VZCZCXRO6987
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #3481/01 1730832
ZNR UUUUU ZZH
R 220832Z JUN 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3577
INFO RUEHFK/AMCONSUL FUKUOKA 6876
RUEHNAG/AMCONSUL NAGOYA 6780
RUEHNH/AMCONSUL NAHA 9487
RUEHOK/AMCONSUL OSAKA KOBE 0139
RUEHKSO/AMCONSUL SAPPORO 8026
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 06 TOKYO 003481 
 
SIPDIS 
 
SIPDIS 
 
PLEASE PASS TO USTR WENDY CUTLER/MICHAEL BEEMAN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD JA
SUBJECT: SOME DIET ECONOMIC GOALS ACHIEVED DESPITE 
POLITICAL DIFFICULTIES 
 
REF: A. REF A: 2006 TOKYO 3290 
 
     ¶B. REF B: 2005 TOKYO 5709 
 
 ¶1. (SBU) Summary.  Prime Minister Koizumi christened the 
164th Diet session the "administrative reform" Diet, a 
fitting moniker in terms of legislative achievement.  He 
refused to extend the Diet past June 18, leaving behind much 
unfinished business such as Constitutional and educational 
reform (see Septel), but his legislation to reform the 
government,s administration was passed after lengthy 
negotiation.  For a discussion of administration reform and 
tax reform see paragraphs 2-5.  Bills involving health care 
are discussed in paragraphs 6 and 7.  The Financial 
Instruments and Exchange Law can be found in paragraphs 8-10 
while agricultural reforms are handled in paragraphs 11-12. 
The revision to the Town Planning Laws is described in 
paragraph 13 (and Reftel A) and an examination of employment 
laws affecting women and youth begins in paragraph 14. 
Additional bills, agreements, and treaties are examined in 
paragraphs 15-23.  End summary. 
 
Administrative reform 
--------------------- 
 
¶2. (SBU) After 128 hours of deliberations in both houses, the 
Diet finally passed the administrative reform bill, which 
provides a framework to realize a "simplified and efficient 
government".  Although intended to set in motion a program 
for continued reform after Koizumi's departure, the actual 
details will have to be worked out with subsequent 
implementation bills to be discussed in the fall or during 
next year's Diet sessions, at which time bureaucracies 
affected by the downsizing may fight back.  The bill also 
establishes the Headquarters for Administrative Reform, made 
up of Cabinet members and headed by the Prime Minister. 
 
¶3. (SBU) Specific policy measures adopted by this bill are: 
(a) review of independent administrative institutions and 
other government-affiliated corporate entities; (b) 
streamlining of special accounts by decreasing the number to 
half or one-third from the existing 31 accounts within five 
years.  (In terms of amount, however, it only affects 12 
trillion yen out of the Special Accounts' total 225 trillion 
yen.) (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 unnecessary practices; (d) reducing government 
assets to half of that of FY2005 in terms of GDP percentage; 
(e) consolidating or privatizing eight government-affiliated 
financial entities, i.e., merging five institutions -- the 
Japan Finance Corporation for Small and Medium Enterprise, 
the National Life Finance Corp., Okinawa Development Finance 
Corporation, 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.  The Development Bank of 
Japan and Shoko Chukin Bank will be fully privatized in five 
to seven years.  The overseas yen loan aid operations at JBIC 
will be transferred to the Japan International Cooperation 
Agency by April 2008.   The merger of JIBC yen loan program 
into JICA is part of the larger ODA (official development 
assistance) reform, being undertaken by the Ministry of 
Foreign Affairs.   The Koizumi administration intended to 
produce a major consolidation of government financial 
institutions but critics claim this move may have only 
shuffled agencies around with little downsizing of government 
institutions. 
 
Tax Change Legislation for 2006 
------------------------------- 
 
¶4. (SBU) The Diet approved this year,s tax reform 
legislation on March 27.  The tax bill is estimated to result 
in a 2.4 trillion (0.5 percent of GDP) increase in central 
and local tax revenues once the tax measures are fully in 
place.  Highlights include eliminating the remaining half of 
the 3.3 trillion special fixed-rate individual income tax 
cuts starting in January 2007.  (Half of the special tax cuts 
were eliminated from January 2006.)  This is an incremental 
increase in the tax rate but with the economy doing better we 
do not expect it to have a negative impact on growth. 
 
¶5. (SBU) Other tax changes include (a) scaling back tax 
 
TOKYO 00003481  002 OF 006 
 
 
incentive programs for corporate investment in IT and R&D; 
(b) scaling back earlier reductions in taxes on real estate 
transactions, such as the property acquisition tax, and the 
registration and license tax; (c) simplifying the liquor tax 
system by reclassifying ten categories of alcoholic beverages 
to four, including an increase in the wine tax by 6.9 to 
57.6 per 720-ml bottle, and a lowering of the sake tax by 
14.8 to 86.4 per 720-ml bottle, effective May 2006; (d) 
raising the tobacco tax on cigarettes by 0.85 to about 8 
per cigarette, effective July 2006; (e) modifying the 
qualification for non-permanent resident tax status.  From 
2006, anyone living in Japan for any 5 out of any 10 
consecutive years will not qualify for non-permanent resident 
tax status.  In particular, the increase in the wine tax is 
somewhat worrisome because it may represent only the first of 
many tax increases on US exports of wine. 
 
Health Care Reform 
------------------ 
 
¶6. (SBU) Health care reform bills passed on June 14 will 
increase co-payments for well-off seniors age 70 and over, 
decrease co-payments for children, and give private 
non-profit hospitals greater flexibility to supplement 
revenues, including through issuance of hospital bonds. 
Liberal Democratic Party (LDP) lawmakers reportedly are 
already discussing additional new measures to reduce 
government health care spending, however, in response to 
criticism that these bills passed with inadequate debate and 
do not go far enough to address waste in Japan's health care 
system.  Measures under consideration by the LDP reportedly 
include significant new cuts in reimbursement prices for 
pharmaceuticals and a move from biannual to annual price 
cuts, changes that will exacerbate downward price pressures 
on domestic and foreign pharmaceutical manufacturers.  Also 
reportedly under consideration are measures to expand the use 
of a "fee-for-diagnosis" reimbursement model, in which 
hospitals are reimbursed at a flat rate determined by the 
type of illness, rather than the current "fee-for-service" 
model, which gives health care providers an incentive to 
maximize billable services to patients, including frequent 
visits to the doctor and prolonged hospital stays.  How the 
LDP discussions play out will give some indication of the 
extent to which the conservative Japan Medical Association is 
able to regain its traditionally strong influence with LDP 
politicians during the upcoming transition to a new LDP 
leader. 
 
¶7. (SBU) Separately, the Diet revised the Pharmaceuticals Law 
June 8 to permit over the counter retail sale of less risky 
non-prescription drugs, subject to licensing at the 
prefectural level.  These changes are expected to pave the 
way for convenience stores and other retailers to sell all 
but the highest risk non-prescription medicines, including 
treatments for common ailments such as colds, headaches etc. 
The revised law does not permit Internet or mail order sales, 
however. 
 
Financial Instruments and Exchange Law 
-------------------------------------- 
 
¶8. (SBU) On June 7 the Diet passed the Financial Instruments 
and Exchange Law.  This law, which amends and renames the 
former "Securities and Exchange Law," provides a wide-ranging 
legal framework designed to enhance consumer protections and 
establish uniform rules for transactions involving financial 
products and services. 
 
¶9. (SBU) The four basic goals of the law are: (a) to 
establish a cross-sectoral regulatory framework of financial 
products and services by providing a definition of collective 
investment scheme and derivatives; (b) to enhance disclosure 
requirements by introducing a statutory quarterly reporting 
system for listed firms, enhancing regulations on internal 
control for financial reporting with a mandatory 
certification by management, and improving the transparency 
of the Tender Offer Bid (TOB) process; (c) to strengthen 
penalties for illegal transactions by increasing the maximum 
criminal penalties against such frauds as false financial 
reports and market manipulation to 10 years in prison from 
the present five years; and  (d)  to permit stock exchanges 
to create self-regulatory committees to make exchanges more 
transparent and reliable.  The law is expected to take effect 
by summer 2007. 
 
TOKYO 00003481  003 OF 006 
 
 
 
¶10. (SBU) The new Financial Instruments and Exchange Law has 
drawn much attention in the wake of the June 5 arrest of 
maverick investor Yoshiaki Murakami on charges of insider 
trading related to the 2005 Livedoor-Nippon Broadcasting 
hostile takeover attempt.  The new law closes loopholes used 
by Murakami and former Livedoor CEO Takafumi Horie to acquire 
major ownership positions in target firms without filing a 
formal TOB.  At the same time, the new law revises TOB rules 
to increase the transparency of the process by requiring 
target company boards to take a formal position on tender 
offers and communicate their views to shareholders. 
Furthermore, it permits buyers to withdraw or revise their 
offers in response to target companies' deployment of 
takeover defense measures such as stock splits or poison 
pills.  The new law also tightens the deadline for 
institutional investors to report the acquisition of more 
than five percent of a given company's stock, from 90 days to 
two weeks, and it requires fund managers to register and 
report their names and addresses.  These two changes could 
potentially interfere with legitimate investment strategies 
and inhibiting the development of Japan's investment fund 
market. 
 
Agricultural Reform 
------------------- 
 
¶11. (SBU) A farm bill ostensibly designed to promote 
agriculture reform passed the Diet on June 14th.  When it 
goes into effect in 2007, the government will focus direct 
payment subsidies on large-scale farmers or farmer 
organizations in an effort to promote consolidation and 
increased agricultural productivity.  GOJ authorities, 
claiming the new supports will be more consistent with WTO 
rules, hurriedly passed the bills in part to prepare Japan 
for the now-stalled Doha negotiations.  Some observers with 
whom we have discussed the bills are not optimistic that they 
will prove effective in promoting reform in Japan's 
lackluster agriculture sector, however since local 
governments can exploit loopholes to funnel subsidies to 
smaller farmers despite the goal of focusing on larger, 
competitive farms. 
 
¶12. (SBU) Two bills related to BSE and submitted by the 
opposition Democratic Party of Japan (DPJ) will be carried 
over to the next Diet session, but it is unlikely they will 
ever be passed by the LDP-controlled Diet.  The bills are 
designed to provide consumers with more information on the 
beef they are purchasing, in particular where and when it was 
imported.  In addition, importers would be obliged to keep a 
register of the name of the exporting country, code 
identifying the cattle of origin, the party responsible for 
the code and the date of import. Distributors of imported 
beef would either place this information on the packages of 
beef or display it in their stores. The bill also mandates 
that the government evaluate BSE risk in countries or regions 
that have experienced a BSE problem. 
 
Town Planning Laws (Machizukuri Sanpo) 
-------------------------------------- 
 
¶13. (SBU) Newly-passed amendments to Japan's Three Town 
Planning Laws -- comprised of the City Planning Law, the 
Large-scale Retail Store Location Law, and the Urban Center 
Revitalization Law -- will make it more difficult for 
retailers to open stores of over 10,000 square meters.  This 
will be achieved by reducing the types of land available to 
retailers hoping to build large stores from six zones to only 
three -- commercial districts, neighborhood commercial 
districts, and quasi-industrial districts -- and prohibit 
retailers from building such stores on unzoned and 
agricultural land, which they are currently allowed to do. 
The Japanese retail sector believes the amended laws will not 
achieve their objective of attracting retailers back to 
depressed urban shopping areas, but will instead result in 
fewer, and smaller, shopping options in suburban areas.  The 
laws will not go into effect until December 2007, but 
prefectures and local governments around Japan have already 
used their impending enactment as an excuse to introduce 
further restrictions on large retailers and reject 
large-scale retail store applications. The Embassy is 
engaging the GOJ to ensure that the Laws' implementing 
regulations and the process leading up to them will be 
implemented transparently and fairly and include 
 
TOKYO 00003481  004 OF 006 
 
 
opportunities for the USG and private sector to provide 
input.  (For further information please see Reftel A.) 
 
Employment Practices 
-------------------- 
 
¶14. (SBU) The Diet passed an MHLW-drafted bill to expand 
employment opportunities for women and youth on June 15, only 
a day before the Diet session effectively came to a close and 
only after heated debate between the ruling and opposition 
parties finally resulted in a compromise.  The measure was 
prompted by concerns over the declining workforce -- a 
government census confirmed that Japan,s total population 
decreased in 2005 for the first time since the end of WWII. 
Known as the Equal Employment Opportunity Bill, the 
legislation is designed to reduce gender discrimination.  One 
goal was to create a ministerial order to prohibit implicit 
gender discriminations such as recruiting based on height and 
weight, basing promotion decisions on willingness to accept 
transfers to other parts of the country -- even when an 
assignment does not require it -- or basing promotion on the 
number of different locations where an employee has worked 
(female workers tend to stay in one place during their 
career, making them vulnerable to this type of 
discrimination). Labor unions argued that other implicit 
gender discrimination existed as well and successfully 
convinced the Diet to add a supplementary resolution (futai 
ketsugi), which states that any discrimination not included 
in the ministerial order could be defined as illegal through 
judicial rulings. The government hopes this legislation will 
encourage more female workers to join the labor pool. 
 
¶15. (SBU) The Diet also passed the Human Resource Development 
and Employment Management Amendment Bill.  It is designed to 
give practical, effective vocational training to youths 
through a new system combining on-the-job training with 
lectures. The government hopes this new system will encourage 
retiring baby boomers to transfer their technical skills and 
know-how to young people. 
 
Market Testing Law 
------------------ 
 
¶16. (SBU) The Bill for the Reform of Public Services through 
the Introduction of Competition, known as the "Market Testing 
Law", establishes a legal framework and lays out the 
procedure for allowing the private sector to bid 
competitively with the public sector to provide public 
services on national and, on a voluntary-basis, local levels. 
 An independent, third party organization made up of lawyers 
and accountants is to be set up to ensure transparency, 
neutrality and fairness in the process.  The Prime Minister's 
Council on the Promotion of Regulatory Reform has championed 
this legislation as a way to reduce the size of government by 
outsourcing government services and has visited the United 
States and Europe to gather ideas on possible outsourcing 
options.  In addition, the impact of this bill already has 
been felt.  On June 1 the government outsourced the issuance 
of parking tickets to private firms.  Another service that is 
a candidate for this initiative is the government "Hello 
Work" job placement services.  (For more background on this 
bill see Reftel B.) 
 
Customs Law 
----------- 
 
¶17. (SBU) The Customs Tariff Law (kanzei teiritsu ho) 
Amendment Bill was passed on March 29 and went into 
enforcement on April 1.  The Ministry of Finance (MOF) had 
hoped to broaden the reporting authority to allow prior 
notification by a broader range of authorized reporters in 
response to public comment in November 2006, but the bill 
that ultimately was submitted and passed requires duties only 
on aircraft and vessel captains. 
 
Road Transportation Vehicle Law 
------------------------------- 
 
¶18. (SBU) The Road Transportation Vehicle Bill was passed on 
May 12, released to the public on May 19, and will become 
effective within 2.5 years.  The revision to this law 
includes the ability to register new vehicles on-line. Other 
recommendations, such as removing owners, information from 
the original certificates of vehicle inspection, thus 
 
TOKYO 00003481  005 OF 006 
 
 
reducing the burden on auto leasing companies and other 
owners of large numbers of vehicles, were not included.  The 
relevant Ministerial Ordinances are to be drafted by the end 
of 2006. The law still requires owners to complete the 
registration process within a 15 day time period, however, 
MLIT is now willing to accept en masse applications which 
would enable the re-registration to be done within six 
months. US stakeholders are fully involved in the outlining 
and drafting of the Ministerial Ordinances, and a study group 
began meeting on June 20.  The US had been requesting this 
step in the Regulatory Reform Initiative as a means to reduce 
the burden on auto leasing companies.  GE is among the 
American companies that will benefit from this relaxation of 
regulations. 
 
Anti-corruption Legislation 
--------------------------- 
 
¶19. (SBU) The Diet approved ratification of the United 
Nations Anti-Corruption Convention on June 2 but did not pass 
the legislation actually containing the ratification because 
the opposition DPJ raised objections to the 
government-drafted bill.  The legislation, dubbed the 
"Conspiracy Bill", was drafted to combat organized crime.  It 
also would have brought Japan into accordance with OECD 
anti-corruption guidelines because it included a provision to 
penalize Japanese nationals who commit bribery overseas. 
Originally submitted in 2004, the bill continues to be "under 
consideration," and will be carried over to the next Diet 
session. 
 
Eliminating Tariffs on Multi-chip Integrated Circuits 
--------------------------------------------- -------- 
 
¶20. (SBU) Measures to implement the agreement to eliminate 
tariffs on multi-chip integrated circuits between the United 
States, EU, Korea, Taiwan and Japan, passed the Diet at the 
end of April with apparently little or no dissension.  With 
the ratification of this agreement, the U.S., EU, and Korea 
will abolish their duties, and Japan will bind its applied 
rate at zero. Although it was hoped the treaty would spur 
zero-tariff sectoral agreements in WTO negotiations, this 
does not appear to have happened yet. 
 
MRA on Telecommunications Equipment 
----------------------------------- 
 
¶21. (SBU) U.S. and Japanese negotiators have not yet reached 
agreement on a final text for a Mutual Recognition Agreement 
(MRA) on Telecommunications Equipment.  It is likely the 
agreement will not be ready for submission to the Diet until 
¶2007. 
 
Free Trade Agreements (FTAs) 
--------------------------- 
 
¶22. (SBU) As expected, Japan's "economic partnership 
agreement" (EPA) with Malaysia was ratified during this Diet 
session.   Because of the ongoing political uncertainty in 
Thailand, however, the Thailand-Japan agreement remains 
unsigned and consequently has yet to be submitted for Diet 
approval even though the text of the agreement itself has 
been completed.  Negotiations on the Japan-Philippines EPA 
continued without final resolution, thus preventing Diet 
action on that agreement as well. 
 
Japan,s EEZ with China and South Korea 
-------------------------------------- 
 
¶23. (SBU) Three bills to crack down on Chinese and South 
Korean energy exploration within Japan,s exclusive economic 
zone (EEZ) will be taken up in the next Diet session.  The 
bills were submitted by the LDP and the DPJ, respectively. 
The LDP,s bill restricts entry into an area 500 meters 
around a facility set up to exploit, develop, or explore 
natural resources inside the Japan-set EEZ median line.  This 
bill is designed to protect oil drilling and other equipment 
from being damaged.  The DPJ on the other hand submitted two 
bills.  One deems that exploration for natural resources be 
carried out by the government and requires all exploration 
plans be subject to Cabinet approval.  The other would 
prohibit foreign nationals or entities from carrying out such 
research within the same coastal area without government 
approval.  The government will now have to continue 
 
TOKYO 00003481  006 OF 006 
 
 
contentious negotiations with China and South Korea over the 
EEZ median line without domestic legislation allowing it to 
crack down on violators. 
 
Conclusion 
---------- 
 
¶24. (SBU) Overall, this was a lackluster session, perhaps not 
surprising given Koizumi,s lame duck status.  Koizumi 
achieved his main objective, however -- passing his 
administrative reform bill.  In addition, the Diet began the 
difficult process of reforming the health care system and 
also made some progress toward deregulation with the Market 
Testing and Road Transportation Vehicle Laws.  The attempt at 
agricultural reform was disappointing, however, as was the 
failed attempt at anti-corruption legislation.  As for other 
bills, such as the Financial Instruments and Exchange Law and 
the Town Planning Law, we will continue to monitor and report 
on the impact on US interests. 
SCHIEFFER