VZCZCXRO6621
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #5288/01 2570342
ZNR UUUUU ZZH
R 140342Z SEP 06 ZDS
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 6374
INFO RUEHBJ/AMEMBASSY BEIJING 4169
RUEHGP/AMEMBASSY SINGAPORE 6753
RUEHFK/AMCONSUL FUKUOKA 8058
RUEHNAG/AMCONSUL NAGOYA 7829
RUEHNH/AMCONSUL NAHA 0614
RUEHOK/AMCONSUL OSAKA KOBE 1404
RUEHKSO/AMCONSUL SAPPORO 9152
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC

UNCLAS SECTION 01 OF 03 TOKYO 005288 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EB FOR A/S SULLIVAN 
USTR FOR AUSTR CUTLER AND MBEEMAN 
AGRICULTURE FOR USDA/OSEC, FAS/ITP, FAS/FAA/IO/NA 
USDOC FOR 4410/ITA/MAC/OJ/NMELCHER 
TREASURY FOR IA/DOHNER, HAARSAGER, AND YANG 
 
E.O. 12958: N/A 
TAGS: ECON PREL EFIN ETRD ECIN JA APECO
SUBJECT: SCENESETTER FOR EB A/S SULLIVAN: INCOMING 
CABINET'S ECONOMIC POLICY OUTLOOK 
 
REF: A. STATE 132255 
 
     ¶B. TOKYO 4025 
 
TOKYO 00005288  001.3 OF 003 
 
 
Summary 
------- 
¶1.  (SBU) With Chief Cabinet Secretary Shinzo Abe the 
presumptive next prime minister, beef receding from the 
economic agenda, and a summit with President Bush anticipated 
in the coming months, your visit to Tokyo comes at an 
important point in discussions of how to broaden and deepen 
the bilateral economic relationship.  The USG and GOJ raised 
potential areas of cooperation, such as secure trade, IPR, 
and investment initiatives, at the economic sub-cabinet 
meetings in June.  Meanwhile, both U.S. and Japanese business 
representatives have urged our governments to take steps 
toward an FTA or economic integration agreement.  We suggest 
that now is the time to assess how bold the next round of USG 
proposals can be, given Japan's current economic policy 
outlook.  We believe there are three key areas on which to 
evaluate the incoming leadership's economic policy: the GOJ's 
commitment to growth, the orientation of its fiscal policy, 
and its ability to bring strategic coherence to its trade and 
regional economic relations.  Your meetings will take place 
as ministries are making their own assessments of how the new 
leadership will proceed on IPR as well as the broader agenda. 
 End summary. 
 
The GOJ's Commitment to Growth: Reform and Investment 
--------------------------------------------- -------- 
¶2.  (SBU) Japan has emerged from the economic slump of the 
1990s, largely putting its non-performing loan crisis and 
fourteen-year property market slump behind it and gradually 
emerging from its decade-long struggle with deflation.  A 
steady stream of reforms has fostered large-scale 
restructuring and recovery, and the privatization of Japan 
Post, the centerpiece of PM Koizumi's reform agenda, 
commences in 2007.  The privatization of the post office's 
banking and insurance arms, which collectively hold assets 
exceeding $3 trillion, could make enormous amounts of 
currently underutilized capital available to domestic and 
world financial markets. 
 
¶3.  (SBU)  PM Koizumi strongly pushed structural reform as 
central to the restoration of growth, but many in Japan 
remain unconvinced that the results are worth the economic 
and social costs.  Some have even simplistically blamed 
reform and deregulation for recent high-profile scandals over 
faked earthquake resistance data and insider trading, 
eliciting fears in some corners that Koizumi-style structural 
reform has undermined the Japanese economy.  We believe, 
however, that further economic reform will be a main 
determinant of whether the economy can maintain robust 
growth.  In the short term, the new Cabinet economic lineup 
and decisions on how to staff and strengthen the Committee 
for the Promotion of Regulatory Reform (CPRR) will indicate 
the seriousness with which the new leadership intends to 
address Japan's economic challenges. 
 
¶4.  (SBU) We will also be watching efforts to boost economic 
vitality through foreign investment.  PM Koizumi's five-year 
effort to double the stock of inward foreign direct 
investment successfully enabled foreign companies to 
revitalize struggling concerns, increase competition, and 
foster improvements in goods and services for consumers. 
Nonetheless, important investment incentives, such as 
allowing triangular mergers, are yet to be fully implemented. 
 The new Cabinet's public openness to and support for FDI 
will be needed to contain a potential populist backlash 
against "foreign style" mergers and acquisitions and other 
measures that help to advance productivity in the Japanese 
corporate sector, which is necessary to maintain strong 
growth. 
 
Fiscal Policy: Resources for New Initiatives 
-------------------------------------------- 
 
TOKYO 00005288  002.3 OF 003 
 
 
¶5.  (SBU) Japanese government debt stands at approximately 
175% of GDP (comparatively, the U.S. debt is around 63%) and 
the GOJ continues to run a deficit of almost 6% of GDP. 
While the current fiscal situation is generally seen as 
unsustainable, the last consumption tax increase, from 3% to 
5% in 1997, is blamed for prolonging the slump of the "lost 
decade."  Even Finance Minister Sadakazu Tanigaki, the prime 
ministerial candidate seen as most inclined to boost tax 
rates, has not called for increases before 2010 (legislative 
realities would prevent any candidate from effecting an 
increase before 2009).  That leaves the question of what 
expenses the government will cut.  PM Koizumi consistently 
targeted pork-barrel public investment and downsized 
government payrolls.  Future belt-tightening will likely 
involve more difficult policy trade-offs, and the current 
budget framework for FY07 calls for cuts in areas of 
strategic importance to the United States, such as official 
development assistance (ODA) and defense spending. Cuts to 
ODA, for example, could limit plans to broaden cooperation 
under the Strategic Development Alliance, and the trimming of 
personnel in ministries responsible for energy programs, IPR 
protection, or transportation security could test the GOJ's 
ability to undertake related initiatives.  All parts of the 
USG will need to be cognizant of the tight fiscal situation 
facing Japan when considering increased Japanese financial 
contributions to bilateral or multilateral activities. 
 
¶6.  (SBU) Significant new domestic social programs could also 
compete for resources.  A recent OECD report that highlighted 
rising income inequality in Japan has added fuel to a 
national conversation about whether there is a widening 
divide between stable, career workers and part-timers, and 
between large cities and outlying regions.  Abe's platform 
suggests he might play to this issue through new social 
safety net and "family-friendly" programs targeting medical, 
education, and pension benefits.  With the population aging 
rapidly and the pension burden already rising, we see the 
incoming Cabinet's response to social inequality issues as a 
potential bellwether for how it will balance the competing 
needs to reform, control the budget, and address domestic 
political demands. 
 
Strategic Coherence: Regional Architecture and Trade 
--------------------------------------------- ------- 
¶7.  (SBU) How the incoming leadership sees its economic 
relationships with China and Asia will also be a key 
question.  Will the incoming administration have a strategic 
vision for integrating various proposals, including ASEAN 6 
and the East Asian Summit, into existing regional structures? 
 Or will the various initiatives have little or no 
consideration of their impact on existing regional 
institutions like APEC or on the U.S. role in region?  We 
will look for substantive support for APEC, as well as 
consultation on new regional proposals, in assessing the 
viability of regional architecture as a focus of our 
strategic economic dialogue. 
 
¶8.  (SBU) Similarly, sustained efforts to keep agricultural 
trade issues off the political agenda and in the technical 
realm following internationally accepted standards will be 
needed to maintain our attention on further improving our 
economic relationship.  Another suspension of beef imports, 
or a series of other agricultural import restrictions based 
on consumer safety issues, could turn a managed irritant into 
a serious impediment to progress. 
 
Intellectual Property Rights Agenda 
----------------------------------- 
¶9.  (SBU) On IPR, the USG has shifted its focus over the past 
year from our (relatively minor) bilateral complaints about 
the adequacy of Japan's IP protection to an emphasis on 
greater cooperation, using IPR as a means for greater 
U.S.-Japan economic integration and for improving the 
international environment for IP protection.  While both 
sides agree on the potential for cooperation on IPR, the 
 
TOKYO 00005288  003.3 OF 003 
 
 
specifics have proved elusive.  The most substantive progress 
has been the work of the two Patent Offices in launching the 
pilot "Patent Prosecution Highway" in July 2006, with the 
long-term goal of mutual recognition of patents.  The most 
notable failure has been the GOJ's unwillingness to join USTR 
in an IPR case against China at the WTO.  Japanese companies, 
concerned about Chinese retaliation, are strongly against it, 
and the GOJ has told us it is committed to its current IPR 
dialogue with China -- one of the few bright spots in 
Japan-China diplomatic relations.  Within the GOJ, the 
Ministry of Economy, Trade, and Industry (METI), specifically 
Minister Nikai, has been the primary opponent to Japan 
joining the WTO case.  That opposition is unlikely to change 
in the next few months, even with the appointment of a new 
minister. 
 
¶10.  (SBU) You will be meeting IP Strategy Headquarters 
(IPSH) Secretary-General Hisamitsu Arai, who has used his 
position in the Cabinet Secretariat to substantially improve 
Japan's protection of intellectual property over the last 
five years.  He is a strong backer of a U.S.-Japan bilateral 
IPR agreement and gave us a draft of a statement on IPR for 
the next U.S.-Japan summit (ref B).  The concept for a new 
anti-counterfeiting agreement originated in his office two 
years ago and he strongly supports USTR's proposal for an 
Anti-Counterfeiting Trade Agreement (ACTA).  However, he has 
also warned that it would be foolish if developed countries 
wasted time and effort arguing about what a Gold Standard is 
while counterfeiters went about their business.  Arai and the 
IPSH staff will continue to be the key players on IPR policy 
under the new prime minister, and this will be an early 
opportunity to explore where and how far we can move forward 
on a joint IPR agenda in the coming years.  (Note: The 
Ministry of Foreign Affairs has the lead on negotiating the 
ACTA text.) 
 
Conclusion 
---------- 
¶11.  (SBU) Your meetings in Tokyo provide an excellent 
opportunity to energize key private sector and government 
decision-makers on the need for continued reform, strategic 
thinking on trade and regional economic issues, and progress 
on IPR initiatives.  Speculation varies about the makeup of 
the new Cabinet economic team, but we sense a certain 
complacency among our economic interlocutors, who seem 
generally satisfied with the current path of the economy. 
Moreover, Abe's policy interests appear to lean more toward a 
number of high-profile security and political efforts, such 
as elevating the Japan Defense Agency to ministry status and 
re-examining Japan's constitutional military limits.  It is 
natural for the urgency felt during Japan's slump to 
dissipate with the economy's recovery, but the logic of 
continuing to broaden and deepen our relationship remains as 
strong as ever.  In engaging your interlocutors on key 
economic themes, your visit will be timely in shaping 
discussion of the next round of bilateral economic 
initiatives, including consideration of eventually launching 
negotiations toward an FTA or economic integration agreement. 
 
SCHIEFFER