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UNCLAS SECTION 01 OF 10 TOKYO 007028 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR E, P, EB, EAP/J, EAP/P, EAP/PD, PA 
WHITE HOUSE/NSC/NEC; JUSTICE FOR STU CHEMTOB IN ANTI-TRUST DIVISION; 
TREASURY/OASIA/IMI/JAPAN; DEPT PASS USTR/PUBLIC AFFAIRS OFFICE; 
SECDEF FOR JCS-J-5/JAPAN, 
DASD/ISA/EAPR/JAPAN; DEPT PASS ELECTRONICALLY TO USDA 
FAS/ITP FOR SCHROETER; PACOM HONOLULU FOR PUBLIC DIPLOMACY ADVISOR; 
CINCPAC FLT/PA/ COMNAVFORJAPAN/PA. 
 
E.O. 12958: N/A 
TAGS: OIIP KMDR KPAO PGOV PINR ECON ELAB JA
SUBJECT:  DAILY SUMMARY OF JAPANESE PRESS 12/18/06-2 
 
 
INDEX: 
 
(2) Minshuto's strategy of confrontation ends in vain; Party's 
reluctance to submit censure motion against prime minister causes 
other opposition parties to lose trust in it 
 
(3) Ruling camp focuses on tax breaks for corporations; Heavier 
burden expected on households after elections 
 
(4) Defense Agency's upgrading to ministry: Debate on permanent law 
to be accelerated 
 
(5) Editorial: What lies ahead now that a Defense Ministry is being 
established 
 
(6) LDP's Aso to launch faction tomorrow; Mixed motives to create 
"grand Kochikai" 
 
(7) Sakhalin-2 project: Japan facing challenge in securing 
resources; Future course of supply contract unclear 
 
ARTICLES: 
 
(2) Minshuto's strategy of confrontation ends in vain; Party's 
reluctance to submit censure motion against prime minister causes 
other opposition parties to lose trust in it 
 
NIHON KEIZAI (Page 2) (Abridged) 
December 16, 2006 
 
The first extraordinary Diet session under the Abe administration 
ended on Dec. 15. All in all, the session was marked by the largest 
opposition Minshuto's (Democratic Party of Japan) futile attempts to 
turn the tables. The party, for instance, unsuccessfully submitted a 
no-confidence motion against the Abe cabinet over its responsibility 
for a series of staged town meetings. A lack of cooperation between 
the Minshuto lower and upper chambers of the Diet and discord among 
opposition parties were also evident throughout the Diet session. 
The ruling coalition, which employed the carrot-and-stick approach, 
also continued struggling exercising its leadership in running Diet 
business. 
 
Diet affairs chiefs of Upper House opposition parties met around 
noon on Dec. 15. In the session, the Japanese Communist Party and 
the Social Democratic Party urged Minshuto to jointly submit a 
censure motion against Prime Minister Shinzo Abe. But Minshuto's 
Upper House Diet chief Akira Gunji flatly refused their request, 
saying: "Minshuto has made clear its stance in the Lower House. We 
must not submit a censure motion against the prime minister so 
lightly." 
 
The proposal was intended to form a united front among opposition 
parties following the no-confidence motion in the Lower House 
against the cabinet. The People' New Party, too, refused to 
cosponsor a censure motion due to Minshuto's reluctance. The Upper 
House steering committee, which determines agenda items for plenary 
sessions, does not include any directors from the three opposition 
parties excluding Minshuto. The option of submitting a censure 
motion against the prime minister did not realize. 
 
JCP Secretariat Head Tadayoshi Ichida and SDP Secretary General 
Seiji Mataichi held a joint press conference in which Ichida 
criticized Minshuto, saying: "Not submitting a motion just because 
 
TOKYO 00007028  002 OF 010 
 
 
it is unlikely to clear the Diet is suicidal." Mataichi also blasted 
the main opposition party: "We asked Minshuto to come up with a 
unified view between its upper and lower house members. They should 
not have made a promise they could not keep." 
 
The secretaries general of the four opposition parties met on Dec. 
14 in which they agreed to take every possible measure by 
maintaining close cooperation between the two chambers of the Diet 
with the aim of blocking the enactment of amendments to the Basic 
Education Law. Minshuto Secretary General Yukio Hatoyama explicitly 
stated in a press conference after the meeting that the agreement 
covered the Upper House's plan to submit a censure motion against 
the prime minister, as well. But when he met the press after major 
Diet events were over on the night of Dec. 15, Hatoyama insisted 
that there had been no agreement with other opposition parties, 
reversing his earlier statement. 
 
As the Diet session continued, the other opposition parties 
developed strong doubts about Minshuto. Some Minshuto members, who 
had produced their own plan to revise the Basic Education Law, 
conducted revision talks with the ruling coalition behind the 
scenes. 
 
The party also softened its stance and supported a set of bills to 
upgrade the Defense Agency to ministry status following the 
opposition bloc's defeat in the Nov. 19 Okinawa gubernatorial race. 
 
The JCP and the SDP's distrust of Minshuto might adversely affect 
the ruling bloc's plan to join efforts in running Diet business and 
the Upper House election next summer. 
 
"We tried very hard to communicate with the Upper House, but to our 
regret, they did not listen to us," Minshuto Diet Affairs Committee 
Chairman Yoshiaki Takagi criticized the Minshuto Upper House at a 
meeting of Lower House members before the Lower House plenary 
session on the afternoon of Dec. 15. 
 
But Takagi himself had consistently opposed submitting a 
no-confidence motion against the Abe cabinet. Some non-Minshuto 
members even suggested holding a meeting of Diet affairs chiefs of 
opposition parties excluding the Minshuto fawning upon the LDP. 
 
Bills discussed in the extraordinary Diet session 
 
Bills cleared the Diet 
 
? Amendments to the Basic Education LawThe revised law includes, 
among other things, teaching respect for public-mindedness and 
patriotism. The first revision since the law was established in 
¶1947. 
 
 ? Amendments to the Trust LawThe revised law allows firms to 
entrust their businesses to others to facilitate the reorganization 
of their operating departments. The first drastic revision since 
¶1984. 
 
 ? Revision of the Antiterrorism Special Measures LawThe term of the 
Maritime Self-Defense Force's activities to refuel warships of the 
US and other countries in the Indian Ocean was extended for one year 
until November 2007. 
 
 ? Money Lending LawGray-zone interest rates will be abolished. 
Regulations will be placed on total amounts of lending as well as on 
 
TOKYO 00007028  003 OF 010 
 
 
loan sharks and multiple consumer loans. 
 
 ? Doshu (Regional Bloc) System Special Zone Promotion LawPart of 
state authority will be shifted to Hokkaido as a pilot of the doshu 
system. Promotion headquarters will be established in the 
government. 
 
 ? Legislation to raise the Defense Agency to ministry statusThe 
Defense Agency will be upgraded to the Defense Ministry that can 
independently submit bills and make budgetary requests. The 
Self-Defense Forces' overseas activities will also be raised to main 
duties. 
 
Bills carried over to the next Diet session 
 
? National referendum billThe legislation governs procedures for 
constitutional revision. The ruling block and Minshuto presented 
their own plans. The two sides reached a broad agreement to set the 
voting age at 18. 
 
 ? Amendments to the Organized Crime Punishment LawThe main factor 
is to make it a crime offense to conspire to commit a crime even if 
it is never carried out with the aim of countering terrorism. The 
JCP, the SDP, and other parties are opposed to revising the law. 
 
Bills scrapped 
 
? Social Insurance Agency reform-related billsComposed of, among 
other things, a bill to establish an insurance business corporation 
to keep the Social Insurance Agency as a state-run organization in 
principle. Following a series of improprieties, fresh bills 
including one to fundamentally reform the agency will be presented 
to the regular Diet session next year. 
 
(3) Ruling camp focuses on tax breaks for corporations; Heavier 
burden expected on households after elections 
 
ASAHI (Page 2) (Abridged) 
December 15, 2006 
 
LDP pours energy in dispensing favors 
 
The Abe administration's first tax reform outline includes 
large-scale tax-break measures. With an eye on the nationwide local 
elections and House of Councillors elections next year, the Liberal 
Democratic Party sealed off the controversial issue of whether to 
hike the consumption tax and decided to allocate the increase in tax 
revenues owing to the recent economic recovery to cover the revenue 
shortfall expected from the tax cuts for business corporations. The 
ruling party thus poured its energy into dispensing favors to 
companies. This year, too, the government has set side the key task 
of securing fiscal resources for social security payments and 
reconstructing the nation's financial system. 
 
The government's tax reform outline includes a number of 
preferential tax-cut measures for corporations. The Koizumi 
administration also took considerable tax-break measures for 
corporations, but the Abe administration, given the increase in tax 
revenues, has come up with even more drastic proposals. The package 
reflects a growing desire among lawmakers to cover the decrease in 
public works projects with tax breaks. In a meeting on December 12 
of the LDP's Tax System Research Commission, many participants 
called on the government to hammer out positive measures for local 
 
TOKYO 00007028  004 OF 010 
 
 
communities. 
 
The government's Tax Commission proposed abolishing the preferential 
tax system for securities transactions in next fiscal year as a sole 
tax-hike measure, but the LDP has already requested that the system 
be extended. The New Komeito tried to stop the LDP's extension 
proposal, calling it "intended to favorably treat only wealthy 
persons." 
 
In an executive meeting of the ruling camp at a Tokyo hotel on Dec. 
6, LDP Secretary General Hidenao Nakagawa said, "Stock prices will 
unavoidably dip unless the preferential tax system is extended." In 
response, New Komeito Secretary General Kazuo Kitagawa asserted, 
"Will stock prices really drop once the preferential tax system is 
scrapped? Investors have already kept in mind the planned 
abolishment of the system. I do not think that the measures will 
lead to lowering stock prices." The New Komeito, with an eye on the 
upcoming elections, also needs to play up being a "political party 
for the public". 
 
The New Komeito accepted a one-year extension plan in the end, in 
part out of fear that if a negative impact appeared on the stock 
market, it might be treated like the culprit. A member of the New 
Komeito tax panel said, "We cannot pull the trigger to bring down 
stock prices." 
 
Business circles and small businesses are strong voting bases for 
the ruling parties. They naturally need to take favorable measures 
for companies, with en eye on the next Upper House elections. On the 
thorny issue of raising the consumption tax, the ruling camp has 
decided to put off to sometime after the Upper House elections. 
 
A senior LDP tax panel member said, with a touch of self-derision, 
"We have to delay it, keeping the elections in mind." 
 
Uncertainly over results of "Abenomics' 
 
The ruling camp's tax reform package proposed tax cuts worth 600 
million yen by reviewing the write-off system, about 30 billion yen 
by abolishing the taxation on affiliated companies' reserves (only 
for small businesses), and about 18 billion yen by extending the 
special measure on replacement of business property. In the 1990s, 
the government took large-scale lavish tax cuts as measures to buoy 
up the economy. Now that fiscal reconstruction is an imminent 
national task, however, the economic community, as well as the 
Ministry of Economy, Trade and Industry had not anticipated this 
general scale of cut breaks to come out. 
 
The Abe administration has put forth the policy goal of attaining 
economic growth through corporate tax cuts and deregulation. LDP 
Secretary General Nakagawa dubbed its as Abenomics, following 
 
SIPDIS 
"Reaganomics." 
 
In response, the economic world is growing a call for corporate tax 
breaks. Nippon Keidanren (the Japan Business Federation), chaired by 
Fujio Mitarai, will praise in its Mitarai vision due out next 
January that Reaganomics contributed to reviving the US economy, 
calling for similar measures to be taken in Japan. Specifically, the 
business group aims to lower the current 40% effective corporate tax 
rate to the 10% level. If implemented, it will be a tax cut measure 
worth more than 4 trillion yen. Keidanren intends to call in its 
vision for a 2% hike in the consumption tax by FY2011. This measure 
is estimated to generate more than 4 trillion in tax revenues. This 
 
TOKYO 00007028  005 OF 010 
 
 
means that the increase in consumption tax revenues would make up 
for the revenue shortfall expected from the tax cuts. 
 
The policy of encouraging economic growth through corporate tax cuts 
is a sort of gamble for Japan, saddled with a huge fiscal deficit, 
because Reaganomics did not bring about very rosy results. 
 
Furthermore, a heavier tax burden is likely to be imposed on 
households in Japan in the future. In debate on tax reform next 
year, the consumption tax will be high on the agenda. 
 
Even some officials in the LDP members are skeptical of the listed 
favorable measures for big companies. A senior LDP tax panel member 
said when asked over the phone by Mitarai for tax cut measures, "It 
is unacceptable for the government to take only measures to make 
companies more competitive and take no other measures for others." 
 
(4) Defense Agency's upgrading to ministry: Debate on permanent law 
to be accelerated 
 
MAINICHI (Page 2) (Full) 
December 15, 2006 
 
The House of Councillors Committee on Foreign and Defense Affairs 
yesterday approved a government-introduced package of legislative 
measures to upgrade the Defense Agency to the status of a ministry, 
and the legislation is expected to clear the House of Councillors in 
its plenary sitting today. The Self-Defense Forces-with its overseas 
activities being raised to primary tasks-will presumably be called 
to play an even more proactive role in the international community. 
However, the SDF, unlike foreign forces, will remain saddled with 
constitutional constraints in its activities. Prime Minister Shinzo 
Abe, who questions such a gap, is thinking of accelerating debate on 
the advisability of establishing a permanent law allowing Japan to 
send SDF troops overseas at any time-instead of enacting an ad hoc 
law for each dispatch. At the same time, Abe will also step up 
studies aiming to have Constitution Article 9 reinterpreted for 
collective security. 
 
If the legislation gets through the Diet, the SDF will be tasked 
with international emergency relief operations, United Nations 
peacekeeping operations, and rear-echelon support for US forces 
under the Law Concerning Measures to Ensure Japan's Peace and 
Security in the Event of Situations in Areas Surrounding Japan or 
the so-called "regional contingency security law" as primary 
missions. In addition, the government, after heated debates in the 
Diet, forged ad hoc laws for the SDF's current activities in the 
Indian Ocean and Iraq because Japan had no law-based endorsements 
for Japan's dispatch of SDF troops there. These activities will also 
become primary missions for the SDF. 
 
One in the ruling Liberal Democratic Party has suggested the need 
for Japan to meet the international community's needs without delay. 
The SDF will now be tasked with these overseas activities as its 
primary missions, and it is certain that there will be calls from 
within the government and ruling coalition for creating a permanent 
law in order for Japan to send SDF troops overseas without taking 
time. The government is now conducting case studies in the Cabinet 
Secretariat. SDF personnel's use of weapons is currently constrained 
 
SIPDIS 
in line with Japan's constitutional prohibition against its overseas 
use of armed force. The focus will be on how far to ease the 
government's weapons use guidelines or rules of engagement (ROE). 
 
 
TOKYO 00007028  006 OF 010 
 
 
SDF members on overseas missions are currently allowed to use 
weapons in self-defense or emergency evacuation only, and they are 
not allowed to use weapons for any other purposes, such as harming 
others. For instance, Ground Self-Defense Force members dispatched 
to the southern Iraqi city of Samawah were not allowed to use 
weapons to cover nearby foreign troops when they were attacked. The 
prime minister strongly voiced a question about such a case, noting: 
"I wonder if it's unconstitutional to help foreign troops at a time 
when they are attacked." This is one of the government's case 
studies to reinterpret Constitutional Article 9. 
 
Collective self-defense also envisaged 
 
The Constitution-according to the government's conventional 
interpretation of its provisions-prohibits Japan from participating 
in collective security. This issue is also likely to get a grip on 
reality. 
 
"For the Self-Defense Forces' overseas activities so far, what I 
think is the most precarious of all from the legal point of view is 
the Antiterrorism Special Measures Law," Defense Agency Director 
General Fumio Kyuma stated before the House of Councillors Committee 
on Foreign and Defense Affairs in its Dec. 7 meeting. The 
Antiterrorism Special Measures Law was established to back up the 
United States' air campaign in Afghanistan. Kyuma was apparently 
concerned about the risk of exercising the right of collective 
self-defense under the law. 
 
In the wake of the Sept. 11, 2001 terrorist attacks, the United 
States invoked its right of self-defense and launched attacks in 
Afghanistan. The Maritime Self-Defense Force embarked on refueling 
US naval vessels under the Antiterrorism Special Measures Law. 
 
An MSDF supply ship refuels a US naval vessel at sea while running 
alongside. In case that US naval vessel is attacked then, an MSDF 
escort covers the US vessel. This case could conflict with Japan's 
constitutional prohibition against collective self-defense. That is 
why the MSDF is not allowed to cover US vessels in such a case. This 
is the government's way of reading the Constitution. LDP lawmakers 
have a question about such a way of interpreting the Constitution. 
One of them wonders if the MSDF has no choice but to leave that US 
ship in the lurch and get away. Similar situations are also 
anticipated in the event of contingencies in areas surrounding 
Japan. Under an envisioned permanent law, one of the SDF's primary 
tasks in such situations is to back up US forces. The prime minister 
has clarified that the government would study the issue of 
reinterpreting the Constitution for collective self-defense, as well 
as to study the issue of using weapons overseas. 
 
However, if the government creates a legal framework under which 
Japan can easily dispatch troops overseas, Japan's defense-only 
posture may be undermined. "Judging from arguments in the past over 
constitutional revision, we will need to amend the Constitution, 
instead of reinterpreting its provisions," says one of the Defense 
Agency's senior officials. The New Komeito party, the LDP-allied 
coalition partner, is cautious about the idea of reinterpreting 
Constitution Article 9. The government will likely study this 
matter, with an eye on political schedules ahead, including next 
year's election for the House of Councillors. 
 
(5) Editorial: What lies ahead now that a Defense Ministry is being 
established 
 
 
TOKYO 00007028  007 OF 010 
 
 
TOKYO SHIMBUN (Page 5) (Full) 
December 15, 2006 
 
A bill to upgrade the Defense Agency to ministry status is expected 
to clear the Diet today. The upgrade signifies more than changing a 
sign on the building. The step might bring changes to the 
Self-Defense Forces' exclusively defense-oriented nature. What lies 
ahead after the upgrade? 
 
The Defense Agency has been an agency, not a ministry, since its 
establishment in 1954. The Defense Agency has been a symbol of 
postwar Japan, which has prioritized economics over military 
affairs. The government has explained that the upgrade would result 
in no substantial change. Is that true? 
 
Once the Defense Agency becomes a ministry, the SDF's overseas 
activities will also be upgraded from secondary to a main duty. Many 
observers believe that taking advantage of the upgrade, the Abe 
administration will now accelerate its efforts to establish a 
permanent law to facilitate SDF overseas missions and to reconsider 
the use of the right to collective self-defense, which is prohibited 
under the Constitution. 
 
Prime Minister Shinzo Abe has been eager to enact a permanent PKO 
law. The Liberal Democratic Party defense policy subcommittee has 
drafted a bill enabling the government to deploy SDF troops 
overseas, as needed, even without a UN resolution or a request from 
an international organization. 
 
SDF missions overseas, including the dispatch to Iraq, have always 
required special measures legislation. The scope of specific cases 
must be examined thoroughly before allowing the government to 
dispatch SDF troops overseas, as needed. The LDP plan is designed to 
allow overseas missions with prior Diet approval. The plan has no 
brakes. 
 
In parallel with the effort to establish a permanent law, there is a 
move to relax the guidelines on the use of weapons by SDF personnel, 
which are now strictly only to be used for defending themselves or 
international agency workers under their control. Allowing the use 
of weapons to assist foreign troops would raise questions on the 
consistency with Article 9 of the Constitution, which prohibits use 
of force overseas. 
 
Abe has announced a plan to study individual, specific cases to 
identify what kind of case falls under the exercise of collective 
self-defense. Such a plan seems to reflect his intention to open to 
door to intercepting enemy missiles headed for the US and rescuing 
foreign troops. 
 
Even a partial lift of the ban would result in a phased integration 
of the SDF and the US military and much greater chances of the SDF 
becoming embroiled in combat. Article 9 might become a dead letter. 
 
Some of our concerns are on their way to reality. For instance, the 
plan to upgrade SDF overseas activities to a main duty made the 
National Defense Program Guideline produced two years ago. 
Additionally, a decision has already been made to establish a Ground 
Self-Defense Force central rapid response group tasked with serving 
as a control tower for overseas missions and to set up its command 
at Camp Zama along with the US joint operations command. 
 
Amendments to the Basic Education Law including a goal of nurturing 
 
TOKYO 00007028  008 OF 010 
 
 
an attitude to love the country is expected to clear the Upper House 
along with the defense ministry bill. The Abe administration is 
beginning to show its true colors. 
 
(6) LDP's Aso to launch faction tomorrow; Mixed motives to create 
"grand Kochikai" 
 
NIHON KEIZAI (Page 2) (Full) 
December 18, 2006 
 
Foreign Minister Taro Aso tomorrow will launch his own faction, to 
be made up of the members of the Liberal Democratic Party (LDP) 
faction that used to be headed by Yohei Kono. With that event, 
whether the factions led respectively by Aso, Makoto Koga and 
Sadakazu Tanigaki -- all drawn from the former Miyazawa faction 
(Kochikai) -- will form a "grand Kochikai" will likely draw 
political speculation. Influential lawmakers and junior and 
mid-level members in the three factions have begun working for that 
goal though with different motives. If momentum picks up, friction 
will intensify among the three factions. 
 
Exhilaration not spreading 
 
At a party to dissolve the Kono faction on the evening of Dec. 15, 
Aso said, "I plan to launch the new faction on the 19th." He has 
been secretly working on increasing the numbers of members. 
 
On the night of Nov. 21, Aso sounded out Tanigaki about a reunion of 
former Miyazawa faction-affiliated lawmakers. He also has actively 
worked on inducing independent lawmakers to join him in order to get 
at least 20 lawmakers -- the number necessary for running in a LDP 
presidential election -- in order to secure the position of being 
the most likely candidate to succeed Prime Minister Shinzo Abe. 
 
Aso met on Dec. 13 with Yuya Niwa, chairman of the LDP General 
Council, to explain his plan to set up a new faction. He paved the 
way for cooperating with Niwa, who is still at odds with Koga ever 
since the factional leadership race. Shunichi Suzuki, a Koga faction 
member and Aso's brother-in-law, who is eager to create a grand 
Kochikai, took part in the Dec. 13 meeting. 
 
Niwa, however, calmly said: "Mr. Aso is excited about a merger, but 
it is not so exciting." Tanigaki reportedly is equivocal about Aso's 
idea. Many predict that the number of lawmakers joining the new 
faction will be less than 20. 
 
Koga faction takes action 
 
The Koga faction, the largest of the three factions, has suddenly 
begun to move. Koga will have a party honoring the memory of the 
late Prime Minister Hayato Ikeda, who founded the Kochikai, which 
will mark its 50th anniversary next year. Koga's aim is to play up 
being the next head of Kochikai. 
 
Koga and Tanigaki agreed on Dec. 7 to cooperate with each other with 
the idea of forming a grand Kochikai in mind. Koga was believed to 
have helped Tanigaki boost the number of LDP members supporting him 
in the September LDP presidential election. With the cabinet of 
Prime Minister Shinzo Abe suffering from dropping public support 
rates, their moves will likely set off speculation. 
 
Tanigaki has grumbled to his aides, "It is limited what a faction 
with a membership of only a dozen or so can do." Separate from Aso's 
 
TOKYO 00007028  009 OF 010 
 
 
"love call" to Tanigaki about forming a grand Kochikai, cooperation 
between Koga and Tanigaki could be strengthening. The fate of their 
cooperation cannot be seen since Koga is at odds with Jiro Kawasaki, 
an aide to Tanigaki. 
 
Generational clash 
 
Lawmakers from the three factions who are now serving their sixth 
term or more in the Diet got together at a Chinese restaurant in 
Tokyo. At the gathering, Shuichi Suzuki underscored the need for 
creating a grand Kochikai. 
 
Some veteran lawmakers of the three factions still suffer from the 
aftereffects of past divisions such as the so-called Kato rebellion 
in November 2000 in which Koichi Kato called on then Prime Minister 
Mori to step down. A mid-level lawmaker of the Koga faction 
commented: "We, junior members, will be able to grab leadership if 
we unite while veteran lawmakers are competing." A tug-of-war over 
forming a grand Kochikai is taking on an aspect of a generational 
clash. This is making it difficult to create a grand Kochikai. Views 
toward the grand Kochikai notion in the LDP remain icy. 
 
(7) Sakhalin-2 project: Japan facing challenge in securing 
resources; Future course of supply contract unclear 
 
MAINICHI (Page 9) (Full) 
December 16, 2006 
 
It is now certain that management lead over the Sakhalin-2 project 
to develop oil and natural gas fields near Sakhalin -- which is the 
largest liquefied natural gas project in the world -- will be 
shifted from Japanese and European companies to Russia's state-run 
Gasprom. Though the contract to supply gas to Japan may be 
implemented for the time being, it is unclear what will happen in 
the future. Japan's strategy to secure resources has now hit a major 
snag. 
 
When the Sakhalin-2 project goes into full operation in 2008, 
production of crude oil is expected to be 180,000 barrels a day and 
output of natural gas will be 9.6 million tons a year in terms of 
LNG. 
 
These numbers corresponds to 4% and 18%, respectively, of what Japan 
imports of these resources. In particular, Japanese companies, such 
as TEPCO and Tokyo Gas, have already signed contracts for imports of 
LNG starting in 2008. 
 
Royal Dutch Shell of the Netherlands and Britain, which has a 55% 
stake in the project company, has had the lead in the project, but 
the transfer of such authority to Gasprom means that the project 
will essentially come under the actual control of the Russian 
government, according to an informed source. 
 
Royal Dutch Shell, Mitsui Bussan and Mitsubishi Corporation were 
forced to give up a large quantity of shares they possessed, because 
their plans to sell LNG starting in 2008 could be upset if 
negotiations dragged on any longer. Having already invested a large 
amount of money in the project, these companies could experience the 
risk of lagging behind in obtaining the expected returns from their 
invested capital. For this reason, they had no other choice but to 
accept Russia's demand, which is aimed at taking the lead in the 
project. 
 
 
TOKYO 00007028  010 OF 010 
 
 
The Japanese government, however, remains optimistic, with one 
senior official from the Ministry of Economy, Trade and Industry 
noting, "If the project does not progress, Russia will find itself 
in trouble. It will execute the contracts with the Japanese 
companies for the time being." However, there is no guarantee of a 
stable supply in the future. Gasprom once unilaterally stopped 
supplying gas to the Ukraine, following the breakdown of gas price 
talks with it. Russia has the reputation of using natural resources 
as an international bargaining chip, as one informed source put it. 
 
Since LNG supply-demand is tight across the world right now, a 
sudden suspension of supply could be a major blow to Japan. 
 
All this may be to Russia's disadvantage because an increasing 
number of Japanese companies are now distrustful of Moscow for 
applying pressure to bring Gasprom into the project, brandishing the 
threat of suspending the project for environmental reasons. 
 
SCHIEFFER