems came to light.

Hideshi Michino, Director of Japan's Health Ministry's Office of
Food Import Inspection and Safety, led the GOJ delegation.

Michino has been the point person for Japan in expert talks with
the United States on BSE. (ECON: Nicholas Hill)

7. (SBU) Upper House Election Complicates Economic Decision
making
----------------------------------------

The defeat Japanese voters handed the ruling Liberal Democratic
Party (LDP) on July 29 stems primarily from domestic concerns the
Diet will have to take up when it reconvenes in the autumn.

For an outline of Embassy expectations for these issues, a brief
discussion of the future of the Council for Economic and Fiscal
Policy, reactions of investors and key business leaders, and an
explanation of the mechanics for passing legislation, please see
Tokyo 3660 (ECON: Joan Siegel)

8. (SBU)Trade Policy Limbo?
----------------------------------------

A cast of speakers from government, academia, and business
presented a mixed picture of Japan's trade policy at a symposium
on August 6 in Tokyo sponsored by the Research Institute for
Economy, Trade and Industry (RIETI).

An Economics professor at Tokyo University, Akira Kotera, said he
did not see a Doha multilateral trade deal getting done before
2010.

Kotera pointed to the political reality in the United States,
including presidential elections and a Congress reluctant to
continue extending fast track trade promotion authority.
The professor added that WTO members such as India could "stall"
the talks again by making more demands in the services
negotiations.

A Trade Ministry (METI) official professed to be more optimistic.
Naoshi Hirose, Director of the Multilateral Trade System
Department, told the audience he hoped a deal could be struck
before year-end.

The draft modalities papers for the NAMA and agriculture talks
may actually provide an impetus for progress, Hirose asserted,
precisely because so many countries seem to be "equally
dissatisfied" with them.

Kazayuki Kinbara, representing the Japan Business Federation
(Keidanren) was dour about the slow pace of the Doha negotiations.

He said Japan's business community would be willing to accept a
"bad" deal just to get it done.

On the impact of the recent Japanese elections, speakers said
that the LDP and DPJ shared similar views on trade policy.
Shigehiro Tanaka, Director for FTA affairs at METI, said that the
government continued to make good progress on negotiating
bilateral deals, particularly considering the human resource
constraints the bureaucracy faces.

RIETI is a quasi-public think tank funded primarily by METI. The
papers for the conference will be uploaded on to the RIETI
website in the next two weeks. (ECON: Nicholas Hill/Ryoko
Nakano)

9. (U) METI Extends Byrd Countermeasures
----------------------------------------

Japan will continue sanctions against the United States in
retaliation for the Byrd Amendment which the United States
repealed last year, but has not been completely phased out.
According to the Trade Ministry website, the countermeasures will
be extended beyond September 1 after they receive formal approval
at an August 10 cabinet meeting.

TOKYO 00003681 004 OF 007

The Finance Ministry's (MOF) Council on Customs, Tariffs, Foreign
Exchange, and Other Transactions recommended the extension when
it met earlier this month.

From a review of the MOF Japanese language website, the
commodities covered and tariff rates will basically remain the
same as in the past.

According to METI's announcement, the countermeasures will
continue beyond September because commodities cleared by U.S.
customs before October 1, 2007 would continue to be subject to
allocation under a transitional provision of the February 2006
legislation that repealed the Byrd Amendment. (Click here for
the press release in Japanese.)

The MOF website indicates that the countermeasures will end when
the U.S. carries out the WTO recommendations related to the Byrd
amendment. For more information (in Japanese) click here.
(ECON: Ryoko Nakano)

10. (SBU) Former House Speaker Hastert Visits Nuclear Power
Facilities
----------------------------------------

During an August 5-9 visit to Japan, J. Dennis Hastert, former
Speaker of the House of Representatives and now ranking member of
the House Energy and Commerce Committee, toured the Rokkasho
nuclear fuel reprocessing facility in Aomori Prefecture and the
MONJU breeder reactor near Osaka.
In Tokyo, Hastert also met with Defense Minister Yuriko Koike,
and several leading LDP Diet members including Acting LDP
Secretary General Nobuteru Ishihara and Lower House Speaker Yohei

SIPDIS
Kono. (ECON: Chris Wurzel)

11. (U) JETRO Notes Record FDI Outflow, Examines FTA Strategy: -
---------------------------------------

In its annual trade and investment white paper released on August
8, the Japan External Trade Organization (JETRO) reports that
Japan's outward foreign direct investment grew 10.3 percent year-
on-year to reach $50.2 billion in 2006, setting a new record.

In contrast, net inward FDI was negative $6.8 billion, the first
net outflow since 1996, as Japanese firms made major acquisitions
of foreign-invested assets in Japan. The report also analyzes
Japan's free trade agreement/economic partnership agreements
strategies and concludes that agreements that extend beyond
simple tariff reductions and include non-tariff barriers that
contribute to higher transportation and service costs have
yielded the greatest economic benefits in the Asia-Pacific region.

(ECON: Chris Wurzel)

12. (U) Cabinet Office Calls for Higher Productivity Growth, Use
of M&As
----------------------------------------

In the 2007 Cabinet Office Annual Report on the Japanese Economy
and Public Finance, the government of Japan called for measures
to address the phenomena of rising income inequality during a
period of economic growth.

Titled, "Toward Higher Productivity Growth", the white paper
argued that the increasing disparity was due in part to
globalization and the increasing proliferation of information
technology.

"This report highlights the structural problems of the Japanese
economy," explained Economic and Fiscal Policy Minister Hiroko
Ota. Recognizing that not only have income differences in major
firms between permanent and temporary employees been growing, but
also that temporary workers with lower wages now account for one-
third of the country's total workforce

The report suggests fiscal and social security measures to
resolve growing disparities. It urges the government to
reconsider the current system of wealth redistribution, including
social security benefit payments and income tax deductions.
The Cabinet Office's views on M&A activity stand in sharp relief
to recent comments to the contrary by METI officials. (FINATT:
Mateo Ayala)

TOKYO 00003681 005 OF 007

13. (SBU) Capital Investment Booming in Kansai
----------------------------------------

According to a recent study by the Kansai Branch of the
Development Bank of Japan (DBJ), the estimated amount of capital
investment in the Kansai's six prefectures for FY2007 was 2.3
trillion yen. The amount represented a 20.6 percent increase
from the previous year and was the highest growth rate among the
other nine districts in Japan.

Hyogo Prefectural Officials commented that the local economy will
be significantly affected by these enormous investments. Since
Matsushita started operating in Amagasaki city, nearby vacant
industrial sites are quickly being bought up with all sites
likely to be sold out within the year.

The businesses purchasing these sites are not only sub-
contractors, but also printing services and small gas companies
that do business with Matsushita. Osaka Prefecture officials are
expecting similar results with Sharp's new plant in Sakai city.
(Osaka-Kobe: Scott Ravenhill/Naomi Shibui)

14. (SBU) Central Japan Economy Plateaus
----------------------------------------

The Central Japan heads of METI and the Bank of Japan told the
Principal Officer that regional growth appears to be leveling off,
but that should not have too much of a negative effect on the
national economy.

Nagoya-area companies have invested heavily to increase
production in other parts of Japan, and the Central Japan economy
itself continues with stable growth, in part due to immigrant
labor.

Nevertheless, regional disparities continue to worsen, and are
likely to become even more severe with the aging of Japan's
population and the LDP's historic shift away from massive
subsidies to rural areas -- a policy change that cost the party
dearly in the recent Upper House election. For more information,
see Nagoya 0034. (Nagoya: Dan Rochman)

15. (U) Chicago Firm Opens its First Overseas Office in Nagoya
--------------------------------------

Chicago Powdered Metal Products Company (CPM) of Illinois, a
family-owned SME with annual sales of approx. $35 million,
officially opened its first overseas office in Nagoya, Japan on
August 6.

CPM uses unique powdered metal technology to produce high-tech
auto parts for GM, Ford, and increasingly Japanese firms. Its
Asia office will allow CPM to design-in products for assembly in
Japanese auto plants worldwide by providing local technical and
sales support directly to headquarters decision-makers in Japan,
as well as allow it to expand into the global aerospace market.
Nagoya is the center of Japan's manufacturing base and hosts the
headquarters and main plants of auto behemoths such as Toyota,
Denso, Aishin, Suzuki, and Honda -- and aerospace giants
Mitsubishi, Fuji, and Kawasaki Heavy industries.

CPM's Japanese manager is a long-time FCS contact. At an August
6 reception marking CPM's Nagoya launch, he noted the Consulate's
support as one factor in CPM's decision to open a Nagoya office.
(FCS Nagoya: Edward Yagi)

16. (U)JAL Stronger 1st Quarter, Flight Changes, and Cargo Tie-
ups
----------------------------------------

Japan Airlines, which is in deep financial trouble, announced on
August 6 a stronger 2007 first quarter as compared to the same
period last year. Revenues declined slightly from the year
before, but expenses declined considerably more, the result, JAL
claims, of the company's restructuring efforts, making for a
better showing than the year before.

The Japanese press reports that JAL's major banks are still
skeptical and awaiting the results of JAL's second quarter. JAL
on August 3 projected its passenger traffic for the mid-August
vacation season with a 1.5 percent increase in international

TOKYO 00003681 006 OF 007


passengers over the year before and a three percent decline in
domestic passengers.

JAL on August 7 revealed further revisions to its international
routes particularly in Asia to focus on high profit, high growth
routes, including flights from China that carry on to the United
States via Narita.

This week the press reported that JAL would tie-up with two of
Japan's leading distribution companies, Nippon Express and
Kintetsu Express, to create an international small-package
delivery network.

The goal is to compete with DHL, FedEx and UPS for the outbound
Japanese market aiming to achieve a 30 percent market share on
par with DHL, the market leader. JAL has not made a formal
announcement about the tie-up, but the news has resulted in rise
of share prices of three companies.
For further reading, see press releases on JAL's website. (ECON:
Junko Nagahama/Josh Handler)

17. (SBU) KIX Plans for Future after Opening 2nd Runway
----------------------------------------

Currently operating as a 24-hour airport after the August 2
opening of a second runway, Kansai International Airport Company
(KIAC) President Atsushi Murayama has set his sights on making
Kansai International Airport (KIX) profitable by accelerating the
promotion of cargo business.

Murayama believes the recent decision by ANA to shift its cargo
business from Chubu to KIX and a JAL announcement stating it will
be increasing its cargo flights out of KIX are steps in the right
direction. In addition, a KIAC official mentioned that
increasing trade with Russia has caused Aeroflot Russian Airlines
to consider operating direct cargo flights between KIX and Moscow
or St. Petersburg in the near future.

In contrast to cargo business, KIX is still struggling to improve
its passenger flight business. According to a Kansai Economic
Federation (Kankeiren) announcement last week, member companies
are encouraging its employees, not just its executives, to
purchase business class seats on business trips from KIX. (Osaka-
Kobe: Scott Ravenhill/Naomi Shibui)

18. (U)MLIT Preparing New Airport Legislation?
----------------------------------------

Following on the work done in the last year by Ministry of Land,
Infrastructure and Transport's (MLIT) Airport Discussion Group
and Aviation Subcommittee (see Tokyo 2180, May 15, 2007), MLIT
has created a study group to examine the future of Japan's
airports with the goal of submitting items for legislation in the
fall session of the Diet.

Specific issues to be considered include legislation for Itami
airport in Osaka and improvements in international airport
management, a topic which was not covered in the Airport
Discussion Group.

The study group comprises virtually all the committee members
from the previous Airport Discussion Group as well as Shizuoka
governor Ishikawa, Tokyo University Prof. Kanemoto, CEO from TV
Osaka Tomizawa, and Gifu University Prof. Takeuchi.
Details of the first meeting are not yet available. (ECON: Junko
Nagahama)

19. (U) MLIT Studying Simplifying Port and Harbor Procedures
----------------------------------------

As a result of Prime Minister Abe's May 16 Asia Gateway
Initiative report, the Ministry of Land, Infrastructure and
Transport (MLIT) established a study group to examine simplifying
port and harbor procedures.

The study group held its first meeting on July 30, and will be
looking at using IT and paperless processes to streamline port
procedures for the Next Generation Single Window system as is
called for in the Asia Gateway Initiative under its Trade
Procedure Reform Program.

At the first meeting, members agreed to work closely with the

TOKYO 00003681 007 OF 007


Ministry of Economy, Trade and Industry (METI) with which MLIT is
already working on a Partnership Program for Competitive
International Distribution.

The group's goal is to expand and facilitate trade with East
Asian countries, and with the Ministry of Finance, which is
developing the Next Generation Single Window system.
The next study group meeting will be held in October. (ECON:
Junko Nagahama)

20. (SBU) Japan Export Controls Officials to Help Other
Countries' Officials in Asia
----------------------------------------

The Trade Ministry's (METI) Export Controls division is creating
a pilot program of outreach to other countries in the region.
Representatives of the Export Controls division told us on August
3 that will visit other major cities in Asia to share information
the GOJ has on possible export controls violations. They plan to
share with their counter parts observations concerning methods
used by companies that are attempting to skirt export controls.
This program is an extension to a change in Japan's laws. In
accordance with UN Security Counsel Resolution 1540, the GOJ
passed in to law on June 1 a regulation making it illegal for any
Japanese company to broker a trade or provide logistical support
for transshipment of dual use items without appropriate METI
approval and the corresponding license.

Prior to June 1, Japanese law enforcement authorities only had
jurisdiction if the products were shipped from Japan. Nonetheless,
Japanese police and prosecutor's office have brought to trial
several cases for violating export controls. Officials are
pleased with the change in the law that provides a necessary
legal mechanism to continue increasing oversight of export
controlled items. For related story, take a look at Tokyo 03590.
(ECON: Charlie Crouch)

21. (U)Treatment of Digital Content - Public Comment
Announcement
----------------------------------------

MIC announced a public comment period, until 14 September, on a
report entitled "Toward Promotion of Digital Content
Distribution."

The advisory panel report includes proposals for "Internet Policy
of the 21st Century" and "Administrative roles to be played
toward an expansion of application/usage of terrestrial digital
broadcast."

The draft report also deals with copyright related issues such as
secondary usage of broadcast programs and movies and original
programs of IP multicast. For example, the report recommends
loosening existing rules allowing only one-time copying of
digital programming, to allow copying up to 10 times.

The 94-page report is divided into two chapters: Ways to control
copies of digital broadcast (deals with "copy once" issues); and
Development of content transaction markets and specific measures
toward vitalization of transactions (deals with IP multicast and
related issues).

Click here to access the report along with the public comment
announcement in Japanese. (ECON: Scott Smith/Kaoru Nakata)
SCHIEFFER

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