VZCZCXRO4303
RR RUEHFK RUEHGH RUEHKSO RUEHNAG
DE RUEHKO #0454/01 0320319
ZNR UUUUU ZZH
R 010319Z FEB 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 0254
INFO RUEHBJ/AMEMBASSY BEIJING 5664
RUEHUL/AMEMBASSY SEOUL 1749
RUEHFR/AMEMBASSY PARIS 5275
RUEHIN/AIT TAIPEI 6310
RUEHOK/AMCONSUL OSAKA KOBE 3200
RUEHFK/AMCONSUL FUKUOKA 9731
RUEHKSO/AMCONSUL SAPPORO 0733
RUEHNAG/AMCONSUL NAGOYA 9178
RUEHGH/AMCONSUL SHANGHAI 0111
RUEHHK/AMCONSUL HONG KONG 6153
RUEHGV/USMISSION GENEVA 3002
RUEHBS/USEU BRUSSELS
RUCPDOC/USDOC WASHDC
RUEATRS/TREASURY DEPT WASHDC
RUEAWJA/DOJ WASHDC

UNCLAS SECTION 01 OF 03 TOKYO 000454 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
FOR EAP, EAP/J AND EB/IFD/OIA 
USDOC FOR 4410/ITA/MAC/OJ/NMELCHER 
STATE PASS USTR FOR WCUTLER, MBEEMAN, RMEYERS 
JUSTICE FOR ANITTRUST DIVISION -CHEMTOB 
GENEVA ALSO FOR USTR 
PARIS FOR OECD 
 
E.O. 12958: N/A 
TAGS: EINV ECON PARM JA
SUBJECT: METI TO REVIEW SECURITY CRITERIA FOR FDI 
 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY 
 
¶1. (SBU) SUMMARY: The Ministry of Economy, Trade and Industry (METI) 
has established an outside study group to recommend possible 
revisions to the law that governs those sectors in which foreign 
direct investment (FDI) requires prior government notification and 
approval.  The study group's ideas will feed into METI 
recommendations to the Ministry of Finance (MOF) regarding possible 
future amendments to the law.  The announcement of the study group 
coincided with the issuance of a report by the Japan Business 
Federation (Keidanren) calling for changes to Japan's existing M&A 
legislation, including, inter alia, stricter review of proposed M&A 
transactions on national security grounds.  METI officials insist 
the timing of the two announcements is coincidental.  The 
composition of the study group is sufficiently broad that we do not 
believe it will recommend significant tightening of Japan's current 
FDI rules.  End Summary. 
 
Study Group to Examine Rules Governing M&A Deals 
--------------------------------------------- --- 
 
¶2.  (U) On December 19, 2006, METI announced the formation of a 
"Study Group on the International Investment Climate in a Globalized 
Economy."  The ministry's instructions to the 20-member panel were 
to review the Foreign Exchange and Foreign Trade Control Law, (FEL) 
from the viewpoint both of protecting technologies important to 
national security as well as "clarifying problems with measures to 
improve corporate value (i.e. M&A), while maintaining an equitable 
international investment climate." 
 
¶3.  (U) Under Articles 26 and 27 of the FEL, foreign direct 
investment - defined as acquisition of more than 10 percent of a 
firm's listed stock by a foreign investor - in certain sectors 
requires prior notification to the Minister of Finance and the 
minister in charge of the specific industry.  The ministers have 
thirty days (extendable) to review the proposed transaction after 
which they may approve, reject, or recommend changes to the deal. 
The sectors in which FDI is subject to prior notification are: 
aircraft manufacturing, nuclear power, lethal weaponry and 
gunpowder, spacecraft and rocketry, electricity generation, 
distribution of gas, heat or water, communications, broadcasting, 
railroads, passenger transport, biological chemicals, guard 
services, oil, leather, and air/maritime transport. 
 
¶4.  (SBU) The government has not updated the criteria governing the 
notification process or the list of covered sectors since 1991, 
although in that time there has been significant liberalization of 
Japan's FDI regime.  METI officials in the Trade Finance and 
Economic Cooperation Bureau, which is overseeing the study group's 
work, told us that Ministry officials want to be sure that the 
coverage of Article 27 keeps pace with changes to Japan's FDI regime 
and changes in the global security environment (e.g. development of 
new technologies and materials and increasing concerns about 
proliferation.)  A January 4 Sankei newspaper article on the 
formation of the study group described it as part of an effort to 
prevent proliferation of technology that could be used in production 
of WMD and linked the group's mandate to Japan's efforts to improve 
its counter-terrorism laws. 
 
No Weakening of Japan's Welcome to Inward FDI 
--------------------------------------------- 
 
¶5.  (SBU) The minutes of the study group's first meeting in December 
reflect some of these concerns, especially the worry that new 
commercial technologies, especially those with dual-use 
applications, could be outpacing Japan's regulatory regime.  Some 
members expressed concern about potential diversion of such 
commercial technologies to military use and thought the government 
needed to develop a regulatory system that reflected both the high 
 
TOKYO 00000454  002 OF 003 
 
 
level of Japanese technology and the increasing amount of inward 
FDI.  Other participants noted the growing use of "holding 
companies" for investment purposes which made it difficult to 
identify the party that has effective control over the investment. 
METI officials also noted the concerns were not about investment 
from Japan's close partners such as the United States but that some 
business sectors worried that increased inward M&A by Chinese 
companies could, over time, result in a drain of sensitive 
technology. 
 
¶6.  (SBU) At the same time, according to the minutes, members of the 
study group in their discussion emphasized the importance of 
maintaining an open investment climate and the growing contribution 
of FDI to Japan's economic growth.  Others noted that FDI growth 
last year had been below expectations so it was important that the 
study group and the government avoid giving the impression that 
Japan is turning its back on international investment flows.  Other 
members called for clarity in the regulations noting that 
uncertainty about whether a particular sector was covered would by 
itself have a discouraging effect on investment. 
 
¶7.  (SBU) METI officials as well as the chairman of the study group, 
Waseda University Graduate School Professor Dr Shujiro Urata, 
emphasized to us that the group's mandate did not signal a reversal 
of the government's pro-FDI policies.  A look at the composition of 
the study group does not indicate any obvious protectionist bias in 
the membership.  Of the 20 members, eight are professors from 
prominent economic or business faculties.  Two others are lawyers 
who are active in M&A deals.  The remaining ten are business 
executives from "blue-chip" firms as Mitsubishi Heavy Industries, 
Canon, Toyota and JFE Steel Corporation including executives from 
Sumitomo and Mitsubishi trading companies.  METI officials involved 
in selecting the study group's members told us they included 
companies that both "like and dislike METI's regulatory regime." 
 
¶8.  (SBU) The Committee has already met twice and Urata expected it 
would meet twice more before submitting an interim report to METI 
Directors General of Trade and Economic Cooperation and Economic and 
Industrial Policy in April this year.  The group's report will 
provide input into METI's formal recommendations to MOF on whether 
and how to amend the FEL.  If the cabinet agrees amendments are 
needed, the earliest it could submit draft legislation to the Diet 
would be during the 2008 regular session (January-July 2008). 
 
No Connection to Keidanren's Recommendations 
-------------------------------------------- 
 
¶9.  (U) The announcement of the study group coincided almost exactly 
with the release by Keidanren of a report calling for further 
amendments to Japan's M&A legislation.  Among its recommendations, 
Keidanren expressed concern over the "threat to Japan's economic 
foundation or damage to national security from the outflow of 
technology."  It called for a review of the FEL to consider possible 
changes to prior notification requirements and the expansion of the 
scope of production and technologies subject to regulation, and 
establishment of a process similar to that in the United States' 
CFIUS process.  Keidanren used similar arguments about the threat to 
Japanese high technology firms in its recent public campaign for 
strict rules to govern the triangular merger mechanism ostensibly 
designed to facilitate M&A through cross-border stock swaps. 
 
¶10.  (SBU) Despite the coincidence of timing, METI officials 
insisted that the study group was not a response to the Keidanren 
report.  In fact, they said, the establishment of the study group 
had been planned since early 2006 in expectation of the 
liberalization of M&A rules and full implementation of Japan's new 
Company Law in May 2007.  The officials opined that Article 27 and 
its implementing regulations do not reflect changing geopolitical 
circumstances in the region including changes in technology and the 
 
TOKYO 00000454  003 OF 003 
 
 
rapid emergence of the East Asia region not only as a destination 
but also as a source of FDI. 
 
SCHIEFFER