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RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 07 TOKYO 000044 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
PARIS PLEASE PASS USOECD 
STATE PLEASE PASS TO USTR 
 
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. Unemployment Dips to Under 4% 
¶4. Cabinet Approves Conservative Regular Budget for FY07 
¶5. New Tax Commission Chairman Pro-Growth 
¶6. METI "Investment Security" Study Group:  Japan's "Exon-Florio"? 
¶7. CPRR Issues Mixed Final Reform Recommendations 
¶8. Japan Post:  Rules of the Road Will Apply to Yu-Pac Too 
¶9. Japanese Skeptical of Government's View of the Economy 
¶10. Execs Concerned about Foreign M&As 
¶11. IPR, Doha, Asean +3/+6: Osaka ABAC and APEC Hanoi Meetings 
Readout 
¶12. Civair:  GOJ to Study 24-hour Use of Haneda Airport 
¶13. Mizutani Construction Allegedly Paid Bribes for Airport Work 
¶14. Kobe Airport Changes Flight Schedule 
¶15. Ports:  GOJ to Ease Customs Clearance 
¶16. Call for Swift Establishment of Basic Ocean Law 
¶17. Auto Friction Speculation in the News 
¶18. Manufacturers: Aiming for Profits while Meeting Emission Limits 
 
¶19. FDI/FTA:  Sharp Builds Mexican LCD TV Plant for U.S. Market 
¶20. Kobe: Government and Business Views on 2007 Economic Prospects 
¶21. Japan's Fiscal Consolidation: Smaller Required Adjustment 
Estimated 
¶22. Cabinet Office and BOJ Updated Economic Indicators 
 
¶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 January 5, 2007, 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) Unemployment Dips to Under 4% 
------------------------------- 
 
Japan's seasonally adjusted unemployment rate fell slightly to 3.99% 
in November, the first time it has dropped below four percent since 
March 1998.  The job offers-to-applicants ratio remained 1.06. 
 
While a tighter labor market could encourage workers to change jobs 
in search of better pay and benefits, one market observer predicted 
that the rate will continue a gradual decline, possibly to the mid-3 
percent range, into 2008. 
 
4.(U) Cabinet Approves Conservative Regular Budget for FY07 
------------------------------ 
 
The Cabinet approved the central government's regular budget for 
FY07 (April 2007 Q March 2008) on December 24, clearing the way for 
its submission to the Diet. 
 
As is the typical budgetary pattern, the regular general account 
budget for FY07 shows an increase of 4.0 percent in overall outlays 
over the initial FY06 budget, but a decline of 0.7 percent from the 
revised FY06 budget, inclusive of the supplemental. 
 
The FY07 budget projects a record %4.5 trillion (nearly one percent 
of GDP) reduction in government bond issuance, thanks to the 
expected brisk growth in tax revenues. 
 
Due to the sizable cut in the deficit, Finance Minister Omi said in 
a December 20 press conference that there is the possibility of 
moving up the current FY11 target to achieve primary fiscal balance 
of the central and local governments by one or two years. See 
attached for details. 
 
 
¶5. (U) New Tax Commission Chairman Pro-Growth 
------------------------------ 
 
Prime Minister Abe selected Yutaka Kosai to replace disgraced 
 
TOKYO 00000044  002 OF 007 
 
 
Masaaki Honma as head of the government's Tax Commission. Kosai, an 
economist, is a known reformer. 
 
There was speculation that tax reform would be derailed because of 
the personal scandal that brought down Honma, but Kosai is expected 
to pursue pro-growth changes to support the Abe administration's 
reform efforts. 
 
¶6. (SBU) METI "Investment Security" Study Group:  Japan's 
"Exon-Florio"? 
------------------------------ 
 
METI announced the establishment of a "Study Group on the 
International Investment Climate in a Globalized Economy", under the 
chairmanship of Waseda University Graduate School Professor Shujiro 
Urata, which is tasked with reviewing regulations concerning inward 
FDI (especially the Foreign Exchange Law), with a view toward 
securing sensitive technologies and national security. 
 
Such a review was included among the recommendations regarding 
Japan's M&A laws issued by Keidanren (KDR) on December 12. 
The METI proposal addresses concerns expressed by some business 
leaders that increased foreign merger activity risks the loss of 
"sensitive" Japanese technology and appears to be a step toward 
setting up a formal review procedure for cross-border merger deals 
in sensitive sectors similar to the U.S.' CFIUS process. 
 
The 20-member study group consists of academics, leading M&A lawyers 
and executives of several large corporate enterprises including 
Canon (the company led by KDR chairman Mitarai), Nippon Steel, 
Toyota, Mitsubishi Heavy Industry and Sumitomo. 
According to a METI press release, the group met for the first time 
on December 19 and will advise the Director Generals of the Trade 
and Economic Cooperation Bureau and the Economic and Industrial 
Policy Bureau on "measures to address problems arising from the 
growth of international investment activities and changes in the 
national security environment." 
 
Separately, a January 4 Sankei Shimbun press report said METI plans 
to tighten its regulations on foreign M&A to prevent the 
proliferation of technology that can be used for WMD.  The article 
hinted the target of the new rules were Chinese state-owned 
enterprises. 
 
¶7. (U) CPRR Issues Mixed Final Reform Recommendations 
------------------------------ 
 
The Council for the Promotion of Regulatory Reform (CPRR) issued its 
third, final and much watered-down report of recommendations of 
issues on which the GOJ should focus its reform efforts on December 
¶25. 
Press articles state that key recommendations from the interim 
version issued in July were dropped, including several on education 
and collective bargaining reform. 
 
The CPRR did recommend revising work hour legislation to eliminate 
the need to pay white-collar workers overtime. 
Other "recommendations," most notably on Haneda Airport slot 
allotment rules and pharmaceutical approvals, however, simply 
suggest continued study and discussion rather than specific action. 
 
Separately, the Cabinet Office announced the appointment of fifteen 
new members to the Council effective January 2007.  Eight current 
members, including current Chairman Takao Kusakari, will continue 
their reform work.  For more details, see Tokyo 7180. 
 
¶8. (SBU) Japan Post:  Rules of the Road Will Apply to Yu-Pac Too 
------------------------------ 
 
National Police Administration officials told Econoffs that, 
beginning June 2007, new license plates will be issued to 
distinguish between Japan Post's Yupac express mail delivery 
vehicles and those vehicles delivering Japan Post's universal 
service mail. 
 
The former will have to abide by the same parking rules and 
enforcement private express mail delivery companies.  If a truck is 
found in violation of this separation of Yupac and Universal 
Service, the license will be revoked. 
 
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 This issue has been a major industry concern due to the recent 
crackdown in parking enforcement and the resulting increase in the 
cost of doing business. 
 
¶9. (U) Japanese Skeptical of Government's View of the Economy 
------------------------------ 
 
In a Yomiuri Shimbun poll conducted on December 9-10, 78 percent of 
respondents stated they "felt the government's view that the economy 
was recovering was unrealistic or doubtful." A similar number 
believe the gap between rich and poor was widening.  The full 
article can be found here. 
 
¶10. (SBU) Execs Concerned about Foreign M&As 
------------------------------ 
 
The Embassy and the foreign business community here clearly have a 
continuing challenge to convince corporate leaders that M&A has 
benefits both to the Japanese economy as a whole as well as to 
individual companies. 
's top executives are "concerned" about new rules for triangular 
mergers that are to take effect in May 2007, according to year-end 
Nikkei poll.  Ironically, 84% percent of respondents also said they 
were "actively considering" M&A strategies to increase their firms' 
competitiveness in an increasingly global market. 
 
The seeming disparity comes from the strong aversion of Japanese 
managers to "hostile" takeovers, although only nine percent 
considered this an inevitable risk for a listed company. 
 
According to the poll, Japanese executives still view cross-border 
triangular merger as inherently "hostile" and "abusive" and 
potential foreign acquirers as only interested in short-term 
profits. 
Forty percent of those opposed to foreign M&A cited fears "their 
firm would be dissolved immediately," while 23% worried their 
company "would immediately be resold." 
 
 
¶11. (SBU) IPR, Doha, Asean +3/+6: Osaka ABAC and APEC Hanoi Meetings 
Readout 
------------------------------ 
 
Kansai Economic Federation (Kankeiren) held a briefing on the recent 
APEC Business Advisory Council (ABAC) and APEC meeting in Hanoi in 
late December. 
 
ABAC consists of private sector committees that formulate advice and 
requests to their government counterparts in APEC. 
The ABAC Japan Committee is currently composed of Mr. Yukio Shotoku, 
Advisor from Matsushita Electric, Mr. Yoshio Ishizaka, Advisor from 
Toyota, and Mr. Yasuo Kanzaki, Advisor from Nikko City Group 
Securities. 
 
 Mr. Nobuhiko Sasaki, APEC negotiator from METI, and Mr. Masashi 
Mizukami, Deputy Director-General from MOFA also attended the 
meeting to report on the meetings in Hanoi  (Click here for further 
details). 
 
The GOJ and ABAC Japan representatives present in Osaka were very 
much interested in American commitments made in Hanoi. 
ABAC urged PM Abe to help resolve Japanese firms' IPR protection 
problems in East Asia, and to restart WTO DDR talks prior to APEC 
Hanoi.  Mr. Shotoku said that the IPR issue was one of the most 
important issues for all participants in Hanoi. 
 
METI's Sasaki mentioned that most Asian countries did not welcome 
the concept of either ASEAN +3 or +6. 
 
The Kansai region around Osaka is home to many SMEs operating in 
China and Southeast Asia, and there was a high level of interest in 
the Osaka debriefing on how APEC can protect small business 
investors.  Mr. Mizukami commented that unfortunately the discussion 
in APEC has not followed the issue, but it should be covered in the 
near future. 
 
The business audience also expressed strong interest in business 
opportunities available through APEC initiatives. 
 
TOKYO 00000044  004 OF 007 
 
 
 
 
¶12. (U)  Civair:  GOJ to Study 24-hour Use of Haneda Airport 
------------------------------ 
 
The Abe administration will establish a study group this January to 
examine the 24-hour use of Haneda airport as part of PM Abe's "Asia 
Gateway" initiative according to the Tokyo Shimbun. 
 
Special Advisor to the Prime Minister Nemoto will lead the group and 
it will produce a report with specific measures for the full 24-hour 
use of Haneda airport by May 2007. 
 
¶13. (SBU) Mizutani Construction Allegedly Paid Bribes for Airport 
Work 
------------------------------ 
 
Mizutani Construction spent about 1.5 billion yen ($13 million) on 
bribes and kickbacks, with the bulk going to yakuza groups and a 
lesser amount to Diet members' aides, according to the Asahi 
Shimbun. 
 
Many of the bribes were allegedly tied to Mizutani's land 
reclamation work for Osaka's Kansai International and Nagoya's Chubu 
International Airports. 
 
Mizutani's chairman and other staff pleaded guilty in December to 
hiding 3.8 billion yen ($32 million) in corporate income. 
Among the Diet members previously reported to have received 
legitimate political donations from the Nagoya-area based Mizutani 
between 1998 and 2004 were then-Health Labor and Welfare Minister 
Jiro Kawasaki, then Science and Technology Minister Iwao Matsuda, 
and then-DPJ Vice President Ichiro Ozawa. 
 
Those donations were all relatively small, in the two to three 
million yen (about $20,000 to $30,000) range. 
 
¶14. (SBU) Kobe Airport Changes Flight Schedule 
------------------------------ 
 
Kobe City announced that JAL and ANA would change flight schedules 
and routes to and from Kobe Airport due to the gap between routes 
with high/low load factors, and increasing fuel costs. 
 
Since the opening of UKB in February 2006, Haneda, Naha, and Sapporo 
routes reached 60-70 percent load factors, but routes to Sendai, 
Niigata, and Kagoshima are only selling at 30-40 percent. 
 
ANA will discontinue its Kagoshima route and add one flight each to 
Haneda and Naha in April, and discontinue its Niigata route and add 
one flight to Sapporo in June. 
 
JAL will also discontinue its Sendai and Kumamoto routes and 
increase coverage of Sapporo and Ishigaki Island, Okinawa in June or 
July.  There will be no change in each carrier's total flights 
servicing Kobe. 
 
A Kobe City official told ConGen that he expects an increase in 
revenue from higher landing fees due to the larger aircraft likely 
to be used by both ANA and JAL. 
 
However, he noted that the city government was surprised to learn 
how airlines quickly react to changes in profitability on their 
routes, signaling that the city has a long way to go in 
understanding the aviation industry. 
 
¶15. (SBU) Ports:  GOJ to Ease Customs Clearance 
------------------------------ 
 
The government's Asian Gateway council plans to recommend changing 
cargo handling at ports and airports to improve efficiencies and cut 
costs under the heading "Distribution Big Bang," according to the 
Yomiuri Shimbun. 
 
The GOJ aims to bring port handling costs more in line with the 
other major Asian ports in order to promote trade and stimulate the 
economy. 
 
Further discussions on promoting efficiency are to begin in January 
 
TOKYO 00000044  005 OF 007 
 
 
and the council intends to have a final report by late May. 
 
Foreign maritime operators told Econoff in interviews over the past 
several weeks that Japanese ports have high cargo handling costs and 
as a result have been losing business Q particularly the 
transshipment of goods -- to the more efficient Asian ports, 
especially Korea. 
 
Shippers, even from Japan's west coast, find it more economic to 
aggregate smaller loads into larger shipments at Pusan, Korea. 
The GOJ over the last year has been seeking measures to counteract 
this trend. 
 
¶16. (U) Call for Swift Establishment of Basic Ocean Law 
------------------------------ 
 
Underscoring the interest in revising Japan's marine policy, a 
Yomiuri Shimbun editorial on December 31 called for swift 
establishment of Basic ocean law, which is expected to be submitted 
to the ordinary Diet Sessions this year. For more background on the 
maritime bill, see JES Volume 2 Issue #50 Q December 22, 2006. 
 
¶17. (U) Auto Friction Speculation in the News 
------------------------------ 
 
High level of car exports to the United States Q the highest since 
the early 1990s when auto trade friction was at its peak -- 
increasing sales in the United States Q Toyota taking third place in 
sales in 2006 in the United States received wide coverage here Q and 
the Democrat Party's control of the new Congress have fueled 
Japanese press reports about Japanese automakers worries over a 
possible rise of protectionism in the United States. 
 
¶18. (SBU) Manufacturers: Aiming for Profits while Meeting Emission 
Limits 
------------------------------ 
 
Even as large Japanese manufacturers, including Osaka-based 
Matsushita and Sharp, enjoyed a surge in sales over the past year, 
they have bumped up against a new problem: the requirement to reduce 
CO2 emissions under Japan's Kyoto Protocol commitments. 
 
The problem is acute for firms relying heavily on coal-dependent 
manufacturing plants in China and electronics and auto 
manufacturers, whose products contain higher levels of toxic 
substances like lead or cadmium or which produce high levels of 
carbon emissions while operating. 
 
Some firms, however, are taking a long-range view of these emissions 
requirements by rethinking the entire production line in order to 
improve total energy efficiency and increase recyclability, while 
making their goods more profitable and attractive to American 
consumers. 
 
Matsushita, whose carbon emissions have otherwise risen by almost 14 
percent since 2002, has had remarkable success in eliminating all 
lead from its flat glass displays, which made up approximately 97 
percent of the total lead content in their popular flat panel TVs. 
 
The firm has begun emphasizing its corporate responsibility and 
environmental consciousness in meetings with ConGen staff. 
By incentivizing "green" production for its engineers and designers, 
Matsushita executives are confident they will beat a GOJ Environment 
Ministry goal of 25 percent reduction in CO2 output from 1990 levels 
among electronics manufacturers by 2012. 
 
¶19. (U) FDI/FTA:  Sharp Builds Mexican LCD TV Plant for U.S. Market 
 
------------------------------ 
 
Sharp Corp, the strongest LCD flat screen TV manufacturer in Japan, 
will build a new five billion yen ($41.7 million) LCD TV assembly 
plant in Mexico's Baja California region this year, next to an 
existing Sharp facility. 
 
Due to the current boom in flat TV sales in the United States, Sharp 
aims to produce 150,000 TV sets a month by the fall, increasing 
current production capacity threefold. 
 
 
TOKYO 00000044  006 OF 007 
 
 
Sharp has been slow to join Sony and Matsushita in increasing 
production within NAFTA.  Sharp had a 9.7 percent and falling share 
of the U.S. market in summer 2006. 
 
Japanese competition in the flat TV market in the United States is 
set to accelerate in 2007. 
 
¶20. (U) Kobe: Government and Business Views on 2007 Economic 
Prospects 
------------------------------ 
 
Highlights of today's Kobe-Hyogo Joint New Year's Party organized by 
the Hyogo Chamber of Commerce included Mayor Yada's call for 
improving local business conditions in Kobe by making more use of 
the city's transportation links, including Kobe Airport (UKB) and 
the Port of Kobe, the latter of which is about to enter its 140th 
year of operation as an international seaport. 
Citing its designation as a super hub port, Yada hoped to see an 
increase in the flow of goods and people this year to celebrate this 
anniversary. 
 
Although some said the corner had finally been turned on Kobe's 
recovery from the 1995 Hanshin Earthquake, at least one SME business 
group representative said things were still bad for small business 
owners due to the increased competition from Chinese textiles and 
manufacturing. 
 
Business, government, academic and military leaders all variously 
sought greater cooperation from the USG on economic and political 
issues. 
 
Governor Ido specifically asked Econoff to make progress in efforts 
to promote greater U.S. SME investment in local markets. 
 
¶21. (U) Japan's Fiscal Consolidation: Smaller Required Adjustment 
Estimated 
------------------------------ 
 
The Cabinet Office presented to the Council on Fiscal and Economic 
Policy a revised estimate on the required adjustment to achieve a 
combined central/local government primary surplus on a national 
accounts basis by JPFY11 on December 26. 
 
According to the estimate, the required adjustment was revised 
sizably downward, from the initially projected %16.5 trillion (3.2 
percent of GDP), to %9.5 trillion (1.9 percent of GDP), reflecting 
restrictive discretionary spending and brisk tax revenues projected 
in the Cabinet-approved budget for FY07. 
 
Central/local government expenditures for FY07 are estimated to 
total %107.3 trillion in FY07, about %3.5 trillion smaller than the 
amount without spending reforms. 
 
Tax revenues for FY11 are now projected to be about %3.5 trillion 
larger than the initial estimate.  See attached for details. 
 
¶22. (U) Cabinet Office and BOJ Updated Economic Indicators 
------------------------------ 
 
The Cabinet Office kept its overall assessment of Japan's economy 
unchanged, noting that the economy is recovering, although there is 
some weakness in consumption. 
 
The monthly economic report, submitted to the Cabinet on December 
25, indicated that personal consumption will increase if the growth 
of income changes for the better with improvement in employment. 
It added that consumer prices are flat, while growth of corporate 
goods prices has slowed with declines in oil prices. 
The BOJ report, released on December 19, also left unchanged its 
core economic assessment, indicating that the economy is "expanding 
moderately." 
 
However, the BOJ indicated somewhat a cautious view on personal 
consumption, noting an increasing trend, although at a moderate 
pace. 
 
The BOJ outlook expects the economy to continue expanding 
moderately.  See attached document for further details. 
 
 
TOKYO 00000044  007 OF 007 
 
 
DONOVAN