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TO CIA WASHDC

UNCLAS SECTION 01 OF 07 TOKYO 000385 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - January 25, 2007 
 
Sensitive but unclassified.  Please protect accordingly. 
 
¶1. (SBU) Table of Contents 
 
¶3.  Keidanren Tells Ambassador Position on M&A "Misunderstood" 
¶4.  Kansai Association of Corporate Executives: Support for 
Agriculture Reforms, Abe's Survivability 
¶5.  Keidanren Hasn't Given Up on Doha 
¶6.  U.S.-Japan Reg Reform Talks Commence 
¶7.  Financial Services Working Group Meets in Tokyo 
¶8.  FTAs: Private Sector Interest: Joint Statement Calls for EPA 
Discussion 
¶9.  Japan-Swiss Report Calling for FTA Issued 
¶10. Reform: CPRR Members Hopeful; Abe's Press Treatment 
¶11. House of Councilors' Member Hayashi on Reform and Leadership 
¶12. Japanese M&A Surge; Most Domestic Deals 
¶13. Ag:  U.S. Beef Imports to Japan Remain Low 
¶14. New Barriers to Trade Being Erected? 
¶15. Energy: Joint Seminar Examines Asia Pacific Energy Security 
¶16. Business:  Keidanren Leadership Reshuffle 
¶17. Osaka Prefecture to Provide Japan's First SME Tax Incentives 
¶18. Civair:  Israeli FM Discussed Tel Aviv Tokyo Flights 
¶19. MLIT's Airports Discussion Group Members Express Need for 
More Meetings 
¶20. New Study Group to Promote KIX U.S. Routes 
¶21.  Regional Airports in Western Japan Focus on Profit and Shed 
Low-Demand Routes 
¶22. Basic Industries: Japanese Diemakers Look to Expand Abroad 
 
¶2. (U) This cable contains the Japan Economic Scope from January 
19, 2007. 
 
¶3. (SBU) Keidanren Tells Ambassador Position on M&A 
"Misunderstood" 
--------------- 
 
At a January 23 lunch hosted by Keidanren Chairman Fujio Mitarai, 
the Ambassador expressed the United States' disappointment at 
Keidanren's very public lobbying against proposed new triangular 
merger rules and warned it was inconsistent with the business 
group's position favoring a bilateral FTA. 
 
Mitarai responded that Keidanren's position on triangular mergers 
had been "misrepresented" both in the editorials in the Nikkei 
newspaper as well as public and private comments from METI. 
 
Mitarai promised to set up a briefing for the Ambassador to 
explain Keidanren's real views.  A hint of those views came in 
comments by Keidanren Vice Chairman Miyahara at the same event 
who described Japanese companies as "weak" and "vulnerable" to 
hostile take over bids in comparison to U.S. and European firms. 
For a full report on the Ambassador's lunch see Tokyo 0368. 
 
¶4. (SBU) Kansai Association of Corporate Executives: Support for 
Agriculture Reforms, Abe's Survivability 
------------------------------ 
 
At a recent dinner with Osaka-Kobe Consul General Danny Russel, 
Co-Chair of the Kansai Association of Corporate Executives 
(Kansai Keizai Doyukai) Atsushi Kojima again showed himself to be 
a strong advocate of agricultural liberalization. 
 
He repeated his belief that a handful of farmers are locking up 
Japan's agricultural sector to the detriment of public/national 
interest.  Beyond the unsustainability of farming demographics 
and the high cost to consumers, he argues that the demanding 
Japanese palate will support the domestic niche market for 
certain uniquely Japanese items (so there is no need for import 
barriers) and that Japanese agriculture can be competitive in 
producing/exporting certain high-end products. 
 
Although personally he favors developing a scheme to promote 
imported labor in Japan, his Doyukai colleagues are not ready to 
support changes to Japan's immigration system yet. 
 
Kojima said that he and other business leaders are worried about 
Prime Minister Abe's survivability.  Lately, people commonly ask 
one another "is he going to make it?" 
 
Kojima said the business community in Osaka needs to back the 
government and he -- as well as Doyukai -- is determined to 
support Abe. 
 
He clearly was very pleased with Abe's perceived responsiveness 
to Kansai Doyukai's recommendations on economic policy issues, 
praising Abe for making adjustments to GOJ policy based on 
Osaka's input. 
 
He said Abe was an ineffective communicator and that was not 
likely to change -- attributing it to his regional background. 
 
¶5. (U) Keidanren Hasn't Given Up on Doha 
 
TOKYO 00000385  002 OF 007 
 
 
------------------------------ 
 
With the Davos meeting of world economic leaders set to start, 
the Japan Business Federation (Keidanren) joined with several 
non-Japanese business organizations to call on WTO members to 
redouble efforts to reach an agreement on the Doha Round of 
multilateral trade talks. 
 
The joint statement was drafted under the leadership of the 
American Chamber of Commerce to the European Union, together with 
other business organizations from the United States, European 
Union, Australia, Canada, Hong Kong, Brazil, Taiwan, South Korea 
and India. 
 
It urges WTO members to jump start the Round and achieve 
agreements on core elements within the next 2-3 months. 
 
The business organizations suggest that if the round fails it 
could lead to increased regionalism and protectionism. 
 
A Keidanren official told us that, compared to a similar 
statement issued in July 2006, this one enjoyed wider support, 
with more organizations signing on.  She added that the joint 
statement is more balanced and ambitious, covering core sectors 
such as industrial goods, agriculture, services, trade 
facilitation, and development. 
 
The U.S. business organizations included the Coalition of Service 
Industries (CSI), National Foreign Trade Council (NFTC), the 
United States Council for International Business (USCIB), and the 
American Chamber of Commerce to the European Union. 
 
¶6.  (U) U.S.-Japan Reg Reform Talks Commence 
------------------------------ 
 
An inter-agency team arrived from Washington to meet with their 
GOJ counterparts to launch the sixth round of talks on Regulatory 
Reform the week of January 22. 
They are discussing each government's recommendations, which were 
exchanged last month between Deputy Foreign Minister Yabunaka and 
Deputy U.S. Trade Representative Bhatia. 
 
The recommendations are covered in working groups on 
Telecommunications, Cross Sectoral, Information Technology, 
Financial Services, and MedPharm and can be found on the U.S. 
Embassy website. 
 
¶7. (U) Financial Services Working Group Meets in Tokyo 
------------------------------ 
 
Treasury DAS Mark Sobel led a delegation of U.S. financial 
services regulators to the annual Financial Services Working 
Group on January 22. 
 
Participants included: the Securities and Exchange Commission, 
the Federal Reserve Bank, the Office of the Comptroller of the 
Currency, the Commodity Futures Trading Commission, and the 
Federal Deposit Insurance Corporation. 
 
Interfacing primarily with the Financial Services Agency, much of 
the talk centered on banking and financial service regulatory 
matters, with a series of regulator-to-regulator meetings 
subsequent to the main discussion. 
 
Given Financial Services Minister Yamamoto's recent exhortations 
for Tokyo to become an international financial center, Japan's 
financial regulatory regime will be subject to frequent 
assessment leading up to next year's talks. 
 
¶8.  (U) FTAs: Private Sector Interest: Joint Statement Calls for 
EPA Discussion 
-------------- 
 
The U.S. Business Roundtable and the Japan Business Federation 
(Keidanren) issued a joint statement on January 19 urging both 
governments to begin discussions toward a framework of 
negotiations for an economic partnership agreement as soon as 
possible. 
 
In the joint statement, the two organizations agree that the 
United States and Japan already enjoy a strong, interdependent 
relationship, but that an EPA would further remove inefficient 
regulations that impede economic growth in certain areas, such as 
liberalization in trade in services, investment and protection of 
intellectual property rights. 
 
The statement has so far received scant attention in the Japanese 
press. 
 
¶9.  (U) Japan-Swiss Report Calling for FTA Issued 
------------------------------ 
 
TOKYO 00000385  003 OF 007 
 
 
The 35-page Report of the Joint Governmental Study Group for 
Strengthening Economic Relations between Japan and Switzerland is 
now on the MOFA website in English. 
 
(Texts in English of agreements relating to FTAs with other 
countries can also be found on this site.) 
 
The Study Group recommends launching negotiations for a 
comprehensive FTA/EPA between Japan and Switzerland "as soon as 
possible." 
 
If reached, the report notes, the FTA/EPA would be the first of 
its kind between Japan and a European country. 
 
Topics covered in the report include: trade in goods; trade in 
services; investment; government procurement; IPR; movement of 
natural persons; competition policy; improvement of business 
environment; cooperation; institutional issues and dispute 
settlement; and a simulation study on the economic effects of an 
EPA. 
 
The report's appendix has a lengthy list of the Japanese and 
Swiss officials involved in the Study Group. 
 
For the uninitiated, the agricultural section makes for a 
fascinating read. 
 
¶10. (SBU) Reform: CPRR Members Hopeful; Abe's Press Treatment 
------------------------------ 
 
CPRR chairman Takao Kusakari and council members Keiko Honda and 
Tatsuo Hatta conveyed their disappointment to EMIN during a 
January 24 meeting on the relative lack of progress on reform 
recommendations in the council's December 2006 final report (see 
Tokyo 7180 on December 2006 final report). 
The trio expressed hope, however, that the infusion of new 
members and a change of Ministers responsible for the CPRR would 
breathe new life into the reform process. 
 
(Note:  Ms. Honda comments from two weeks ago were distinctly 
negative about the reform process, see Tokyo 0154) 
 
They stated that Prime Minister Abe is a gifted politician but is 
not being treated fairly by the press and speculated as to why. 
 
We will report more on this in an upcoming cable. 
 
¶11. (SBU) House of Councilors' Member Hayashi on Reform and 
Leadership 
---------- 
 
In a January 24 meeting with EMIN, fourth generation politician 
Yoshimasa Hayashi expounded upon efforts to consolidate Japan's 
47 prefectures into 14 administrative blocks, stating that, if 
achieved, it would be the biggest reform movement since the Meiji 
era. 
 
The consolidation, which will begin this year with Hokkaido as a 
test case, would push powers currently held by the central 
government down to the prefectural level and would have wide- 
ranging implications, including necessitating to re-organize 
government ministries. 
 
Hayashi also stated that Abe has a more orthodox negotiating 
style than his predecessor, Junichiro Koizumi, and is perhaps 
finding it difficult to get out from under that shadow. 
 
We will report more on this in an upcoming cable. 
 
¶12. (U) Japanese M&A Surge; Most Domestic Deals 
------------------------------ 
 
There were a record high of 2,775 M&A transactions involving 
Japanese companies in 2006 worth 15.2 trillion yen, up 27.1 
percent from the previous year, according to M&A consulting firm 
RECOF. 
 
RECOF noted this growth showed the aggressiveness of business 
managers against the backdrop of satisfactory business 
performance and the rise in stock prices. 
This value of transactions was the second highest on record after 
the 18 trillion yen worth of deals in 2001 when several major 
Japanese banks were reorganized. 
 
An analysis of the figures by direction shows the vast majority - 
- 2,175 -- were purely domestic deals ("IN-IN").  The rest of the 
breakdown was: purchases of foreign companies by Japanese 
companies ("IN-OUT"): 412 transactions; purchases of Japanese 
companies by foreign companies ("OUT-IN"): 171 transactions and; 
purchases by Japanese overseas subsidiaries of other overseas 
firms ("OUT-OUT"): 17 deals. 
 
TOKYO 00000385  004 OF 007 
 
 
Despite the increase in total M&A transactions, inward M&As 
showed a slight year-on-year decline. 
 
The top three deals by value were Japan Tobacco's purchase of the 
British firm, Gallaher (2,253 billion yen) Softbank's purchase of 
the mobile phone operator  Vodafone's Japanese operations (1,917 
billion yen, combination LBO/TOB), and Toshiba and Ishikwajima 
Harima's purchase of Westinghouse (621 billion yen). 
Among top 20 deals, 12 were outward investment and the other 8 
were domestic transactions. 
 
¶13. (SBU) Ag:  U.S. Beef Imports to Japan Remain Low 
------------------------------ 
 
After the partial lifting of an import ban last summer, Japanese 
consumers are not coming back to U.S. beef. 
 
According to a January 25 Nikkei article, trade statistics show 
import levels at only 10 percent of pre-ban levels. 
 
In November 2006, 1,600 tons were imported, compared to 20,000 
tons before the discovery of a BSE infected cow in the United 
States in 2003 prompted GOJ authorities to halt trade. 
 
A MOFA official told us it does not help that Japan's media, 
including NHK, continue to produce alarming stories about the BSE 
problem. 
 
According to Nikkei, "safety-sensitive" housewives have switched 
to Australian products and far fewer Japanese retailers now sell 
U.S. beef. 
 
The article did not note that a major part of the problem is on 
the supply side -- Japan's continued ban on beef from cows over 
20 months old has severely constricted U.S. efforts to export to 
Japan. 
 
¶14. (SBU) New Barriers to Trade Being Erected 
------------------------------ 
 
At a meeting at the Agriculture Ministry (MAFF) on January 24, an 
inter-agency delegation from USTR, USDA, the U.S. Patent Office 
and the Embassy raised concerns about a new labeling system the 
Japanese are developing which could make impossible all imports 
of wagyu beef. (To read about the background of wagyu, click 
here.) 
 
The Japanese are taking steps to ban imports at a time when the 
United States -- saddled with restraints on U.S. beef exports 
over the BSE problem -- is blocked from shipping wagyu to Japan 
anyway. 
 
The Embassy is preparing points (attached below) to submit during 
a public comment period that concludes on February 10. 
 
The labeling initiative is a troubling precedent that suggests 
Japan is willing to move beyond tariff and phytosanitary barriers 
to restrict agricultural trade. 
The MAFF officials said that the new guidelines were "voluntary." 
They were put forward by a study group over which the Ministry 
has no control. 
 
The U.S. delegation countered that the guidelines in question 
were drafted by MAFF before being taken up by the study group at 
MAFF's request. 
 
The Embassy's FAS section heard separately that MAFF's original 
intention was to put out the wagyu guidelines as mandatory 
regulations, but when Japan's Fair Trade Commission balked, they 
were recast as "voluntary." 
 
A key concern the United States has is whether authorities are 
planning other similar guidelines on products such as Japonica 
rice.  Perhaps recognizing the larger WTO/trade implications of 
the broader issue, MAFF deflected this line of questioning, with 
one official indicating they were meeting "only to discuss 
wagyu." 
 
The MAFF officials said that the guidelines could be changed 
after new information is introduced.  If foreign producers could 
prove that their product meets the strict domestic standards of 
wagyu producers, one official asserted, the born-and-raised-in- 
Japan requirement could be reconsidered. 
 
¶15. (U) Energy: Joint Seminar Examines Asia Pacific Energy 
Security 
-------- 
 
MOFA and METI co-sponsored an Energy Security Seminar on January 
19 with guest speakers from the International Energy Agency (IEA), 
the Canadian and New Zealand Embassies, the Australian Department 
of Industry, Tourism and Resources, the Korean Ministry of 
 
TOKYO 00000385  005 OF 007 
 
 
Commerce, Industry and Energy, and Singapore's ReCAAP Information 
Sharing Centre, which looks at piracy and armed robbery in Asia. 
Discussions ranged from energy security policy to energy 
efficiency to emergency response in the Asia Pacific region. 
 
Ambassador William Ramsay of IEA defined energy security as clean, 
affordable, reliable energy, while New Zealand's Bruce McCallum 
argued that definitions of energy security often have varying 
emphases on reliability, market volatility, adequacy of supply 
and environmental trade-offs. 
 
Ramsay addressed concerns over China and India participating in 
IEA responses to emergencies such as Hurricanes Katrina and Rita, 
highlighting the IEA's ongoing efforts to help the two countries 
understand coordination efforts and impact.  He also raised the 
need to stockpile natural gas similar to the way oil is now 
stockpiled. 
 
Participants generally agreed that energy security is a growing 
concern requiring increased investment and cooperation.  The Asia 
Pacific will need to increase its energy diversification and 
efficiency as well as improve its data sharing.  Collectively, 
the region and the world can mitigate disruptions to energy 
supply but without coordination the region is vulnerable. 
 
¶16. (U) Business:  Keidanren Leadership Reshuffle 
------------------------------ 
 
The Japan Business Federation (Nippon Keidanren) has announced 
the new makeup of its board to take effect after its general 
meeting in late May.  Seven of the current 15 Vice-Chairmen will 
be replaced. 
 
The seven incoming Vice-Chairmen are: 
Mikio Sasaki (Chairman, Mitsubishi Corp); 
Kunio Nakamura (Chairman, Matsushita Electric Industrial); 
Tomijiro Morita (Chairman, Dai-Ichi Mutual Life Insurance); 
Shoei Utsuda (CEO, Mitsui & Co.); 
Sadayuki Sakakibara (CEO, Toray Industrial); 
Terunobu Maeda (CEO, Mizuho Financial Group), and; 
Kazuo Furukawa (CEO, Hitachi). 
The remaining eight Vice-Chairmen reappointed for another term 
are: 
 
Hiromasa Yonekura (President, Sumitomo Chemical); 
Takao Kusakari (Chairman, Nippon Yusen (NYK Line)); 
Tsunehisa Katsumata (President, Tokyo Electric Power); 
 
SIPDIS 
Fujio Cho, Chairman (Toyota Motor); 
Tadashi Okamura (Chairman, Toshiba) (Former Keidanren chair); 
Akio Mimura (President, Nippon Steel); 
Watari Fumiaki (Chairman, Nippon Oil), and; 
Kunio Egashira (Chairman, Ajinomoto). 
 
¶17. (SBU)  Osaka Prefecture to Provide Japan's First SME Tax 
Incentives 
---------- 
 
In 2007, Osaka Prefecture will introduce a 1.6 billion yen (13.3 
million USD) tax incentive program targeted at investment by 
small and medium enterprises (SMEs) with capital of less than 10 
million yen (83,000 USD). 
The prefecture will reduce corporate taxes by 20 percent for 
companies making a capital investment of more than $13,000 in 
Osaka. 
 
Although many local governments, including Osaka, have provided 
subsidies and loans for SMEs, this is reportedly the first tax 
exemption program in the country. 
 
Takumi Hirai, senior industrial researcher with the prefecture, 
commented that the advantage of attracting new businesses and 
halting the flight of businesses already in Osaka outweighs the 
estimated reduction in short term corporate tax revenues from the 
plan. 
 
Approximately one third of Osaka's 3.3 billion USD tax revenue in 
FY2005 came from businesses. 
 
Hirai speculated that the real impact of the plan would be hard 
to predict because businesses with a deficit already do not pay 
any corporate tax to the prefecture. 
 
 
¶18. (U) Civair:  Israeli FM Discussed Tel Aviv Tokyo Flights 
------------------------------ 
 
Amidst front burner Middle East issues, Israeli Foreign Minister 
Tzipi Livni also discussed arranging direct flights between Tel 
Aviv and Tokyo during her January 17-18 trip to Japan, according 
to the Israeli Ministry of Foreign Affairs' website.  For more on 
her trip see Tokyo 0356. 
 
TOKYO 00000385  006 OF 007 
 
 
¶19. (U) MLIT's Airports Discussion Group Members Express Need for 
More Meetings 
------------- 
 
According to a January 22 Aviation Daily Japan article, the 
Airports Discussion Group 4th meeting held on January 19 concluded 
that further discussion was needed of the "internationalization" 
of Haneda airport, 24-hour operation at Japan's three 
international airports, and the operations of fully privatized 
international airports. 
 
Members of the group reportedly requested to Japan Civil Aviation 
Bureau that other related parties, such as representatives from 
other ministries and the tourism and cargo service industries, 
which had not been invited to previous meetings, should be 
invited to make presentations. 
 
 In response, Mr. Hisayasu Suzuki, Director-General of Civil 
Aviation Bureau at Ministry of Land, Infrastructure and Transport 
(MLIT), hinted at the possibility of extending the number of 
meetings before the final report is to be produced.  It is 
currently expected by the end of March. 
 
The Airports Discussion Group has held a series of meeting since 
October 24, 2006 with the goal of producing a report on "concept 
of Japan's international airport in future" by end of March 2007. 
In the previous meetings, Japanese airport companies, Japanese 
airlines and municipal governments related to international 
airports made presentations. 
 
The final report is scheduled to be submitted to Aviation 
Subcommittee, which sits under the Transportation policy 
committee in MLIT, to be taken up for the budgetary request for 
implementation in 2008. 
 
The USG had requested transparency of those discussions for all 
stakeholders in the recent bilateral regulatory reform 
recommendations, but foreign airlines' association has not been 
invited for those hearings so far. 
 
¶20. (SBU) New Study Group to Promote KIX U.S. Routes 
------------------------------ 
 
Kansai International Airport Co., Ltd. (KIAC), the Kansai 
Economic Federation, the Osaka Chamber of Commerce and Industry, 
the Japan Association of Travel Agents, and Osaka Prefecture will 
establish a study group for increasing KIX U.S. routes. ConGen 
Econoff will join the group as an observer. 
 
Those involved are seriously concerned about the precipitous 
drop in flights between KIX and the U.S.  KIX used to have six 
carriers operating 63 flights a week to six cities on the U.S. 
mainland.  Now there are only 14 flights to two cities, United's 
San Francisco route and Northwest's Detroit route.  Japan 
Airlines has decided to discontinue all flights to the mainland 
United States after the summer of 2006. 
 
In 2006, the number of passengers traveling between KIX and U.S. 
cities is almost half of the 1999 level. 
 
The study group understands that carriers are concentrating on 
Narita for improved efficiency given rising fuel and security 
costs and the dearth of KIX business passengers.  Therefore, the 
study group will target both U.S. and Japanese carriers as well 
as the local business customer base. 
 
     The GOJ stipulated that KIX reach 130,000 flights in 2007 in 
order to receive national budget funding for its 2nd runway, which 
is scheduled to be opened in August 2007. 
 
More China routes have improved KIX's bottom line, but these are 
being offset by the reduction in flights to North America. 
 
¶21. (U) Regional Airports in Western Japan Focus on Profit and 
Shed Low-Demand Routes 
---------------------- 
 
In revised new flight schedule starting April 2007, KIX will 
increase its Sapporo, Fukuoka, and Kochi routes and discontinue 
flights to Miyazaki.  Kobe Airport will increase flights to 
Haneda, Sapporo, and Naha, and cut Sendai, Kumamoto, Niigata, and 
Kagoshima.  The total number of domestic flights will remain 
unchanged, but all airports are focusing on maximizing more 
profitable routes. 
 
On the other hand, Itami Airport, despite having a higher load 
factor than a similar route from KIX, is cutting back on its 
Sapporo route to only one flight a day.  Starting in April, Itami 
will be under an MLIT ceiling of 370 flights (200 jet flights) 
per day. 
 
Airlines use jet flights for long hauls to Hokkaido and Okinawa, 
 
TOKYO 00000385  007 OF 007 
 
 
so the MLIT policy is forcing airlines to sacrifice these high 
demand flights. 
 
Local business travelers and tourists still like the convenience 
of Itami and are reportedly unhappy about the central 
government's new policy. 
 
¶22. (U) Basic Industries: Japanese Diemakers Look to Expand 
Abroad 
------ 
 
Nikkei's fifth annual survey of Japanese die and mold makers 
shows they are seeking to increase overseas operations as their 
customers globalize, according to the Nikkei Weekly of  January 
¶22. 
 
Nikkei notes that Japanese manufactures' "state-of-the-art dies 
and molds have underpinned the overall competitiveness of 
Japanese industry." 
Nikkei reports that there are some 7,000 diemakers employing 
approximately 100,000 workers in Japan.  Declines in output 
recently have been reversed due to a rise in exports. 
 
The Ministry of Economy, Trade and Industry supports the industry 
as it is considered to have important technologies that are basic 
to manufacturing operations. 
 
According to Nikkei's industry sources, high-precision dies that 
have error margins of only 10-20 microns are only made in Japan. 
 
Japanese diemakers are facing greater competition from foreign 
producers of dies and molds as computer-aided design and quality 
machine tools have spread.  While going abroad, Japanese firms 
worry about technology loss and quality issues, Nikkei notes. 
 
SCHIEFFER