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UNCLAS SECTION 01 OF 06 TOKYO 000679 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
PLEASE PASS TO USTR JOHN NEUFFER/MICHAEL BEEMAN. 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV JA
SUBJECT: ECONOMIC GOALS OF JAPAN'S 164TH DIET SESSION 
 
REF: A. REF A: TOKYO 675 
 
     ¶B. REF B: TOKYO 465 
 
¶1. (SBU) Summary.  Prime Minister Koizumi has labeled this 
150 day session the &administrative reform8 Diet to 
emphasize his continuing commitment toward the structural 
reform of Japan's economy. Important economic bills this 
session include an administrative reform bill -- to be 
submitted by the Cabinet Office after the passage of the 
budget -- a tax bill, health care reforms, revisions to 
tender offer bid (TOB) rules, some small changes in 
agricultural subsidies, amendments to the Town Planning Laws, 
and others.  For a discussion of the budget, administrative 
reform, and the tax bills please see paragraphs 2-6.  Bills 
involving health care are discussed in paragraphs 7-9. 
Corporate bills and amendments to agricultural subsidies can 
be found in paragraphs 10-11. The revision to the Town 
Planning Laws is described in paragraph 12. An examination of 
pending employment laws affecting women and training begins 
in paragraph 13-15.  Additional bills, agreements, and 
treaties are examined in paragraphs 16-22 while one important 
omission -- an amendment to Company Law Article 821 -- is 
discussed in paragraph 23.  See Ref A for a readout on how 
Diet dynamics might affect this legislative agenda.  End 
Summary. 
 
Fiscal 2006 Budget 
------------------ 
¶2. (SBU) Like most years, this Diet ordinary session began 
with deliberations on a supplementary budget for the current 
fiscal year.  On February 3 the Diet passed a 
4.52-trillion-yen (USD 38.6 billion) supplementary budget for 
JFY 2005.   This budget set aside 180 billion yen  (USD 1.5 
billion) for asbestos-related expenditures.  Of this, 38 
billion yen (USD 325 million) was earmarked to compensate 
victims from asbestos-related diseases whose medical bills 
were not covered by existing workman's compensation (such as 
residents living near asbestos-dispersing facilities, and 
family members of employees at asbestos factories).  Yen 141 
billion (USD 1.2 billion) was allotted to remove asbestos 
from schools, hospitals and public buildings. The Diet will 
now begin deliberations on the fiscal 2006 budget, which was 
approved by the Cabinet on December 24 and stands at 79.7 
trillion yen (USD 681 billion), 3 percent less than the one 
in fiscal 2005.  The budget demonstrates improved conditions 
stemming from the recovering economy.  The primary balance 
deficit is projected at 2.2 percent of GDP, a 0.9-point 
improvement on the year.  The bond to cover the budget 
deficit is 30.0 trillion yen (USD 259 billion), the lowest 
level in the past four years.  The fiscal crisis, however, 
still lingers with expected outstanding government bonds of 
541.8 trillion yen (USD 4.63 trillion) at the end of fiscal 
2006, 5.3 trillion yen (USD 45 billion) more than at the end 
of fiscal 2005. 
 
Administrative reform 
--------------------- 
¶3. (SBU) The administrative reform bill provides a general 
framework for reform that should prevent the restructuring 
achieved thus far from stalling or moving backwards after 
Prime Minister Koizumi leaves office in September.  In 
addition, Koizumi has identified the consolidation of the 
eight government-affiliated financial institutions, included 
in the administrative reform bill, as his next goal after 
postal privatization. Although the details have yet to be 
determined, we expect the administrative reform bill to be an 
assortment of basic policies to downsize the government 
including a second round of government restructuring, after 
the 2001 makeover of ministries and agencies launched by then 
Prime Minister Ryutaro Hashimoto.  It also may contain plans 
for a new headquarters to facilitate administrative reform 
and possibly a new Cabinet member committee to coordinate 
with the Council of Economic and Fiscal Policy (CEFP) to 
accelerate reform. Some of the measures to achieve a slimmer, 
more efficient administration are: 
a) Streamlining of independent administrative institutions 
and other government-affiliated corporate entities, including 
the loss of public servant status for most executives and 
employees. 
 
TOKYO 00000679  002 OF 006 
 
 
b) Streamlining of Special Accounts -- rumored to hold even 
more superfluous projects than the General Accounts -- by 
decreasing the number to half or one-third from the existing 
31 accounts within five years.  Other recommendations include 
consolidating five accounts for road improvements, flood 
control, port improvements and other public work projects 
into a single category. 
c) Trimming of the central and local government work force by 
5 percent and 4.6 percent respectively over the next five 
years (FY06-10) through attrition and retirement, outsourcing 
practices to private entities and reducing the number of the 
unnecessary practices. 
d) Streamlining the number of independent administrative 
institutions and other government affiliated corporate 
entities from 56 to 42, while also changing the stature of 
most of the executives and employees to non public servants. 
e) Consolidation or privatization of eight government- 
affiliated financial institutions.  Current plans are to 
merge five institutions -- the Japan Finance Corporation for 
Small and Medium Enterprise, the National Life Finance Corp., 
Okinawa Development Finance Corporation, and the Agriculture, 
Forestry and Fisheries Finance Corporation and the section 
offering international banking services at the Japan Bank of 
International Cooperation (JBIC) -- into a single entity.  As 
of this writing, the rumor is that the overseas AID 
operations at JBIC will be transferred to the Japan 
International Cooperation Agency.  The Development Bank of 
Japan and Shoko Chukin Bank will be fully privatized and 
transferred to two separate stock companies and the Japan 
Finance Corp. for Municipal Enterprises will be transferred 
to municipalities. 
 
2006 Tax Reform Legislation 
--------------------------- 
¶4. (SBU) This year's tax reform legislation will result in an 
effective tax hike of over 2 trillion yen (over USD 16 
billion).  It reflects a fiscal consolidation necessary to 
sustain long-term economic growth. Some commentators have 
warned that increasing taxes too quickly could stall the 
recovery.  As usual, the tax legislation will be based on the 
November 2005 recommendations of the Government Tax 
Committee, an advisory body to the Prime Minister, with some 
refinements from the LDP tax committee led by former Minister 
of State for Financial Services Hakuo Yanagisawa.  The 
proposals include tax hikes for both individuals and 
corporations.  Last year's tax legislation reduced the 1999 
Obuchi special fixed rate individual income tax cuts (3.3 
trillion yen, USD 28 billion, or 0.7 percent of GDP) by 50 
percent.  This year's plan is to eliminate the cuts entirely. 
 Tax incentive programs for corporate investment and research 
and development will be eliminated as scheduled in March 2006 
but some tax incentives will be created for corporate 
investment in advanced software.  The tax reform will also 
transfer 3 trillion yen (USD 26 billion) in tax collection 
authority to local governments by changing tax rate 
structures. 
 
¶5. (SBU) A proposal to simplify liquor taxes by reducing the 
number of categories of liquor will marginally increase the 
price of wine by about 10 yen per bottle but the impact of 
the marginal increase this year on U.S. imports is expected 
to be small.  Tobacco taxes will increase by about 20 yen per 
pack.  The tax legislation will also change the definition of 
non-permanent residents, making it clear that any person 
living in Japan for a period of more than five years within 
any ten-year period cannot claim non-permanent residence 
status and must be considered a resident for tax purposes. 
This will undoubtedly affect foreign company personnel 
decisions regarding length of stay of expatriate employees in 
Japan. 
 
¶6. (SBU) Although there has been discussion in the press 
about an "environment tax" on fossil fuels as a measure to 
help control Japan's greenhouse gas emissions that contribute 
to global warming, the Environment Ministry has decided not 
to press for this tax before the end of FY 2005. 
Environment Ministry contacts expect, however, that it is 
likely they will propose this tax to the Diet next year. 
 
 
TOKYO 00000679  003 OF 006 
 
 
Health Care 
----------- 
¶7. (SBU) The health care reform bills seek to head off 
drastic increases in health care spending but represent only 
modest steps toward addressing the misallocation of health 
care resources, a missed opportunity to promote competition 
and investment in the medical services market and an 
indication of continuing pressure to cut reimbursements for 
medical devices and pharmaceuticals. 
The Ministry of Health, Labor, and Welfare (MHLW) will 
propose amendments to the Medical Law aimed at increasing 
financial transparency in medical corporations and 
reinforcing non-profit healthcare.  Rather than opening the 
medical services market to for-profit enterprises (an issue 
we have raised in bilateral investment talks), the MHLW 
proposals seek to address local shortages of pediatric and 
other emergency care by offering tax breaks and flexibility 
to develop alternative sources of revenue for private 
hospitals that accept an obligation to provide such services 
under a new non-profit "social-medical corporation" form. 
Alternative revenue sources for social-medical corporations 
are to include profit-oriented activities such as nursing 
home and child care services, the proceeds of which could be 
used to make up for thin margins on emergency care but not 
distributed to investors.  The proposal also will relax 
restrictions on issuance of hospital bonds by social-medical 
corporations.  Left essentially untouched by these proposals 
is the vast majority of small private hospitals and clinics 
that account for much of the overcapacity and inefficiency in 
the Japanese health care system. 
 
¶8. (SBU) A bill to amend the Health Insurance Law will 
increase co-payments for relatively wealthy seniors in order 
to reduce projected increases in health care spending driven 
by the aging of Japanese society.  The bill will seek further 
savings through adjustments to the reimbursement model 
designed to reduce incentives for doctors to over-prescribe 
treatments.  Additional provisions would shift responsibility 
for managing public insurance plans to the local level, a 
move that many local officials oppose. 
 
¶9. (SBU) MHLW also will submit an amendment to the 
Pharmaceuticals Law to revise regulations on the retail sale 
of over-the-counter drugs for the first time since the 
current system was introduced in 1960.  It is not yet clear 
whether the new rules will allow for Internet retailing of 
low risk drugs, a topic of hot debate among businesses and 
consumers. 
 
Securities Exchange Law (SEL) 
----------------------------- 
¶10. (SBU) A bill to revise tender offer bid (TOB) rules 
closes loopholes exploited in several high profile corporate 
takeover attempts last year while also increasing the 
transparency of the TOB process and allowing withdrawal or 
modification of offers when target firms deploy certain 
defensive measures.  The new rules, to be submitted by the 
Financial Services Agency (FSA), also will require target 
company boards to take a formal position on TOBs and 
communicate their views to shareholders.  Details have not 
yet been finalized, but the new rules could contribute to 
improving corporate governance if written so as to limit the 
use of takeover defenses deployed to protect entrenched 
management.  The FSA is also expected to propose more 
frequent reporting by shareholders possessing more than 5 
percent of a given firm's outstanding shares, a requirement 
that would interfere with the legitimate investment 
strategies of institutional investors and private funds. 
 
Agricultural Reform 
------------------- 
¶11. (SBU) Agricultural issues are back in the spotlight 
because of the flap over beef, but we anticipate that the 
Diet debate will focus on bills on agricultural reform. The 
bills on the docket constitute a real, if less than sweeping, 
effort to change Japan's subsidy system to raise efficiency. 
They would modify domestic subsidies to improve 
competitiveness in an environment of increased imports after 
the conclusion of the Doha Round of World Trade Organization 
 
TOKYO 00000679  004 OF 006 
 
 
(WTO) talks. The government intends to shift away from 
conventional price subsidies toward cross commodity payments 
that would be limited to farms and farming institutions that 
have demonstrated an ability to revitalize the industry. 
Only farms and farming institutions that exceed the defined 
criteria would receive the payments.  The ministry hopes the 
new bill will encourage farmers to consolidate farmland and 
thus increase competitiveness.  This modest bill should be 
submitted to the Diet at the end of February.  We do not 
expect it to lead to any significant reform of the 
agriculture sector. 
 
Town Planning Laws (Machizukuri Sanpo) 
-------------------------------------- 
¶12. (SBU) The government's bill to revise the Town Planning 
Laws represents a step back from reform, albeit not as bad as 
we had initially heard thanks to energetic lobbying by 
Japanese business to roll back the worst provisions of this 
draft legislation. If passed the bills would restrict the 
opening of new stores over 10,000 square meters.  In order to 
attract retailers back into traditional urban commercial 
centers, the Ministry of Land, Infrastructure, and Transport 
(MLIT) will submit amendments to the City Planning Law that 
reduce from six to three the types of zoned property on which 
retailers will be able to open new stores of over 10,000 
square meters.  To further sweeten the pot for retailers to 
move back downtown, MLIT and the Ministry of Economy, Trade 
and Industry will also introduce amendments to the Urban 
Center Revitalization Law that will simplify procedures and 
offer extra incentives for opening new retail stores in 
"hollowed-out" urban shopping districts.  The Japan Chain 
Store Association -- the large-scale retailing industry's 
main trade group -- opposes the amendments, and the 
private-sector members of the Cabinet's CEFP have also 
expressed their concern that the proposed changes would do 
little to address the problems facing urban shopping areas 
and would reverse the Koizumi administration's regulatory 
reform policies.  Since the GOJ announced plans for these 
revisions in summer 2005, embassy economic officers have 
visited MLIT on a number of occasions to outline our concerns 
that the changes will be overly restrictive toward large 
retailers. In addition, AUSTR Wendy Cutler raised the issue 
during the November US-Japan Trade Forum in Seattle, and we 
also included concerns about the proposed revisions in this 
year's Regulatory Reform Initiative recommendations and 
negotiations. 
 
Employment Practices 
-------------------- 
¶13. (SBU) A preliminary government census indicates that 
Japan,s total population, including foreign residents, may 
have decreased in 2005 for the first time since the end of 
WWII, heightening the importance of government measures to 
increase the number of workers by expanding employment 
opportunities for youth, women and senior citizens, 
especially as baby boomers near retirement. The MHLW intends 
to submit the following bills to address this situation: 
 
¶14. (SBU) The Equal Employment Opportunity and Labor Standard 
Amendment Bill: This bill would further reduce gender 
discrimination, prohibit disadvantageous treatment of woman 
workers because of pregnancy, and relax regulations that 
prohibit women from working in mines.  A ministerial order 
would prohibit implicit gender discriminations such as 
recruitment based on height and weight where there is no 
explicit job requirement thereof. In addition, the number of 
transfers to different posts within a company would become an 
included criterion for promotion. Although it is already 
illegal to fire an employee due to pregnancy, a new amendment 
would also outlaw other discriminatory treatment such as a 
mandatory transfer to a different department or line of work. 
 
¶15. (SBU) Human Resource Development and Employment 
Management Amendment Bill: This bill would provide practical, 
effective, vocational training for youths by establishing a 
new system that combines on-the-job training (OJT) with 
lectures. The system would allow young workers to receive OJT 
at private firms for a defined period, as well as attend 
lectures at educational institutions, while still being paid. 
 
TOKYO 00000679  005 OF 006 
 
 
 The goal is to help retiring baby boomers to transfer their 
technical skills and know-how to young people.  The number of 
young unemployed people, including freeters (&intermittently 
employed8) and NEET (¬ in employment, education or 
training8), now stands at four million. 
 
Market Testing 
-------------- 
¶16. (SBU) The Cabinet Office will submit a draft law on 
market testing -- the outsourcing to private-sector entities 
of a limited number of government services -- in early 
February for consideration in conjunction with the budget 
bill.  The proposed law, tentatively titled the "Bill for the 
Reform of Public Services through the Introduction of 
Competition," would amend laws and procedures to allow the 
private sector to bid competitively with the public sector to 
provide public services on the national and local levels. 
The bill probably will not specify public services that the 
private sector will be allowed to bid on, but will instead 
contain a provision for determining appropriate areas for 
applying market testing. (See Ref B) 
 
Customs Law 
----------- 
¶17. (SBU) The Ministry of Finance (MOF) plans to introduce a 
bill that would revise the Customs Law to require all 
aircraft and ships to submit detailed information on 
passengers and cargo prior to the vessel's arrival in Japan. 
MOF held a public comment period on the bill during November 
9-18 and is now drafting details of the law.  MOF's plan 
would require aircraft and vessel captains to submit the 
necessary information, but the Ministry is considering 
broadening reporting authority to allow prior notification by 
a broader range of authorized reporters, echoing a request 
that the USG made in this year's Regulatory Reform Initiative 
recommendations to the GOJ. 
 
Road Transportation Vehicle Law 
------------------------------- 
¶18. (SBU) MLIT plans to submit a bill to revise the Road 
Transportation Vehicle Law in order to reduce the burden on 
auto leasing companies and other owners of large numbers of 
vehicles when they change registration information and 
transfer titles.  MLIT plans to remove owners' information 
from the original certificates of vehicle inspection so that 
new owners will not have to submit the inspection certificate 
for changes in registration and title transfers, a process 
that currently deprives lessees of the use of the vehicle 
during the transition period.  The revision would also 
include measures to facilitate on-line application for these 
changes.  The USG has advocated this issue both in our annual 
regulatory reform talks and through the Office of the Trade 
Ombudsman and we are pleased that MLIT is taking these steps 
to ease the burden on fleet vehicle owners.  However, we 
believe the revisions do not go far enough since the law will 
still require owners to complete registration procedures 
within an unreasonable 15-day time period. 
 
Anti-Corruption Legislation 
--------------------------- 
¶19. (SBU) The Diet will take up the ratification of the 
United Nations Anti-Corruption Convention at the beginning of 
March according to the current agenda.  Interestingly, 
however, proposed legislation on combating organized crime, 
which includes a provision applying penalties for acts of 
bribery undertaken by Japanese nationals overseas that would 
bring Japan into accord with the OECD anti-corruption 
guidelines, continues to remain "under consideration" as it 
has been since it was originally submitted in 2004.  The 
agenda contains no scheduled time for that bill's 
reconsideration. 
 
Eliminating Tariffs on Multi-chip Integrated Circuits 
--------------------------------------------- -------- 
¶20. (SBU) This multilateral treaty between the United States, 
EU, Korea, Taiwan and Japan will eliminate tariffs on 
multi-chip integrated circuits, with the hope of spurring 
other zero-tariff sectoral agreements in WTO negotiations. 
Under the agreement, the U.S. will abolish its 2.6 percent 
 
TOKYO 00000679  006 OF 006 
 
 
duty, the EU its duties ranging up to 4 percent and Korea its 
8 percent duty.  Japan will keep its existing rate at zero. 
The treaty should be submitted to the Diet end February. 
 
MRA on Telecommunications Equipment 
----------------------------------- 
¶21. (SBU) U.S. and Japanese negotiators are finalizing the 
text of a Mutual Recognition Agreement (MRA), the first MRA 
between the U.S. and Japan.  The agreement will allow U.S. 
and Japanese regulators to accept the results of testing labs 
and certifications on telecommunications equipment obtained 
in the other country leading to easier market access for 
manufacturers on both sides.  Japan is interested in 
expanding the agreement or using it as a model to cover other 
kinds of goods such as medical equipment.  U.S. testing labs 
are especially interested in the agreement.  The Ministry of 
Foreign Affairs (MOFA) expects the Cabinet to submit the MRA 
to the Diet during this session, but the timing is unclear. 
 
Free Trade Agreements (FTAs) 
---------------------------- 
¶22. (SBU) Only the "economic partnership agreement" with 
Malaysia, signed on the fringes of the East Asia Summit in 
December, has formally made the Diet's agenda, scheduled for 
the last 10 days of February.  In addition, an amendment to 
apply the same certificates of origin provisions to Malaysian 
products that the Japan-Mexico FTA offers will also be 
considered, along with changes to Japan's tariff schedule. 
According to contacts at MOFA, the Government is still hoping 
to submit the draft agreement with Thailand and possibly the 
agreement under negotiation with the Philippines.  (Both 
agreements are listed on the schedule for this session as 
"items under discussion outside the submitted agenda.") 
 
What's Missing? 
--------------- 
¶23. (SBU) In addition to the bills and treaties above, it is 
important to note that the government has not submitted any 
revision of Company Law Article 821 to eliminate legal risk 
for foreign firms that conduct their primary business through 
their branches in Japan.  The LDP leadership reportedly has 
rejected a request from an individual LDP Diet member to 
table an amendment during this session, before the Company 
Law enters into force in May, calculating that an admission 
of error would only offer the DPJ more ammunition with which 
to attack the government for past mistakes.  While the Diet 
member in question has suggested that it may be possible to 
amend Article 821 in the fall 2006 session, the prospects for 
this are uncertain at best; we expect a new Prime Minister to 
be in place and he too may be unwilling to risk embarrassment 
over Article 821. 
 
Conclusion 
---------- 
¶24. (SBU) Koizumi has ambitiously set out to further his 
reform agenda in this Diet session with his administrative 
reform bill.  Some of the other bills in the docket are less 
ambitious, however, such as the health care amendments, 
agricultural subsidy revisions, and changes to the Town 
Planning Laws, an indication that the Prime Minister,s 
commitment to reform does not cross all sectors. 
Nevertheless, the outlook for continued, if watered-down, 
reform remains good. 
SCHIEFFER