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FM AMEMBASSY TOKYO
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INFO RUEHBJ/AMEMBASSY BEIJING 5047
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RUEHUL/AMEMBASSY SEOUL 1146
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RHEFHLC/HOMELAND SECURITY CENTER WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RHEHAAA/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/WHITE HOUSE WASHDC

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 006764 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR DNSA MCCORMICK AND KTONG 
STATE PASS USTR FOR DUSTR BHATIA AND DAUSTR BEEMAN 
STATE PASS TO DEPT OF AGRICULTURE 
TREASURY FOR U/S ADAMS AND FOR IA/DOHNER, HAARSAGER, AND 
POGGI 
USDOC FOR U/S LAVIN AND 4410/ITA/MAC/OJ/NMELCHER 
STATE FOR E AND EB A/S SULLIVAN 
AGRICULTURE FOR USDA/OSEC, FAS/ITP, FAS/FAA/IO/NA 
SEOUL PLEASE PASS TO VISITING USDA DEPUTY U/S TERPSTRA 
PARIS FOR USOECD 
GENEVA ALSO FOR USTR 
 
E.O. 12958: DECL: 11/28/2016 
TAGS: ECON ETRD PREL EAGR ENRG ECIN APECO JA
SUBJECT: SCENESETTER FOR ECONOMIC SUBCABINET MEETINGS, DEC. 
6-7 
 
REF: A. TOKYO 5288 
 
     ¶B. TOKYO 5600 
     ¶C. TOKYO 5903 
     ¶D. TOKYO 6250 
     ¶E. TOKYO 6501 
 
Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 b/d. 
 
Summary 
------- 
¶1.  (C) Prime Minister Abe has gotten off to a fast start in 
the beginning of his administration with a strong political 
and foreign policy agenda.  However, he has yet to 
demonstrate the same leadership on domestic economic policy, 
regulatory reform, and international economic policy.  In 
preparations for December 6-7 Subcabinet Meetings, we have 
sensed backsliding in the willingness of our working-level 
interlocutors to engage in discussion of sensitive topics and 
opposition to raising the profile of the meetings through 
press coverage.  In this environment, we believe it is 
important to establish a common medium-term goal of 
completing a study leading towards a U.S-Japan Free Trade 
Agreement (FTA) that will be comprehensive and fully include 
agriculture.  We see exploring an FTA as a way to gauge the 
level of ambition about economic initiatives and as a means 
to prevent drift in the bilateral economic relationship.  The 
subcabinet meetings also provide an opportunity to encourage 
Japanese domestic economic policy reform, including the 
continuance and strengthening of the Council for Promotion of 
Regulatory Reform (CPRR), and to take steps to promote FDI in 
Japan through stock swaps, which is increasingly under 
attack.  End summary. 
 
Abe Off to a Strong Start Politically... 
---------------------------------------- 
¶2.  (SBU) Prime Minister Shinzo Abe has demonstrated strong 
leadership since assuming office on September 26.  Moving 
quickly to defuse tensions with Japan's closest neighbors, 
Abe pulled off surprise summit meetings in Beijing and Seoul 
within days of becoming Prime Minister.  He showed decisive 
leadership in response to North Korea's October 9 nuclear 
test.  Abe's emphasis on close ties with the United States 
and the critical importance of the U.S.-Japan security 
relationship was highlighted in his meeting with President 
Bush at APEC and during the October visit of Secretary of 
State Condoleezza Rice to Tokyo following North Korea,s 
nuclear test.  These foreign policy successes have bolstered 
his public support. 
 
¶3.  (C) Abe came into office with strong conservative 
credentials and a reputation as a "hard-liner," but has since 
shown himself to be a flexible, pragmatic, political realist. 
 Reassuring the LDP's pacifist-leaning coalition partner, 
Komeito, that the LDP will not reconsider Japan's non-nuclear 
status or push hard in the near term to revise long-standing 
defense policies, he led his ruling Liberal Democratic Party 
(LDP) to electoral victories in two Lower House by-elections 
in October and the Okinawa gubernatorial campaign in 
 
TOKYO 00006764  002 OF 004 
 
 
November.  Abe is focused on the elections for the Upper 
House in the summer of 2007, which could end his tenure if 
the LDP goes down to defeat.  Adopting what some in the media 
have dubbed a "safe driver" approach, Abe has avoided pushing 
aggressively on controversial issues in the conservative 
agenda that might alienate Komeito, spook Japanese voters, or 
hand the opposition issues to exploit in the summer campaign. 
 
¶4.  (SBU) Abe is now using the momentum from the recent 
election wins and his high popularity ratings to get his 
legislative program through the Diet before it recesses on 
December 15.  A new Education Law and a bill elevating the 
Japan Defense Agency to a Ministry are the two top "to-do" 
items on Abe's agenda.  At the same time, Abe is navigating 
Diet debates on constitutional revision and a law allowing 
Japanese Self-Defense Force deployments overseas.  Abe's 
ambitious initiatives to establish new bureaucratic 
structures and further centralize decision-making within the 
Prime Minister's Office also remain works in progress. 
 
...But Questions Remain About His Economic Agenda 
--------------------------------------------- ---- 
¶5.  (C) Abe's economic record after two months in office, 
however, is less clear.  As he became prime minister, we 
identified the new government's commitment to growth and 
reform, the orientation of its fiscal policy, and its ability 
to bring strategic coherence to its trade and regional 
economic relations as key to evaluating the direction and 
efficacy of his economic leadership (ref A).  A review of 
these areas shows continued commitment on Abe's part, but it 
also reveals the potential for drift in the bilateral 
economic relationship. 
 
¶6.  (C) In economic circles, Abe has been generally commended 
for his personnel choices, particularly at the second-tier 
level of appointments.  Some question whether Minister Koji 
Omi will be effective at Finance, but the Minister for 
Economic and Fiscal Policy Hiroko Ota is a protege of former 
PM Koizumi's reform architect Heizo Takenaka, and his four 
private-sector selections for the Council on Economic and 
Fiscal Policy (CEFP) have strong reform credentials (ref B). 
Similarly, Abe's new chairman of the Council for Promotion of 
Regulatory Reform (CPRR), Takao Kusakari, used his first 
press conference to stress his intention to maintain the pace 
of regulatory reform. 
 
¶7.  (C) Abe has also said the right things publicly about 
reform and growth.  Neatly side-stepping the framing of 
Japan's public debt burden (over 175% of GDP, the highest in 
the OECD) as a tax-or-fiscal-restraint issue, Abe has 
emphasized the need for growth in the Japanese economy.  He 
has even adopted the slogan "Without growth, there can be no 
fiscal restructuring," a play on PM Koizumi's central 
challenge that "Without reform, there can be no growth" and a 
signal of the issue's importance.  With that said, some worry 
that, besides a proliferation of new committees and reform 
pronouncements, PM Abe has not shown that he is ready or 
eager to make hard decisions to implement needed reform. 
 
TOKYO 00006764  003 OF 004 
 
 
Even on signature issues like his promises of a "second 
chance" for those who feel left behind by economic trends, we 
have not seen the decisions that will guide program-level 
responses and priorities (ref C and D). 
 
¶8.  (C) Furthermore, Abe has not laid down a clear policy 
line with ministries on international issues that affect the 
bilateral economic relationship.  On the Doha Round, Japan's 
stance remains a passive one of "wait and see," and his 
agriculture minister has a reputation as an old-school 
protectionist (ref E).  On regional economic architecture, a 
tension remains between a more Asia-centric economic policy 
and recently improved Japanese rhetoric on APEC.  On 
regulatory reform, when we met with CPRR's Chairman Kusakari 
recently, he expressed great frustration from battling 
opponents of reform although he had been in office less than 
a month.  There have also recently been worrying signs of 
backsliding on the liberalization of merger and acquisition 
rules, particularly for triangular mergers through stock 
swaps, a key tool for greater foreign direct investment. 
 
¶9.  (C) The uncertainty over the economic agenda with the 
United States is clearly visible when discussion turns to a 
Free Trade Agreement.  In the past month, the Japanese 
Business Federation (Keidanren), the American Chamber of 
Commerce in Japan (ACCJ), and the U.S.-Japan Business Council 
(USJBC) have all endorsed exploring greater integration of 
the American and Japanese economies, either through an FTA or 
a so-called "Economic Partnership Agreement" (EPA).  From our 
government contacts, in contrast, we have heard everything 
from senior Ministry of Foreign Affairs (MOFA) and METI 
officials supporting the concept, to others in MOFA 
cautioning that an announcement now of moves toward an FTA 
might kill any hope of reviving the Doha Round, to strident 
opposition from the Ministry of Agriculture (MAFF), to 
uninterested shrugs from the Ministry of Finance (MOF).  Or, 
as a contact in the Prime Minister's Office told us, in the 
field of economic policy, an FTA with the United States is so 
far off on the horizon that it just is not getting 
significant attention. 
 
¶10.  (C) In summary, Abe's clear political agenda and 
leadership have not been matched -- so far -- in 
international economic policy, making concrete progress 
difficult in the bilateral economic relationship.  The signs 
of this are evident even in preparation for the December 6-7 
Subcabinet Meetings, as we have sensed backsliding in the 
willingness of our interlocutors to engage in even a pro 
forma exchange of opinions about an FTA or discussion of food 
safety issues (reportedly due to MAFF and Ministry of Health, 
Labor, and Welfare objections).  Moreover, working-level 
contacts seek to keep press coverage of the event to a bare 
minimum, and we have heard that preparations on the Japanese 
side have been unusually intense and acrimonious.  Perhaps if 
the Abe administration is in "safe driver" mode, no one wants 
to be the one caught speeding. 
 
Setting the Path with an FTA 
 
TOKYO 00006764  004 OF 004 
 
 
---------------------------- 
¶11.  (C) Because the atmospherics signal the potential for 
drift in the bilateral economic relationship, we believe it 
is important to set concluding an FTA study as a medium-term 
goal, with the understanding that any agreement must include 
the agricultural sector.  Our objective must be to have a 
pair of economies where it is as easy for an American 
business to operate in Japan as it is for a Japanese one to 
operate in the States.  We believe that concrete short-term 
steps are necessary to focus attention on the benefits of the 
relationship, as well as the link between international 
agreements and Abe's domestic reform agenda.  For example, 
your visit presents an excellent opportunity to show support 
for the robust continuance and strengthening of the CPRR and 
for the legal and tax changes necessary to enable increasing 
FDI through stock swaps and triangular mergers.  Now is a 
particularly important time on this last issue as the 
government and LDP are under intense pressure from Keidanren 
to adopt rules on tax deferral and eligible stocks that will 
totally gut the possibility of mergers through stock swaps. 
By insisting on liberalization on these and other immediate 
issues of concern, we can measure the level of Japan's 
ambition in moving our economic relationship forward. 
SCHIEFFER