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FM AMEMBASSY TOKYO
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INFO RUEHFR/AMEMBASSY PARIS 5160
RUEHOK/AMCONSUL OSAKA KOBE 2550
RUEHKSO/AMCONSUL SAPPORO 0151
RUEHNAG/AMCONSUL NAGOYA 8673
RUEHFK/AMCONSUL FUKUOKA 9119
RUEHNH/AMCONSUL NAHA 1602
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 08 TOKYO 006931 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT PLEASE PASS TO USTR 
PARIS PLEASE PASS USOECD 
 
E.O. 12958: N/A 
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope ?- Economic News At-A- 
Glance. 
 
Sensitive but unclassified.  Please protect accordingly. 
 
¶1. (SBU) Table of Contents 
 
¶3. Sub Cabinet in Tokyo 
¶4. Transcript of Press Roundtable after Sub Cabinet 
¶5. Triangular Mergers: Still Pushing as the End Game 
Approaches 
¶6. Amb. Michalak's Meetings on Triangular Mergers 
¶7. DUSTR Bhatia and Dep. FM Yabunaka Exchange Reg Reform 
Recommendations 
¶8. Government Tax Committee Calls for Lowering Tax 
Burden on Corporations 
¶9. USDA Acting Undersecretary Terpstra in Tokyo 
¶10. Nishida to be Replaced at MOFA? 
¶11. New Players in Japanese Economic Policy 
¶12. JFTC Claims Advisory Role in Postal Privatization 
Process 
¶13. Japan-Australia Economic Partnership Agreement 
Decided 
¶14. LDP Interest in Aid to India Surprisingly High, Says 
Academic 
¶15. No Road Map on Beef Yet 
¶16. Agriculture Ministry Invites Public Comments on 
Resuming U.S. Potato Imports 
¶17. Toyota the Biggest Player in Japan's Nascent 
Business Aviation Market 
¶18. Kansai International Airport Predicts Historic 
Profit for First Half of 2007 
¶19. EMIN Klemm Pays Visit to Hyogo Governor Toshizo Ido 
¶20. EMIN visits Carnegie Mellon University, CyLab Kobe 
¶21. Japan's Third Quarter GDP Revised Substantial 
Downward to 0.8% Growth 
 
¶2.  (U) The Japan Economic Scope (JES) is a weekly e- 
newsletter produced by Embassy Tokyo's ECON section in 
collaboration with other sections and constituent Posts 
and published every Friday.  It provides a brief 
overview of recent economic developments, insights 
gleaned from contacts, summaries of the latest cables 
and a list of upcoming visitors.  This cable contains 
the December 8, 2006, JES, minus the attachments that 
accompany many of the individual stories in the e-mail 
version.  To be added to the e-mail list, please email 
ProgarJ@state.gov. 
 
¶3. (SBU) Sub Cabinet in Tokyo 
------------------------------ 
 
United States and Japanese inter-agency delegations 
squared off in Tokyo to cover a large range of issues on 
the economic agenda December 6-7, in meetings that both 
sides agreed were marked by a good level of candor and 
informality.  They were the first official Sub Cabinet 
meetings since July 2004. 
 
The U.S. delegation, headed by Deputy National Security 
Advisor for Economic Affairs David McCormick, passed the 
Japanese side papers to initiate concrete activities on 
areas including transparency, IPR, secure trade, and 
food safety. 
 
The Japanese side had three papers of its own to share - 
- including on energy security. 
 
The two sides also discussed alternative views on the 
future of FTAAP in APEC and agreed to share information 
on their respective approaches to FTAs and EPAs. 
The Senior representatives from six USG economic 
agencies that attended the Sub Cabinet sessions also met 
with Keidanren Chairman Mitarai, Minister for Economic 
and Fiscal Policy Ota, PM Special Advisor Nemoto, LDP 
baron Nakagawa and U.S. and Japanese business leaders 
during their visit to Tokyo. 
 
Detailed reporting on the two days of meetings will be 
sent separately. 
 
4.(U) Transcript of Press Roundtable after Sub Cabinet 
 
TOKYO 00006931  002 OF 008 
 
 
--------------------------------------------- --------- 
 
Press attention after the December 6-7 Sub Cabinet 
meetings in Tokyo was fairly modest, in part reflecting 
the Foreign Ministry's desire to keep the event low key. 
While all principals on the U.S. delegation made 
themselves available after the meetings in an on-the- 
record press roundtable, the only on-the-record account 
on the GOJ side was offered by 2nd North Americas 
Division Director Koichi Mizushima. 
 
MOFA officials told us in the lead up to the Sub Cabinet 
that they did not want media attention and Japanese 
principals would not be convening the press for the 
purpose of discussing the results afterward. 
 
Attached is the transcript from the U.S. delegation 
press roundtable. 
 
¶5. (U) Triangular Mergers: Still Pushing as the End Game 
Approaches 
---------- 
 
Embassy has used the opportunity of high level USG 
visitors this week to impress on the GOJ -- on a daily 
basis and at multiple levels -- the need for practical 
and useable rules for cross-border triangular mergers. 
Deputy National Security Advisor David McCormick raised 
the issue in a meeting with the Prime Minister?s Special 
Advisor for Economic Affairs, Takumi Nemoto, and later 
at the formal Sub Cabinet session. 
 
DUSTR Bhatia discussed it with Deputy Trade Minister 
Kitamura and visiting APEC Ambassador Michalak met with 
METI senior VM Yamamoto, the chairman of the LDP Tax 
Subcommittee Working Group, former FM Nobutaka 
Machimura, and LDP Tax Panel Advisor Toranosuke Katayama 
(see below for more details). 
 
The triangular merger issue was also the headline item 
in much of the press coverage of the December 5 exchange 
of recommendations under the Regulatory Reform 
Initiative. 
 
The bureaucratic response to our lobbying, especially 
from METI, has hardened.  Political interlocutors are 
non-committal. 
 
Media coverage, however, especially in the influential 
Nikkei, is not all negative. 
 
In the days leading up to next week?s LDP Tax 
Committee 
decision, we will focus our final lobbying efforts at 
the political level emphasizing the embarrassment to 
the government and loss of credibility with foreign 
investors if the final outcome is a situation in which 
cross-border triangular merger are allowed by law but 
unusable in practice. 
 
¶6. (SBU) Amb. Michalak's Meetings on Triangular Mergers 
--------------------------------------------- ---------- 
 
APEC Ambassador Mike Michalak, who also leads the U.S. 
side in the bilateral investment initiative, met 
December 4-6 with various officials and private sector 
representatives, including LDP Tax System Research 
Committee Working Group Chairman Nobutaka Machimura, LDP 
Upper House Leader Toranosuke Katayama, Finance Vice 
Minister Hideto Fujii, and METI Vice Minister Kozo 
Yamamoto. 
 
Based on what Michalak heard in those meetings, it 
appears that the GOJ is considering, reportedly at the 
behest of the Japan Business Federation (Keidanren), 
proposed tax regulations that would effectively prevent 
foreign companies without an established business in 
Japan from utilizing the so-called "triangular merger" 
mechanism to acquire Japanese companies via a stock swap 
 
TOKYO 00006931  003 OF 008 
 
 
arrangement by prohibiting tax deferral on the 
transaction. 
 
This tracks with what we are hearing from the American 
business community and with remarks that Deputy Foreign 
Minister Yabunaka made to NSC Deputy David McCormick on 
December 6. 
 
Machimura and Katayama were noncommittal regarding USG 
concerns, while METI's Yamamoto clearly advocated the 
position that would undermine the usefulness of 
triangular mergers. 
 
Michalak's interlocutors indicated the LDP Tax Policy 
Committee will make a decision on the proposed 
regulations on or about December 14. 
 
¶7. (SBU) DUSTR Bhatia and Dep. FM Yabunaka Exchange Reg 
Reform Recommendations 
---------------------- 
 
The United States and Japan have a solid framework for 
working together in their current regulatory reform 
process and hopefully it "can continue to grow." 
 
That was what Deputy U.S. Trade Representative Karan 
Bhatia told Deputy Foreign Minister Mitoji Yabunaka 
December 5 as the two exchanged reform recommendations, 
marking the launch of the sixth cycle of talks since the 
two countries' regulatory reform dialogue was launched 
in 2001. 
 
The two countries' reform recommendations are attached. 
 
On the broader economic relationship, Ambassador Bhatia 
also outlined U.S. priorities, touching on IPR 
cooperation; foreign direct investment, including 
triangular mergers; postal privatization; the importance 
of reaching a Doha agreement; and seeing further 
liberalization of Japan's beef market. 
 
Yabunaka claimed to share a number of the same concerns, 
in particular the importance of reaching a multilateral 
trade agreement. 
 
He acknowledged the difficulties associated with Doha, 
and noted he was on the phone with Agriculture Minister 
Matsuoka practically every day. 
 
Ambassador Bhatia was in Tokyo December 5-7 primarily to 
participate in economic Sub Cabinet meetings, which are 
being reported separately. 
 
¶8. (U) Government Tax Committee Calls for Lowering Tax 
Burden on Corporations 
---------------------- 
 
The Government Tax Council recently presented their 
fiscal year 2007 tax changes, including lower taxes for 
corporations, "appropriate measures" on cross-border 
triangular mergers, no mention of a consumption tax hike, 
and perhaps most significantly, a call to ?make active 
efforts? to introduce a taxpayer identification number 
system, a suggestion that has always held the whiff of 
taboo. 
 
¶9. (U) USDA Acting Undersecretary Terpstra in Tokyo 
--------------------------------------------- ------ 
 
Deputy Undersecretary for Farm and Foreign Agricultural 
Service, Ellen Terpstra, was in Tokyo December 5-8 for 
the Sub Cabinet meetings. 
 
She supported Assistant Secretary of State Daniel 
Sullivan?s efforts to introduce agriculture and food 
safety issues into the Sub Cabinet process, something 
that is being vehemently opposed by Japan's Agriculture 
Ministry (MAFF). 
 
 
TOKYO 00006931  004 OF 008 
 
 
In addition to the Sub Cabinet, Terpstra held meetings 
at the Agriculture and Health Ministries, and met former 
Agriculture Minister Shoichi Nakagawa. 
 
Issues raised included food safety, BSE-related age 
restrictions on U.S. beef, Japan?s management of its 
rice import system, and Japan?s enforcement of chemical 
residue rules. 
 
Terpstra also met with key industry leaders such as the 
President of Yoshinoya, the largest single importer of 
U.S. beef. 
 
¶10. (SBU) Nishida to be Replaced at MOFA? 
----------------------------------------- 
 
The press is full of speculation presented as fact that 
MOFA Deputy Minister for Economic Affairs Mitoji 
Yabunaka will replace Deputy Minister for Political 
Affairs Tsuneo Nishida. 
 
Nishida, who rose to the ministry?s second highest 
position in August 2005, will become Japan?s Ambassador 
to Canada. 
 
The press has described the move as retribution for 
Nishida?s lukewarm support for U.N. sanctions against 
North Korea. 
 
No replacement for Yabunaka has been mentioned. 
 
None of our working-level contacts at MOFA would confirm 
the press accounts.  One contact did imply the 
information was accurate but said no official 
announcement would come before January. 
 
¶11. (U) New Players in Japanese Economic Policy 
--------------------------------------------- -- 
 
Prime Minister Abe's initiatives to strengthen the 
Kantei (Prime Minister's Office) in the policy-making 
process have created a number of new economic players, 
one of the most important being Special Assistant to the 
Prime Minister Takumi Nemoto. 
 
Tokyo 6824 details Nemoto's role and effect on economic 
policy-making. 
 
¶12. (SBU) JFTC Claims Advisory Role in Postal 
Privatization Process 
--------------------- 
 
The Japan Fair Trade Commission (JFTC) can offer non- 
binding opinions to the Postal Services Privatization 
Committee (PSPC) on the competitive aspects of postal 
privatization, but it will not have a role in the 
approval process for new products, Coordination Division 
Director Shuichi Sugahisa told ECOUNS November 30. 
 
Per the Anti-Monopoly Act, the JFTC will judge the new 
postal entities by their product practices, and not 
size, when determining if any anti-competitive behavior 
exists. 
 
Regarding the JFTC's testimony to the PSPC on October 
18, Sugahisa said the JFTC recommended two things to 
ensure a level playing field: 1) that the postal network 
should not be closed to commercial businesses; and 2) 
that, given the close ties among the four subsidiary 
postal entities, the four companies must "strengthen 
compliance" to preserve arms-length relationships and 
keep them from acting in a monopolistic manner. 
 
¶13. (U) Japan-Australia Economic Partnership Agreement 
Decided 
------- 
 
The Abe cabinet decided on December 5 to launch 
negotiations for an Economic Partnership Agreement with 
 
TOKYO 00006931  005 OF 008 
 
 
Australia, its seventh largest trading partner. 
 
The Prime Minister and his Australian counterpart, John 
Howard, will make the official announcement when they 
meet at the East Asia Summit next week.  Negotiations 
should begin sometime in the beginning of next year. 
 
As this would be the first free trade agreement for 
Japan to work on with a country with a strong 
agriculture sector, negotiations are expected to be 
difficult. 
 
The government, taking the views of the ruling Liberal 
Democratic Party's Research Commission on Trade in 
Agriculture and Forestry -- whose membership includes 
Japan's agriculture special interests -- wants the 
negotiations to exclude sensitive commodities, including 
rice.  They claim that without exclusions Japan's 
agricultural sector could be devastated.  (Please click 
here for details.) 
 
The final version of the joint report reportedly 
indicates that "negotiations will cover all commodities 
and issues," which would mean all agriculture 
commodities including rice would be subject to 
elimination of tariffs. 
 
The fine print in the report, however, suggests there 
could be special treatment on sensitive products.  For 
example, it indicates that negotiations will be "open to 
all flexible options" including "exclusion (from 
negotiations) and renegotiation." 
 
With two-way trade of approximately 4 trillion yen in 
2005, Japan ran a surplus of 1.3 trillion with 
Australia.  Australia is Japan's third largest supplier 
of agricultural products after the United States and 
China, with agricultural exports worth about 600 billion 
yen. 
 
¶14. (SBU) LDP Interest in Aid to India Surprisingly 
High, Says Academic 
------------------- 
 
After a recent lecture on trends in Overseas Development 
Assistance (ODA), Liberal Democratic Party (LDP) 
lawmakers peppered an academic contact with questions 
about how to use aid to turn India into a counterweight 
to China. 
 
The professor told us the level of interest caught him 
by surprise given ODA's limited domestic constituency; 
he attributed the change to China's continuing rise and 
increased worries about North Korea. 
 
See Tokyo 6839 for details. 
 
¶15. (SBU) No Road Map on Beef Yet 
--------------------------------- 
 
Japan is not ready to discuss a road map to liberalize 
further its onerous restrictions on beef imports from 
the United States. 
 
That was the message we heard from Kenichiro 
Matsubayashi, Principal Deputy Director of MOFA's 2nd 
North Americas Division. 
 
Flanked by officials from the Agriculture and Health 
Ministries, Matsubayashi underscored during a meeting at 
the Foreign Ministry on November 30 that the beef market 
had only recently been reopened and "sensitivities" 
among Japanese consumers remained acutely strong. 
 
Now was not the time to talk about allowing beef from 
cows over 20 months old into the Japanese market. 
 
Matsubayashi stressed that such a decision in any case 
would require deliberation by Japan's independent Food 
 
TOKYO 00006931  006 OF 008 
 
 
Safety Commission, an assertion which had not been 
officially conveyed to us before. 
 
He passed us a non-paper (see attachment) answering the 
United States November 8 request to begin to discuss a 
further opening of Japan's beef market. 
 
¶16. (U) Agriculture Ministry Invites Public Comments on 
Resuming U.S. Potato Imports 
---------------------------- 
 
Japan's Agriculture Ministry (MAFF) on December 5 
invited public comments on resuming imports of U.S. 
potatoes. 
 
The deadline for comments has been set for January 4. 
Imports of U.S. potatoes used in potato chip production 
halted in April after a brief reopening of the market 
when authorities in Idaho discovered a new type of 
nematode, white potato cyst, in the state's crop. 
 
MAFF has identified additional measures to resume 
imports. The Ministry is now asking for public comments 
on four suggested measures. 
 
¶17. (SBU) Toyota the Biggest Player in Japan's Nascent 
Business Aviation Market 
------------------------ 
 
Providing insights into the still relatively tiny world 
of business aviation in Japan, one of the principal 
pilots of AirFlite, Toyota's aviation subsidiary, told 
Nagoya PO  Dan Rochman December 5 that AirFlite now owns 
and operates a total of seven aircraft globally for 
Toyota's exclusive use, including Gulf Stream G5s 
capable of flying between Japan and New York without a 
fuel stop. 
 
Japanese companies often look at business jets as a 
luxury.  Toyota also has a reputation for being 
tightfisted, but sees the advantages for efficiency and 
flexibility of transporting its top executives by 
business jet and is thus the largest Japanese business 
aviation consumer, with frequent flights between Japan 
and the U.S., Europe, China, and India. 
 
Based on his experience, the captain passed on a number 
of existing constraints on expansion of business 
aviation in Japan, in particular advance notification 
requirements for flights. 
 
Note:  Nagoya FCS is co-organizing a business aviation 
forum in Nagoya at Nagoya's Komaki Airport February 9 
with the U.S. National Business Aviation Association 
(NBAA), the Japanese Business Aviation Association and 
Aichi prefecture at which a variety of U.S. 
manufacturers are scheduled to display about a dozen 
jets. 
 
¶18. (U) Kansai International Airport Predicts Historic 
Profit for First Half of 2007 
----------------------------- 
 
Kansai International Airport Co., Ltd. (KIAC) has 
announced that in the first half of fiscal year 2007, 
the airport operator expects to turn a profit of 7.9 
billion yen, a year-on-year increase of seven percent ? 
a record for the company. 
 
 KIAC still receives 4.5 billion yen in annual GOJ 
subsidies, but it turned a profit even when excluding 
the government funding from calculations. 
 
An international affairs manager from KIAC said that 
KIX?s business from increased China routes was 
responsible for the lion?s share of its profits. 
 
Although KIAC?s more than 1 trillion yen in debt is 
decreasing, the airport continues to lobby the GOJ to 
 
TOKYO 00006931  007 OF 008 
 
 
shoulder the largest share of debt, the portion arising 
from land and building construction costs incurred while 
the airport was still a public entity. 
 
¶19. (U) EMIN Klemm Pays Visit to Hyogo Governor Toshizo 
Ido 
--- 
 
EMIN Hans Klemm met with Hyogo Governor Toshizo Ido 
during his first visit to Kobe on November 28. 
 Governor Ido has strongly promoted FDI, and Hyogo 
Prefecture currently has the best rate of attracting new 
businesses in Japan. 
 
Ido emphasized that Hyogo was successful in attracting 
P&G, Eli Lilly, Max Factor, Nestle, AIG?s call center, 
and many other foreign companies and business units. 
 
He invited AIG CEO Sullivan to speak in Hyogo in 
October, and Sullivan was the first business jet 
traveler to use Kobe Airport, a point of pride for Ido. 
 
As to why Hyogo has been successful in attracting 
foreign investment, the governor cited good 
transportation infrastructure, sufficient international 
schools to attract the families of businesspeople, and a 
large number of Hyogo expatriates living in mainland 
Asia who help facilitate trade. 
 
Hyogo also has a variety of high tech SMEs to support 
large enterprises? industrial expansion in the 
prefecture, such as the new Panasonic Plasma Display 
Panel Plant, Kobe Steel, Kawasaki Heavy Industry, etc. 
Hyogo is also promoting investment in its medical 
industry. 
 
According to Governor Ido, private capital investment is 
also increasing. 
 
¶20. (U) EMIN visits Carnegie Mellon University, CyLab 
Kobe 
---- 
 
EMIN also visited Carnegie Mellon University (CMU), 
CyLab in Kobe.  CyLab is the only foreign educational 
institution devoted to Information Security in Japan. 
It opened August 2005 as a foundation (zaidan) 
established by the Hyogo Prefectural Government. 
Governor Ido recognizes the importance of information 
security, and attracted CMU to Kobe through a generous 
funding package. 
 
CyLab was authorized to operate as a foreign university 
by MEXT due the help of U.S. Embassy Tokyo, so it became 
easier for foreign students to get student visas in 
Japan. 
 
 However, it is still faces unfair barriers and is at a 
disadvantage to Japanese institutions. CyLab is required 
to pay corporate tax, and local taxes like a private 
corporation.  Now, CyLab is facing difficulty in 
recruiting new students due to the lower status of 
information security professionals in Japan. 
 
¶21. (U) Japan's Third Quarter GDP Revised Substantial 
Downward to 0.8% Growth 
----------------------- 
 
The Cabinet Office announced today that Japan?s real GDP 
grew at a 0.8 percent annualized rate in the third 
quarter of 2006, well below the preliminary estimate of 
2.0 percent annualized increase. 
 
This substantial downward revision, which fell short of 
the 1.0 percent consensus forecast of private analysts, 
was due to both weaker-than-expected final private 
domestic demand, such as business investment and private 
consumption, and a smaller contribution from inventory 
accumulation. 
 
TOKYO 00006931  008 OF 008 
 
 
 
While the downward GDP revision was not good news for 
the Bank of Japan, it was not weak enough to derail 
market expectations on a BOJ's policy rate hike on 
December 19, as the benchmark 10-year JGB yield rose to 
1.69 percent this morning, up two basis points 
from Thursday and 10 basis points from last Friday. 
 
SCHIEFFER