VZCZCXYZ0008
PP RUEHWEB

DE RUEHKO #5989/01 2860812
ZNR UUUUU ZZH
P 130812Z OCT 06
FM AMEMBASSY TOKYO
TO SECSTATE WASHDC PRIORITY 7447

UNCLAS TOKYO 005989 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
FOR EAP AND EAP/J 
STATE PASS USTR FOR CUTLER/BEEMAN 
STATE PASS DOJ FOR FOREIGN COMMERCE SECTION: CHEMTOB 
 
E.O. 12958: N/A 
TAGS: EINV ECON JA
SUBJECT: BILATERAL INVESTMENT INITIATIVE LOOKS TOWARD FUTURE 
 
 
¶1.  (SBU) Summary: In discussions with U.S. APEC Ambassador Michalak 
on the future of the U.S.- Japan bilateral investment initiative, 
GOJ counterparts expressed willingness to expand the initiative's 
agenda to include a study of investment chapters in FTA and possible 
exchange between U.S. and Japanese local government officials on how 
best to promote investment.  The next Investment Working Group 
meeting is likely in late October via DVC.  Private sector and GOJ 
contacts expressed confidence that Japan is on schedule to complete 
revision of rules allowing triangular mergers before next April. 
Tax deferral for stock swaps is less certain but business leaders 
are cautiously optimistic.  There has been no progress on tax 
exemption for Japan branches of U.S universities although Ministry 
officials told Michalak they are willing to re-open discussions on 
this subject with Temple University - Japan (TUJ). End Summary 
 
¶2.  (SBU) U.S. Senior Official for APEC and co-chair of the U.S. 
Japan Investment Initiative, Ambassador Michael Michalak visited 
Japan, September 27 to October 3 to assess progress on several 
 
pending investment issues including mergers and acquisitions (M&A) 
rules, educational services and labor mobility.  In addition, he met 
the new Japanese co-chair of the bilateral investment working group, 
Ministry of Economy, Trade and Industry (METI) Director General 
Tsunehiro Ogawa, to discuss the working group's future program of 
 
SIPDIS 
work. 
 
M&A/FDI 
------- 
 
¶3.  (SBU) Both Japanese and U.S. private sector interlocutors told 
Ambassador Michalak they were optimistic that revisions to Japan's 
commercial code allowing mergers using foreign stock as 
consideration ("triangular mergers") are likely to go into effect as 
planned in April 2007 without the highly restrictive definitions 
under consideration last spring.  The chairman of the Japan 
Association of Corporate Executives (Keizai Doyukai) FDI committee 
said high-profile objections to foreign triangular mergers from some 
business leaders that had forced a delay in implementing regulations 
in early 2006 had disappeared.  He had "no concerns" that the 
forthcoming Ministry of Justice draft regulations would be highly 
restrictive toward foreign mergers.   METI's Director for Trade and 
Investment Facilitation voiced similar optimism.  Meanwhile the 
chair of the American Chamber of Commerce Japan (ACCJ) Foreign 
Investment Committee was sufficiently sanguine about the outcome 
that he was already considering advancing new proposals for 
improving Japan's M&A framework environment, including promoting 
improved corporate governance by making it easier to file 
shareholder lawsuits. 
 
¶4.  (SBU) The issue of weak corporate governance among Japanese 
businesses also took center stage in Ambassador Michalak's meeting 
with the investment banking team at Nomura Securities that had 
worked on the recent Oji Paper Corporation takeover bid (TOB) for 
rival Hokuetsu.  The bankers explained in detail how Hokuetsu's last 
minute defensive measures, most prominently issuance of new stock to 
a "white knight" investor at a below market price, sunk the bid 
despite its strong economic advantages.  As a result, the interests 
of corporate insiders and management trumped the opportunity for 
outside shareholders to obtain top value for their shares by 
accepting Oji's offer.  Nomura's bankers stressed that this 
highlighted the need for better corporate governance and increased 
shareholder activism to assure Japanese companies and shareholders 
achieve the full economic benefit of a growing M&A market. 
Nonetheless, despite its failure, the bid by an established, 
mainline Japanese firm had attracted widespread positive media 
coverage and, Nomura believed, increased public acceptance of M&A as 
a way to increase corporate value and competitiveness in Japan. 
They said they would continue to look for other potential M&A 
transactions that make economic sense and bring positive synergies 
to the companies involved. 
 
Tax Deferral for Stock Swaps 
 --------------------------- 
 
¶5.  (SBU) The outlook for tax deferral for stock swaps was less 
clear but Keizai Doyukai contacts expressed cautious optimism that 
the Ministry of Finance (MOF) and the LDP Tax Committee would reach 
agreement on deferral in time to include it in the FY-2007 budget 
bill.  They were confident that whatever the exact outcome the GOJ 
would treat foreign and domestic transactions in the same way. 
 
¶6.  (SBU) Separately, MOF's International Tax Policy Division 
Director was noncommittal on the issue but noted  "discussions with 
METI are ongoing."  (In a subsequent aside, he intimated that the 
discussions were contentious.)  In part, the reluctance to discuss 
this issue in detail reflected a desire not to second-guess the 
ruling party's tax commission deliberation set for November.  The 
commission will conclude their annual deliberations by December, and 
the new rules, however formulated would begin in May.  Ambassador 
Michalak confirmed that now was the time to present our views to 
METI on this issue. 
 
¶7.  (SBU) MOF was considering a number of related issues with regard 
to overall tax reform, and noted that deferred tax treatment for 
foreign shareholding was both highly technical and presented 
jurisdictional complications.  MOF said that the entire issue of tax 
deferral for stock-compensated mergers was under discussion, 
regardless of whether it involved domestic or foreign investment. 
When pressed on the point that domestic and foreign mergers would be 
treated the same from a tax standpoint, MOF's Director simply said, 
"Yes."  Ambassador Michalak reiterated our ongoing interest in fair 
tax treatment of triangular mergers, and noted his desire to reach 
out to both the tax commission and the Japan Business Federation 
(Keidanren) to reinforce our message. 
 
Tax Breaks for U.S. Universities 
-------------------------------- 
 
¶8.  (SBU) Ambassador Michalak made less headway on the issue of tax 
exemption for U.S. university branch campuses in Japan.  ACCJ's 
International Education Subcommittee briefed the Ambassador on the 
current state of TUJ's efforts to obtain vocational school status 
from Tokyo Metropolitan government, an alternative route to tax-free 
status suggested by the Ministry of Education, Culture, Sports, 
Science and Technology (MEXT) last spring.  As expected, Tokyo 
turned down TUJ's application since, as a university, it did not 
meet most of the criteria for a vocational institution.  TUJ had 
recently gone back to the MEXT to discuss other alternatives. 
 
¶9.  (SBU) Education was a key issue for both Keizai Doyukai and the 
Chairman of the Japan Investment Council Expert Committee.  Both 
described for Ambassador Michalak the need for greater flexibility 
and openness in Japan's educational system and a demand by Japanese 
businesses for more locally trained MBAs and greater foreign 
language capable graduates.  ACCJ Sub-committee members welcomed the 
opportunity to showcase how they could help Japan address growing 
demographic challenges by promoting the idea of continuing education 
in contrast to an educational establishment that still saw formal 
tertiary education as something focused on the 18-22 year-old 
cohort.  After hearing Ambassador Michalak's description of his 
discussions with Keizai Doyukai, ACCJ members expressed interest in 
meeting with that organization to address these issues. 
 
¶10.  (SBU) Meanwhile, the newly appointed MEXT Director General for 
Higher Education signaled his bureau's flexibility in resolving the 
tax issue. Ambassador Michalak noted the continued USG interest in 
this issue and the important "value-added" that foreign universities 
provide both to Japanese students seeking educational alternatives 
and Japanese employers seeking more globalized workers.  Michalak 
thanked MEXT for agreeing to meet again with TUJ to seek a solution 
and said he looked forward to hearing the outcome of those 
discussions. 
 
Labor Issues 
------------ 
 
¶11.  (SBU) A number of Japanese interlocutors welcomed Ambassador 
Michalak's idea of trying to structure our discussion on labor 
mobility issues (pension portability, layoff compensation, 
management flexibility) in the working group in such a way as to 
support Prime Minister Abe's stated interest in providing a 
"second-chance" to workers and businessmen disadvantaged by economic 
reform (the so-called "sai-challenge" issue.)  The Japan Investment 
Council's Expert Committee Chair told Michalak that Japan faced 
growing problems in its labor market and labor policies in the 
coming years.  Japan's labor force, he said, is under increasing 
"strain" resulting in rising stress levels among workers, declining 
quality as older baby boom worker retire and are replaced by less 
well-trained younger workers. Part of the problems stems from the 
fact that, during the economic recession of the 1990's Japanese 
sharply cut back their training efforts and support staff.  This has 
resulted in a work force less able to handle high-tech production 
processes.  The result, he said, is a decline in Japan's noted 
product quality as evidenced by the growing number of product 
recalls.  He has urged the Ministry of Health, Labor and Welfare to 
take active measure to improve training and labor policies if Japan 
is to avoid serious economic consequences in the next few years. 
 
Future Program of Work 
---------------------- 
 
¶12. (SBU) Ambassador Michalak met the new Initiative co-chair, METI 
Director General Tsunehiro Ogawa, to discuss the Initiative's future 
program of work and reached agreement on having the next investment 
working group in late October via digital videoconference.  Ogawa 
agreed to a U.S. request to keep the existing issues of 
M&A/triangular mergers, education and labor mobility on the agenda 
and to add discussion on a future program of work.  Ogawa promised a 
quick answer to our request for Japan's specific agenda items. 
(Subsequently, METI confirmed that it would also keep its existing 
issues on the agenda - visas, Exon-Florio and cargo security.) 
 
¶13. (SBU) In a general discussion of what might be included in a 
future program of work the two chairs expressed interest in 
undertaking a review of existing investment chapters in U.S. and 
Japan free trade agreements with a view to identifying what might be 
included in a future "gold standard" investment text.  However, METI 
preferred not to explicitly link such a discussion to a possible 
future US-Japan FTA (the "building block" approach) fearing a 
backlash among more protectionist elements in the GOJ.  Rather, METI 
would like to use the outcome of this process to encourage regional 
integration and higher standards in investment chapters in future 
FTA negotiations.  METI officials admit ruefully that Japan has 
failed to get strong investment language in several recently 
concluded FTAs.  METI's Ogawa also suggested the bilateral 
investment discussions could draw upon the Japan-led work on model 
investment guidelines already underway in APEC. 
 
¶14.  (SBU) Ambassador Michalak also tabled two other possible new 
issues drawing on suggestions from business contacts.  First, he 
raised the possibility of using the working group to support 
exchanges between state-level investment promotion offices and 
Japanese prefectural officials so both sides can share "best 
practices" in this area.  METI strongly welcomed the idea as it 
tracks ideas they already had under consideration.  A number of 
business contacts, most notably Keizai Doyukai have lamented the 
ineffectiveness of many Japanese regional governments in promoting 
economic growth and investment when compared with U.S. state-level 
successes. Ogawa and Michalak agreed to discuss this idea in greater 
detail at the DVC. 
 
¶15.  (SBU) METI also welcomed Ambassador Michalak's idea of inviting 
the Industrial Revitalization Corporation of Japan to a future 
working group meeting to brief on "lessons learned" in its efforts 
to promote corporate restructuring.  Another possibility is a 
briefing by Keizai Doyukai on ways to encourage investment funds to 
be effective "change agents" in improving Japanese corporate 
governance and creating a more welcoming M&A environment. 
 
"Invest Japan" Investment Seminar 
--------------------------------- 
 
¶16.  (U) During his visit, Ambassador Michalak took time to travel 
to Sendai to address the first of two back-to back "Invest Japan" 
business seminars co-sponsored by JETRO and the U.S. Embassy.  The 
seminars, aimed at increasing foreign investment in Japan's regions, 
brought together ten small and medium- sized U.S. companies in 
emerging fields of mobile telephony and communication, industrial 
quality control, Voice over Internet Protocol, software design, 
network security and alternative energy with potential Japanese 
partners. One U.S. private sector participant commented after the 
program they found it to be a "very fruitful, well coordinated and 
professionally executed trade mission." 
 
¶17.  (U) Ambassador Michalak has cleared this message. 
 
SCHIEFFER