VZCZCXRO0736
PP RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #7091/01 3550609
ZNR UUUUU ZZH
P 210609Z DEC 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC PRIORITY 9286
RUEHKSO/AMCONSUL SAPPORO PRIORITY 0283
RUEHNAG/AMCONSUL NAGOYA PRIORITY 8784
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 2693
RUEHFK/AMCONSUL FUKUOKA PRIORITY 9258
RUEHNH/AMCONSUL NAHA PRIORITY 1742

UNCLAS SECTION 01 OF 03 TOKYO 007091 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/J, EAP/EP 
EAP/J PLEASE PASS TO USTR CUTLER AND BEEMAN 
 
E.O. 12958: N/A 
TAGS: ETRD ECON JP
SUBJECT: Tokyo-based Economists give DUSTR Bhatia mixed 
outlook on prospects for reform 
 
 
¶1.   (SBU) Summary:  Leading economists told Deputy USTR 
Karan Bhatia and E/B Assistant Secretary Daniel Sullivan 
on December 5 that they were somewhat pessimistic about 
prospects for continued economic reform under PM Abe. 
Richard Jerram, Chief Economist at Macquarie Securities, 
criticized the Japanese government, Bank of Japan, and 
Japanese managers for poor economic stewardship. 
University of Tokyo Economics Professor Motoshige Ito was 
more optimistic and focused on signs that Japanese 
consumers, younger Japanese, and even Japanese farmers 
were becoming more open to reform and change. Toyo 
University Economics Professor Toru Nakakita, who co- 
chairs the Asia Gateway Strategy Conference with Prof. 
Ito, described their goal as bringing together various 
strands of JapanQs Asia economic policy with a focus on 
pushing for more Free Trade Agreements (FTAs) in the 
region. 
 
Prospects for Reform under PM Abe 
--------------------------------- 
 
¶2.   (SBU) Both Japanese economists agreed that Abe will 
find it harder than his predecessor, ex-PM Koizumi, to 
sell reform politically and that Abe seemed to be buying 
some peace before the election with less public emphasis 
on reform. 
 
¶3.   (SBU) Richard Jerram posited that many of JapanQs 
leaders have concluded that the countryQs economic crisis 
is over, that things are back to "normal," freeing them 
to focus on other priorities such as foreign and security 
policy and giving jobs to friends.  Economic policy 
direction has been returned to the bureaucrats, in his 
view.  However, if Japan really wants to push growth, tax 
reform would be one of the single most useful reforms the 
government could carry out.  Jerram pointed out that 
there are no tax Ids in Japan and that there are 
estimates that as much as seventy per cent of Japanese 
companies do not pay any taxes.  Tax evasion is 
particularly widespread among the self-employed in Japan. 
 
¶4.   (SBU) Ito believes the public has fully embraced 
changes that were resisted 20 years ago such as changes 
in the large retail store law.  After recalling several 
other reforms that now go unquestioned, Ito attributed it 
to the transformation of Japanese society, including:  a) 
generation change, b) behavior and lifestyle change, and 
c) attitude change.  Younger Japanese are changing their 
society and may be able to change Japanese corporate 
culture in the future.  Still, Ito felt that 
entrepreneurship and market mechanisms need to be 
nurtured further. 
 
Plenty of Market worries 
------------------------ 
 
¶5.   (SBU) In answer to a question about what most 
worries investors in Japan, Jerram listed market worries 
about: what happens when the current expansion is over; 
when the population begins to decline in earnest; and 
when the Japanese government hits a fiscal crunch. 
Jerram saw problems at the Japanese central bank which is 
worried about inflation and a possible bubble that no one 
else sees.  He characterized the Bank of JapanQs attitude 
as one of knowing better than the government, promising 
to end the party if the government becomes speculative or 
irrational.  Jerram also criticized recent government 
moves on consumer finance which unnecessarily restrain 
the market, and the proposed rules on triangular mergers 
which will reduce foreign direct investment (FDI) into 
Japan.  Another concern is the perception that Japanese 
managers are still not making decisions based only on 
economic factors to maximize profits.  Because of that, 
there is less trust among investors in Japan that the 
market knows best, according to Jerram.  Ito asserted 
that the largest risks to the Japanese economy are still 
a recession in the U.S. and a significant decline in the 
value of the U.S. dollar. 
 
Attitudes towards FDI need to change 
------------------------------------ 
 
¶6.   (SBU) Attitudes towards FDI in Japan, especially 
among big businesses seem to be stuck in the 1930s, Ito 
asserted.  This mercantilist approach creates a vicious 
 
TOKYO 00007091  002 OF 003 
 
 
circle with little investment coming in and, as a result, 
attitudes towards FDI are also slow to change.  Nakakita 
agreed that many people, including in the business 
community, have outsized fears of hostile takeovers, 
which the media have stoked by playing up negative 
stories.   However, some attitudes are beginning to 
change, Professor Ito stressed. As an example he pointed 
out that ten years ago, his students were warned that 
going to work for a foreign company like Goldman Sachs 
would be a "career-killer."  Nowadays many of his 
students apply for jobs at Goldman Sachs, but even some 
of the best cannot get jobs there because of the 
competition. 
 
Asia Gateway/ Regional Relations 
-------------------------------- 
 
¶7.   (SBU) Nakakita and Ito, who are both members of the 
Asia Gateway Strategy Project lead by PM AbeQs chief 
Economic Advisor Takumi Nemoto, described the project as 
a "window for policy," designed to bring together the 
disparate elements of JapanQs economic policy towards 
Asia.  Free Trade Agreements (FTAs) will be an important 
part of that agenda as Japan tries to harness some of 
AsiaQs fast growth for its own benefit.  Ito gave as one 
example the opening up of JapanQs economy through the 
division of labor (with lower labor cost countries) to 
give Japan higher growth.  All of the economists agreed 
that better relations with China are one of the keys to 
JapanQs economic future and hoped that Abe understood the 
importance of getting that relationship back on track. 
 
Agriculture a stumbling block 
----------------------------- 
 
¶8.   (SBU) While all of the economists agreed that 
JapanQs ability to negotiate FTAs is constrained because 
agriculture is considered untouchable, Professor Ito 
claimed that there are signs of change which make him 
optimistic.  Ito believes that there is a change in the 
attitudes of farmers and recalled a conversation with an 
official from the Agriculture Ministry (MAFF) who said 
that they do not want to be seen as obstacles to progress 
on FTAs and are trying to portray themselves as neutral, 
not in opposition.  Ito said it is too soon to say that 
Japan is ready to negotiate on agriculture issues, but 
that change is already started. 
 
¶9.   (SBU) Many aging Japanese farmers are holding onto 
land which they expect will only increase in value, 
making it difficult for younger, more productive farmers 
to acquire land, according to Ito.  He also believed that 
the government provides too many benefits and services to 
aging farmers and should turn its support now to the 
productive and potentially competitive farmers. 
 
Globalization leads to Income Gap 
--------------------------------- 
 
¶10.   (SBU) The group also discussed how globalization 
and the resulting widening gap between rich and poor in 
Japan are increasingly visible in Japan.  The Japanese 
economists agreed globalization has helped those who are 
highly skilled and part of the "knowledge culture," while 
increasing the gap between rural and city residents, 
particularly those living in booming Tokyo.  Many who 
lost jobs or were never able to find permanent employment 
during the decade of recession simply gave up.  They also 
supported PM Abe's idea that it is important to give 
these people a second chance, through education and 
training.  Japanese people do not enjoy the same 
opportunity to recover from bankruptcy or losing a job, 
for example, as people in the U.S., where failure has 
less stigma and Americans believe it is OK to try and 
fail and then try again. 
 
 
¶11.   (U) Economists participating in the lunch: 
 
Motoshige ITO, Professor, Faculty of Economics, 
University of Tokyo: 
Toru NAKAKITA, Professor of Economics at Toyo University 
USG Participants: 
Richard JERRAM, Chief Economist at Macquarie Securities 
Ltd 
 
TOKYO 00007091  003 OF 003 
 
 
 
USG participants: 
 
DUSTR Karan Bhatia 
A/S Daniel Sullivan 
DAUSTR Michael Beeman 
EMIN Hans Klemm 
Econoff Marilyn Ereshefsky (notetaker) 
 
 
DONOVAN