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Cablegate: The Japan Economic Scope--August 16, 2007

DE RUEHKO #3798/01 2290455
R 170455Z AUG 07





E.O. 12958: N/A
SUBJECT: The Japan Economic Scope--August 16, 2007

1. (U) This cable contains the Japan Economic Scope from August
16, 2007.

2.(SBU) Table of Contents

3. Tokyo Markets Respond to Global Turmoil
4. Limited Subprime Impact on Japanese Financial Institutions
5. Carry-Trade Unwind: More Bark than Bite (U)
6. Japan: Second Quarter Real GDP Grew Weaker-Than-Expected 0.5%
7. Japan's Cabinet Approves Restrictive Budget Request
Guidelines for FY08 (U)
8. Sharp Makes Its Presence Felt in Osaka (SBU)
9. Corning and Sharp to Be Neighbors in Sakai (SBU)
10. Diet Reviews Fundamental Space Law (U)
11. Japan boasts Globe's Best Public Transport,8 Million People
Ride Tokyo Metro Daily (U)
12. MLIT Takes Steps Toward Sky Highway (U)
13. End to Cost-Sharing Regime for NTT Fixed-Line Service (U)
14. Telecommunications Accounting System Report--Public Comment
15. Intellectual Property in Japan (U)
16. U.S.-Japan Cyber-Security Bilateral Talks, 28-29 August (U)
17. Fighting to be NFL's first Japanese player, Kinoshita says
It's Tough (U)

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3. (U) Tokyo Markets Respond to Global Turmoil
--------------------------------------------- --

Tokyo's equity and foreign exchange markets reacted sharply to
the subprime-generated turmoil in U.S. and European markets this

The Nikkei 225 stock market index fell nearly six percent in the
week ending August 16, and is down more than 11.5 percent since
its recent high on July 9. The benchmark 10-year Japanese
government bond yield fell to 1.66 percent on August 16 from 1.78
percent a week earlier, as expectations for a rate hike by the
Bank of Japan next week dissipated.

The yen strengthened against most currencies, as carry trades
unwound, strengthening 2.6 percent against the U.S. dollar and
5.1 percent against the Euro over the week.

Nonetheless, short-term credit markets in Japan remained calm,
largely unaffected by the liquidity concerns affecting U.S. and
European short-term credit markets. (FINATT: Maureen Grewe)

4. (U) Limited Subprime Impact on Japanese Financial
--------------------------------------------- --

All indications point to quite limited exposure of Japanese
financial institutions to U.S. subprime loans and securitized
products. Banks are likely the most exposed and a recent
investment bank report analyzes that a negative impact on the
creditworthiness of major Japanese banks is not expected.
Without the benefit of any hard data, the limited exposure of
Japanese financial institutions points to a low likelihood of a
significant exposure by Japanese retail investors. (FINATT:
Maureen Grewe)

5. (U) Carry-Trade Unwind: More Bark than Bite
--------------------------------------------- --

Fears that the unwinding of the yen carry-trade would be
calamitous for financial markets appear to be excessive,
according to Tokyo-based financial sector analysts.
Reports that net non-commercial short-yen positions on the
Chicago Mercantile Exchange have fallen by 80 percent since June
as part of a broader unwinding of short-yen positions and
accompanying moderation in the yen's value appear to show that
the absolute size of those positions is not enough to have a
significant impact on the exchange rate when they are closed.
One explanation cited is the probability that capital outflows
from Japan is deeper than the array of speculative futures
positions, and as a result are not overly responsive to those
positions' unwinding.

TOKYO 00003798 002 OF 006

The yen carry trade phenomena had prompted fears that a
significant reversal in speculative short-yen positions could
prompt a sharp change in exchanges rates, causing financial
system distress, as in 1998 when the yen rose from Y137/US$ in
late September to Y115 by mid-October; in this instance the
exchange rate has risen by around five percent, which is not a
significant change in macroeconomic terms. (FINATT: Mateo Ayala)

6. (U) Japan: Second Quarter Real GDP Grew Weaker-Than-Expected
0.5 percent
--------------------------------------------- --

Japan's real GDP grew at a 0.5 percent annualized rate in Q2 2007,
after a sizable increase in each of the previous two quarters,
according to the preliminary data announced by the Cabinet Office
on August 13.

GDP growth in Q2 was weaker than private analysts' consensus
forecast of a 0.9 percent increase. Overall real GDP growth for
Q2 reflected a 0.9 percentage-point (pp) contribution from final
domestic demand, supported by firm business investment and
personal consumption, and another 0.2pp contribution from net
exports. On the other hand, the contribution to overall growth
from inventories was --0.5pp in the quarter. The overall GDP
deflator dropped 0.3 percent y/y in Q2, the same rate of decline
as in the previous quarter.

For the first half of 2007 as a whole, real GDP grew at a 1.8
percent annual rate, in line with Japan's estimated potential
growth rate of about 1.5-2.0 percent. (FINATT: Shuya Sakurai)

7. (U) Japan's Cabinet Approves Restrictive Budget Request
Guidelines for FY08
--------------------------------------------- --

On August 10, the Abe Cabinet completed the first major phase of
the FY08 budget formulation process by setting restrictive
guidelines for budget requests from individual ministries and

The formulation of FY08 budget request guidelines is the first
major post-election test on the direction of fiscal policy for
the Abe administration. Under the guidelines, "ministerial
budget" spending is estimated to total approximately Y47.3
trillion, up about Y0.3 trillion, or 0.7 percent, compared to the
present FY07 budget.

Ministerial budget spending has been almost unchanged at roughly
the Y47 trillion level since FY02. If social security spending
is excluded, the remaining ministerial budget spending has fallen
by Y4.0 trillion, or 13.2 percent, from FY02. Social security
spending has increased Y3.7 trillion, or 21.6 percent, from FY02,
due largely to demographic factors.

The guidelines demonstrate the Abe Administration's continuing
commitment to fiscal consolidation and its intention to place top
priority on curbing discretionary government spending to achieve
that consolidation. (FINATT: Shuya Sakurai)


8. (SBU) Sharp Makes Its Presence Felt in Osaka
--------------------------------------------- --

Sharp's decision to build a new plant in Sakai City is already
producing palpable benefits in Osaka Prefecture. Since Sharp's
announcement in May, Osaka Prefecture government officials have
received numerous inquiries about government-owned properties in
Sakai. These same properties attracted almost no interest prior
to May. Government officials have decided to sell the sites
through a bidding process.

The new LCD production facility in Sakai will be almost four
times as big as Sharp's LCD plant in Kameyama city of Mie
Prefecture and many local businesses in Sakai and the Kansai are
vying to offer their services to Sharp.

To maximize potential benefits, some companies are studying how
businesses that relocated to areas nearby Sharp's LCD plant in
Kameyama City were successful. The new LCD plant is predicted to

TOKYO 00003798 003 OF 006

inject more than one trillion yen into Sakai's economy.
The Chairman of Sharp, Katsuhiko Machida, announced this week
that he would be appointed as the Vice Chairmen for the Osaka
Chamber of Commerce and Industry (OCCI). Previously, Sharp had
refused offers to join local economic organizations, preferring
to concentrate its attention on internal business matters.

In contrast, Sharp's competitor in the digital appliance industry,
Matsushita, has been active in local business activities in the
Kansai. With annual sales eclipsing 3 trillion yen this past
year, Chairman Machida stated it is imperative for Sharp to join
OCCI and carry out its corporate social responsibilities (and of
course compete with Matsushita). (Osaka-Kobe: Phil
Cummings/Scott Ravenhill/Naomi Shibui)

9. (SBU) Corning and Sharp to Be Neighbors in Sakai
--------------------------------------------- --

According to Osaka government officials, Corning Japan K.K., a
subsidiary company of Corning Incorporated based in New York
(, will open a plant near the site of
Sharp's new LCD Plant in Sakai City. Corning is one of the
leaders in producing glass components used in LCD flat panel
televisions. The investment amount is estimated to be around 100
billion yen.

Organizers of the U.S. -- Japan Investment Initiative Seminar
being held in Osaka on September 12-13 had sought to get an
executive from Corning to speak at the seminar, but were
unsuccessful. (Osaka-Kobe: Phil Cummings/Scott Ravenhill/Naomi


10. (U) Diet Reviews Fundamental Space Law
--------------------------------------------- --

The Japanese Diet is currently considering a "Fundamental Space
Law" that would change Japan's policies on space development and
use. The legislation emphasizes a need for enhanced domestic
aerospace sector competitiveness; more autonomous Japanese
aerospace capabilities; stronger ties between industry, the
government, and academy (San-Kan-Gaku); and potential use of
space for defensive purposes.

The legislation calls for these priorities to be incorporated in
a new Japanese national space plan that would be coordinated and
managed by a new "Space Minister" and associated staff within the
Cabinet Office. The legislation also calls for a review of the
2003 law that established the Japan Aerospace Exploration Agency

The 1969 and 2003 laws that established Japan's space program
strictly limit Japan's use of space for peaceful purposes.
Consequently, the domestic defense aerospace sector has been
somewhat limited in size and capability. The Fundamental Space
Law appears to be driven in part by this sector seeking a larger
role in the defense aerospace market. The perception of
increased regional threats from North Korea and China also appear
to be a factor.

Prior to the July 2007 Upper House election in which the
opposition Democratic Party of Japan gained the Upper House
majority, the Fundamental Space Law was expected to be passed by
the Diet in the Fall session. While still likely to be passed,
the schedule is now unclear. (NASA: Justin Tilman)

11. (U) Japan boasts Globe's Best Public Transport, 8 Million
People Ride Tokyo Metro Daily
--------------------------------------------- --

Tokyo Metro subway officials detailed security improvements to
counter attacks or natural disasters, the final phase of Tokyo
Metro privatization and their strong financial balance sheet in a
meeting at their offices on August 10.

They highlighted the extraordinary percentage of Tokyo commuters
using the subway/rail system, noting the positive impact of
public transportation on the environment. They detailed their
technical assistance to Asia, Africa, Latin America and the

TOKYO 00003798 004 OF 006

Middle East.

The subway officials were proud to tell us that they move a
million passengers during the one hour of morning commute alone,
eight million a day and nearly 3 billion a year over 880
kilometers of rail.

Compared to New York City's less than 400 kilometers of rail, it
is more than twice as large and moves twice the volume of
passengers. Some 75 percent of all people and products moved in
Tokyo are transported using a combination of subway and railway

Tokyo towers over other large metro systems, carrying about as
many passengers as the rail systems in London and New York
combined. (ECON: Charlie Crouch)

12. (U) MLIT Takes Steps Toward Sky Highway
--------------------------------------------- --

The Ministry of Land, Infrastructure and Transport (MLIT)
announced on August 13 that a new system called RNAV for air
traffic will be introduced on 75 domestic routes by the end of

The effort is part of the Sky Highway Plan which would allow more
efficient flight plans, enabling reduced flight times, more
aircraft to fly and CO2 reductions.

RNAV will be implemented starting this fall at eight airports
including Haneda and Kansai International Airport along with
other regional airports. (ECON: Junko Nagahama)


13. (U) End to Cost-Sharing Regime for NTT Fixed-Line Service
--------------------------------------------- --

Nikkei reported on August 11 that MIC plans to abolish in 2009
the cost-sharing framework designed to provide universal fixed-
line phone service throughout Japan.

Nippon Telegraph and Telephone (NTT), through its two regional
units, have historically been required to offer fixed-line phone
service across Japan, including to rural areas and remote islands.

To compensate NTT for operating losses in remote areas, the
government introduced in 2002 a framework under which other
telecommunications service providers would share the costs.
NTT's fixed-line losses have continued to widen, however, as
consumers are increasingly using mobile phones. As a result,
wireless service providers, KDDI, Softbank, NTT DoCoMo, and other
carriers have started passing on their share of the costs to
consumers in the form of a seven yen per month per phone line

Consumer groups have complained about consumers having to bear
the costs of universal service, pressing for NTT to continue to
seek efficiency gains and bring down prices.

As carriers extend the reach of cable and fiber-optic networks,
and the government has set a goal of a nation-wide high-speed
optical network by 2010, it is expected that the government will
encourage other options to fixed-line telephony in order to help
assure universal service. (ECON: Scott Smith/Kaoru Nakata)

14. (U) Telecommunications Accounting System Report --Public
Comment Announcement
--------------------------------------------- --

MIC announced a public comment period, until 10 September, on a
report entitled 'Accounting System for Telecommunications
The report's chapters include:
Need for Review of the Accounting System
Facility Categorizations in Interconnection Accounting
Service Categorizations in Telecommunications Business
Cost Allocation
Depreciation Costs

TOKYO 00003798 005 OF 006

Transparency in Transactions with Subsidiaries
Increased Feasibility of an Accounting System Review
Development of Measures

Annex: British Telecommunications Accounting System (ECON:
Scott Smith/Kaoru Nakata)

15. (U) Intellectual Property in Japan
--------------------------------------------- --

Econ and FCS officers, and a British Embassy colleague,
participated in an informal IPR seminar offered pro bono by a
local law firm. Lawyers from the firm Yamasaki & Partners
presented on basic procedures and the legal framework covering
patents, trademarks, and copyrights in Japan. The firm,
apparently hoping to attract future business with foreign firms,
has reportedly provided the seminar for numerous other embassy
colleagues over the past year.

At this time, we would simply note some potentially interesting
future topics that were identified in the accompanying discussion,
including: evolution of the IP and innovation environment in
Japan since the 2002 passage of a new IP Fundamental Law, the
development of new copyright protection technologies, and the
establishment in recent years of new private sector associations
to advocate IP interests in Japan. (ECON: Scott Smith/Kaoru
Nakata and FCS: Dean Matlack)

16. (U) U.S.-Japan Cyber-Security Bilateral Talks, 28-29 August
--------------------------------------------- --

DHS A/S Greg Garcia will lead a public-private sector U.S.
delegation for U.S.-Japan bilateral talks on Cyber-Security on
28-29 August. The agenda will cover developments in information
security, threats and vulnerabilities, critical infrastructure
and cross-sector interdependencies, and areas for prospective
future cooperation.

Both in the U.S. and Japan, structures and institutions to assure
cyber-security, protect critical infrastructure and respond to
incidents are relatively new. The National Information Security
Center (NISC) is Japan's coordinating agency for information
security and was founded only in 2005, partly as a result of
U.S.-Japan Cyber-Security talks in Tokyo in 2003. DHS has
indicated that it would like to see tangible outcomes result from
these talks, and one expected result is to lay the groundwork for
further future cooperation. (ECON: Scott Smith/Kaoru Nakata)


16. (U) Fighting to be NFL's first Japanese player, Kinoshita
says It's Tough
--------------------------------------------- --

His smile disappeared on day one. After practice Kinoshita
muttered, "It's tough." His first NFL camp demands more than he

For 30 minutes at the end of practice, wide receivers took turns,
but Kinoshita got only three shots: precious little chance to
impress the coach.

With three years NFL Europe experience, he should be well
prepared. Yet Kinoshita felt as if he had stepped into a
different dimension. The playbook, handed out the day before
camp started, is so packed that is hard for native English
speakers to memorize. The WR coach, Petrino, sympathized with
Kinoshita. "It must have been tough to learn everything on the
first day," he said.

Cut from 90, the final 53 players for the roster will be
announced on September 1, and the WR position will only have five
or six players. Kinoshita's challenge to become the first
Japanese NFL player has just begun. (Summary translation by FCS:
John Fleming)

17. (U) This SENSITIVE BUT UNCLASSIFIED e-newsletter from U.S.
Embassy Tokyo's Economic Section, with contributions from the
consulates, is for internal USG use only. Please do not forward
in whole or in part outside of the government. The Scope is

TOKYO 00003798 006 OF 006

edited this week by Charlie Crouch ( and Joy
Progar (

18. (U) Please visit the Tokyo Econ Intranet webpage for back
issues of the Scope. Apologies, this option is only available to
State users. Please contact Joy Progar if you are from a
different agency and are interested in a back issue.

© Scoop Media

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