VZCZCXYZ0003
RR RUEHWEB

DE RUEHKO #0520/01 0370034
ZNR UUUUU ZZH
R 060034Z FEB 07
FM AMEMBASSY TOKYO
TO CIA WASHDC

UNCLAS SECTION 01 OF 05 TOKYO 000520 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - February 2, 2007 
 
 
Sensitive but unclassified.  Please protect accordingly. 
 
¶1. (SBU) Table of Contents 
 
¶3.  High Pathology Avian Influenza in Japan 
¶4.  Abe Urges Early Listing of Japan Post Corporation Stock 
¶5.  USG Urges Postal Privatization Committee to Get Serious About 
Level Playing Field 
¶6.  ANRE's Hosaka Discusses Russian, Chinese Energy Issues 
¶7.  Machimura Lauds Japan's Strengths, Calls for Improved 
Diplomacy 
¶8.  JFTC Releases New Merger Guidelines 
¶9.  Read-outs on Cebu Summit Meeting Results 
¶10. Consumer Finance Legislation Already Leading to Contraction, 
Retrenchment of Industry 
¶11. Japan's Core Consumer Price Growth Decelerates to 0.1% in 
December 
¶12. Midterm Economic Policy Guidelines Expect Over 2% Real, 3.5% 
Nominal Growth 
¶13. GOJ Seeks to Boost Tokyo's Status 
¶14. KIX Victimized by Stock Fraud? 
¶15. JAL and ANA  Announce 2007 Business Plan 
¶16. FedEx Showcases State-of-the-Art Warehouse 
¶17. Kansai Firms Favor ASEAN EPAs for Business Opportunities 
¶18. Western Japan: Unemployment Rate Falls But Contractors 
Increasing 
¶19. Economic Recovery Widens Kyushu-Tokyo Income Gap 
¶21. Again, Fabricated Earthquake-Resistance Reports 
¶22. FDI Success For Central Japan:  AMB Property To Open 
Distribution Center 
¶23. FCS-Sponsored Export Controls Conference a Big Success 
 
¶2. (U) This cable contains the Japan Economic Scope from February 
2, 2007. 
 
¶3. (U) High Pathology Avian Influenza in Japan 
------------------------------ 
 
Over the past month and a half Japan has undergone a series of 
four outbreaks of High Pathology H5N1 Avian Influenza.  Three 
cases have been in Miyazaki Prefecture with one in Okayama 
Prefecture.  The source is currently unknown but suspected to be 
commingling with wild birds.  These outbreaks have resulted in 
the culling of over 170,000 birds.  The most recent outbreak in 
Miyazaki is especially troubling because within the 10km 
quarantine zone there are currently 3.5 million broiler chickens, 
one of the largest chicken production areas in Japan. 
 
¶4. (U) Abe Urges Early Listing of Japan Post Corporation Stock 
------------------------------ 
 
On January 26, the Postal Privatization Promotion Headquarters 
(chaired by Prime Minister Abe) instructed Japan Post Corporation 
to discuss concrete measures for the early listing of the two 
postal financial institutions and to start preparations for the 
early listing of Japan Post Corporation's own shares.  Prime 
Minister Abe repeated the statement in his policy speech that 
afternoon saying that it is important to implement privatization 
in October as scheduled.  Abe told Headquarter members that after 
the privatization each postal entity must be quickly integrated 
into the private economy.  The Prime Minister requested that each 
responsible Minister, i.e. Minister of Internal Affairs and 
Communications, Minister of Land, Infrastructure and Transport 
and Minister of Finance, make proactive efforts to accelerate 
privatization. 
 
¶5.  (U) USG Urges Postal Privatization Committee to Get Serious 
About 
Level Playing Field 
------------------- 
 
On January 31, the USG submitted its comments to the Postal 
Service Privatization Committee (PSPC) on their "Findings 
Regarding the Investigation and Deliberation Over New Business 
Operations by the Postal Savings Bank and Postal Insurance 
corporation," The USG welcomed the PSPC's statement that the new 
Japan Post entities should be fully integrated into Japan's 
financial system on an equal basis with private financial 
institutions.  At the same time, however, the USG indicated 
disappointment and concern that the Findings do not clearly 
mandate equivalent conditions of competition and urged the PSPC 
to include the requirement of truly equivalent conditions of 
competition. The USG urged that, after privatization, necessary 
measures should be implemented to eliminate the perception of a 
government guarantee and that rigorous inspection and supervision 
of the postal financial institutions should be established in the 
same manner as for other private financial institutions. The 
USG's comments also asked the PSPC not to allow the new postal 
financial institutions to enter into new businesses before 
establishing equivalent conditions of competition.  In addition, 
the Japan Association of Corporate Executives (Keizai Doyukai) 
also submitted comments on the Findings to the PSPC saying that 
 
TOKYO 00000520  002 OF 005 
 
 
the PSPC's views could lead to a setback of the postal 
privatization process.  The association insisted that the 
restructuring of current business operations to improve their 
efficiency must be the priority. 
 
¶6. (SBU) ANRE's Hosaka Discusses Russian, Chinese Energy Issues 
------------------------------ 
 
Agency of Natural Resources and Energy (ANRE) Petroleum and 
Natural Gas Division Director Shin Hosaka accompanied ANRE 
Director General Harufumi Mochizuki on a visit to Moscow the week 
of January 22 to talk to Gazprom about Japanese companies aiding 
the construction of a gas infrastructure in Eastern Siberia. 
Japanese companies are uninterested, however, because of the 
difficulty of the projects.  Hosaka expressed frustration over 
Gazprom's takeover of Sakhalin 2 and praised ExxonMobil's 
management of Sakhalin 1, although he complained that its gas 
likely would go to China.  He lamented the lack of cooperation 
from China over the East China Sea oil and natural gas dispute 
and blamed the warming relations between the two countries, 
claiming it prevents Japan from pressing China too hard to 
resolve the issue.  For a complete read-out of this meeting, 
please see Tokyo 00478. 
 
¶7. (SBU) Machimura Lauds Japan's Strengths, Calls for Improved 
Diplomacy 
--------- 
 
Former Foreign Minister Nobutaka Machimura assured listeners 
during a presentation this week on "Japan's Assertive Diplomacy" 
that Japan will surely become a permanent member of the UN 
Security Council in the near future.  Describing Japan as among 
the most popular countries at the UN, he highlighted Japan's 
activities in Africa, such as training sessions for technical 
engineers, as meaningful and beneficial in the long term.  He 
noted that many foreign countries appreciate Japan's overseas 
development aid (ODA) despite media criticism and he declared his 
support for aiding developing countries--in particular, Eastern 
Europe--through Japanese monetary and technological aid.  As 
Deputy Chair of the LDP Special Committee to Enhance Foreign 
Policy Capability, Machimura and Chairman Yoshio Mori plan to 
advocate an increase in the number of Japanese Embassies in 
Africa and Eastern Europe.  Machimura promised that Japan would 
halt ODA to China after the 2008 Olympics because Japan can no 
longer tolerate China's investment in Africa in exchange for 
Africa's natural resources. Machimura defended the cost of the 
relocation of United States Forces Japan (USFJ)--most of which 
will be paid by Japan--explaining that Japan was the beneficiary 
of the USFJ's presence.  He also referred to Foreign Minister 
Taro Aso's "Arc of Freedom and Prosperity," calling on Japan to 
strengthen ties with friendly nations that share common views and 
interests--namely the United States, Australia, India, and 
countries in the EU and NATO. 
 
¶8. (U) JFTC Releases New Merger Guidelines 
------------------------------ 
 
The Japan Fair Trade Commission announced a new set of merger 
review guidelines on January 31.  The new rules eliminate the 
market share criteria for such mergers, with assessments based 
solely on an industry's market concentration. The JFTC will use 
the Herfindahl-Hirschman Index, which takes the squares of 
companies' market shares and adds them together to show an 
industry's concentration as a single number.  For industries with 
international competition, the merging companies' share of 
overseas markets will be taken into account. Firms in industries 
facing global competition -- such as the semiconductor, LCD and 
software businesses -- are expected to be evaluated in terms of 
their market share worldwide. Steelmakers and others competing 
primarily with Asian rivals will be assessed by their share of 
the regional market. 
 
¶9. (U) Read-outs on Cebu Summit Meeting Results 
------------------------------ 
 
Telegrams Tokyo 448 and 450 report on views of GOJ officials on 
the outcomes from the East Asian Summit and related meetings, 
notably the implications for various initiatives on regional 
economic architecture and the effort to improve ties with South 
Korea and China. 
 
¶10. (U) Consumer Finance Legislation Already Leading to 
Contraction, Retrenchment of Industry 
------------------------------ 
 
Consumer finance legislation intended to protect borrowers passed 
by the Diet just over a month ago has prompted branch closures 
and has increased loss reserves and job cuts. 
 
Citigroup, one of the largest players in the industry, plans to 
close 270 consumer finance branches and has allocated an 
additional $375 million to cover anticipated losses due to what 
 
TOKYO 00000520  003 OF 005 
 
 
will now be considered interest overcharging. 
The new law, which will lower maximum interest rates on these 
loans from 29.2 percent to 20 percent in the next few years, is 
expected to significantly lower profitability. 
 
Credia, based in Shizuoka Prefecture, is just one of many 
regional lenders affected.  Its decision to shut all 178 branches 
of its branches, cut its work force 30 percent, and focus 
primarily on screening loan applicants online, is typical of the 
response we are seeing by these lenders. 
 
¶11. (U) Japan's Core Consumer Price Growth Decelerates to 0.1% in 
December 
-------- 
 
Japan's nationwide core CPI, which excludes perishable food items, 
rose 0.1 percent in December from the year before, after having 
increased 0.2 percent in November, the Ministry of Internal 
Affairs and Communications (MIC) announced January 26.  Also, 
overall CPI was up 0.3% in December, the same rate of increase as 
in November.  Please see attached for more details. 
 
¶12. (U) Midterm Economic Policy Guidelines Expect Over 2% Real, 
3.5% Nominal Growth 
------------------- 
 
On January 25, the Cabinet formally approved new medium-term 
economic policy guidelines for the FY07-11 period, formulated by 
the Council on Economic and Fiscal Policy (CEFP).  The new 
guidelines, entitled "The Future Course and Strategy for Japan's 
Economy," represents the first keynote of a pro-growth economic 
agenda by the Abe administration, and serves as the basic roadmap 
for the management of economic and fiscal policy over the next 
five years.  The CEFP forecasts the achievement of ambitious 
economic growth of more than 2 percent in real and 3.5 percent in 
nominal terms, by relying primarily on a substantial improvement 
in total factor productivity (TFP) and accommodative monetary 
policy.  Please see attached analysis and reference guide for 
more details. 
 
¶13. (U) GOJ Seeks to Boost Tokyo's Status 
------------------------------ 
 
The CEFP and the FSA both launched study groups this week to make 
recommendations on ways to develop Tokyo as an international 
financial center. The groups are also charged with exploring ways 
to improve supervisory measures for "complicated financial 
transactions" and harmonizing Japan's accounting rules, financial 
market taxation, and corporate governance measures with global 
practices. Earlier this month, Financial Services Minister Yuji 
Yamamoto declared the government's intention "to create a hub 
bustling with many overseas financial institutions by offering 
tax incentives and other preferential measures."   The focus has 
since been broadened to include improving the competitiveness of 
all Japanese financial markets, perhaps to accommodate 
suggestions from Osaka-based lawmakers. 
 
The CEFP group's recommendations will likely be included in 
June's annual "big boned" policy program. 
 
¶14. (U) KIX Victimized by Stock Fraud? 
------------------------------ 
 
The Asahi Shimbun Kansai version reported recently that Kansai 
International Airport Co., Ltd. (KIAC) discovered that its 
unlisted stock had been sold by 11 investment companies to 
individual investors at 10-20 times the issue price; triggering 
an investigation by the Osaka Prefectural Police.  KIAC is not, 
nor will it be, listed in the foreseeable future, but KIAC was 
surprised by inquiries from individual investors since last fall 
regarding potential IPO dates and called in the police.  The GOJ 
and Osaka Prefecture together hold 88 percent of KIAC shares, 
with the remainder issued to private companies and individual 
investors.  According to a KIAC official, three private companies 
holding KIAC's stocks in Osaka and Kyoto sold brokers 700 shares 
for the investment firms in question, falsely claiming that KIAC 
would be listed in 2007.  The amount of damage for the fraud is 
estimated at more than 100 million yen.  Although KIAC's stocks 
can be traded, selling in the market is not authorized. 
 KIAC's CFO told ConGen that they were the victims in this case, 
and that they worried about negative spillovers affecting KIX 
business after opening its second runway in July. 
 
¶15. (U) JAL and ANA  Announce 2007 Business Plans 
------------------------------ 
 
Japan's two largest airlines, Japan Airlines (JAL) and All Nippon 
Airways (ANA) announced their FY2007 operational plans on January 
29 and January 25, respectively. 
 
JAL will increase flights on four domestic routes and add one new 
route in/out of KIX/Kobe airports while suspending ten routes and 
 
TOKYO 00000520  004 OF 005 
 
 
decreasing flights on five routes.  In the midst of restructuring, 
JAL has cancelled its least profitable routes to focus more on 
profitable ones.  JAL is expected to announce the lay-off of 
3,000 employees in early February. 
 
ANA will increase flights in/out of KIX/Kobe airports by six and 
will add flights on two other routes. ANA will suspend six routes, 
and decrease flights at eight routes.  ANA is optimizing its 
operational plan to take advantage of the Haneda airport 
expansion in 2009.  The company plans to convert passenger 
flights to cargo to focus on its international postal cargo 
operations to China and other Asian countries. 
 
¶16. (U) FedEx Showcases State-of-the-Art Warehouse 
------------------------------ 
 
In a 6am visit to FedEx's Narita Airport facilities, EMIN 
observed the complex operations necessary to handle the more than 
4,500 packages the company recieves everyday.  FedEx, the world's 
largest airline with 677 planes, also showcased its new 76,000 
sqm. warehouse located in Odaiba.  At a cost of $18.5 million, it 
is the company's largest capital expenditure in the Asia Pacific. 
Representatives told EMIN that FedEx will close its Subic Bay 
facility and move the operations to Guangzhou in early 2008. 
They cited Subic Bay's short runways and Guangzhou's more central 
location as the reasons driving the move. 
 
¶17. (U) Kansai Firms Favor ASEAN EPAs for Business Opportunities 
------------------------------ 
 
Approximately 80 companies from Kobe and Osaka attended JETRO 
Kobe's recent FAZ seminar to hear about trade opportunities with 
ASEAN members, especially those with Japanese EPAs/FTAs.  JETRO's 
Trade and Investment Advisor Kota Nagai told the audience that 
many countries were seeking to circumvent the "slow WTO process" 
with free trade agreements, and that such agreements presented 
firms with excellent business opportunities.  Economic activity 
with ASEAN and Asia is becoming more important for Japan, he said. 
 
He suggested that Osaka and Kobe firms with strong ties to 
mainland Asia could capitalize on cultural exchange and tourism 
business from EPAs.  Nagai also cautioned that although large 
firms could quickly benefit from trade with EPA partners, SMEs 
would take several years due to the drag of high tariffs in EPA- 
excluded sectors. 
 
¶18. (U) Western Japan: Unemployment Rate Falls But Contractors 
Increasing 
---------- 
 
According to the Ministry of Internal Affairs and Communications, 
unemployment in Western Japan mirrored the national downward 
trend.  Following on the heels of the October decline, the 
unemployment rate in the Kansai fell by 0.6 points to 4.8 percent. 
 
The median effective job offer rate throughout the Kansai region 
is 1.1, higher than the national median of 1.06 (with even better 
conditions in Osaka (1.28), and Shiga (1.31)). 
 
Although the job offers are increasing, the growth appears to be 
coming from contractors and temporary employees rather than 
permanent positions.  With 75 percent of job applicants seeking 
permanent positions and only 43 percent of companies offering 
them, there is a significant mismatch embedded in the job offer 
data.  Despite the economic growth in the Kansai over the past 
two years, manufacturers continue to cut labor costs. 
 
Nonetheless, one industry source said the current employment 
situation was still an improvement over what faced college grads 
a couple of years ago. 
 
¶19. (U) Economic Recovery Widens Kyushu-Tokyo Income Gap 
------------------------------ 
 
According to the Kyushu Economic Research Center (KERC), Japan's 
economic recovery has increased the income disparity between 
Kyushu and Tokyo residents. 
 
Although the salary gap between the Greater Tokyo Area (Tokyo, 
Saitama, Chiba, and Kanagawa prefectures) and the nine-prefecture 
Kyushu (including Okinawa)/Yamaguchi region somewhat narrowed 
from 2001-2003 when Japan's economy stagnated, the disparity 
began to grow again following the economy's recovery in 2003. 
For instance, while average total monthly wages (including 
overtime) for regular employees in Kyushu/Yamaguchi were 76.4% of 
those in Tokyo in 2003, they fell to 73.6% in 2005.  A KERC 
official attributed the decrease to regional differences in the 
pace of the economic recovery.  For now, it is unclear whether 
this regional income disparity issue will play a role in 
Kyushu/Yamaguchi during the upcoming unified local and Upper 
House elections in April and July, respectively. 
 
TOKYO 00000520  005 OF 005 
 
 
¶20. (SBU) Again, Fabricated Earthquake-Resistance Reports 
------------------------------ 
 
Kyoto City officials announced January 25 that two hotels in the 
APA hotel group in Kyoto were built based on falsified 
structural-strength reports.   According to MLIT and the city, 
Mitsuo Mizuochi, a Toyama City architect in charge of structural 
strength designs for the hotel chain, has admitted to falsifying 
the report for one of the hotels.  MLIT is asking municipal 
governments in 15 prefectures including Toyama, Hiroshima, Hyogo, 
Osaka, and Ishikawa to look into the 168 other structures with 
which Mizuochi was involved.  116 of the buildings under 
investigation are in Toyama.  A ConGen Osaka contact at Kyoto 
City denied the city had any involvement in the deception. 
According to media reports, last June Kobe City asked Mizuochi to 
submit additional information regarding APA hotels and 
condominiums in that city, a request Mizuochi ignored.  It 
appears that Kobe took no further action, something that is 
likely to turn into an election issue very quickly.  A MLIT Kinki 
Regional Bureau official said that the APA Group is well-known 
for undercutting the bids of other firms on public works projects. 
 
 
¶21. (U) FDI Success For Central Japan:  AMB Property To Open 
Distribution Center 
------------------- 
 
San Francisco-based AMB Property Corp. announced January 30 that 
it will invest USD 100 million to build a six-story, 120,000 
square meter (1.3 million square feet) logistics and distribution 
center in Kasugai City, Aichi Prefecture, by end of 2007.  The 
distribution center will be AMB's largest facility in Japan and 
will be located in a suburb of Nagoya known as a hub of aerospace 
and machinery manufacturing. 
 
AMB's decision to build in the region marks a success for the 
Greater Nagoya Initiative (GNI), the joint effort of Central 
Japan local and prefectural governments to attract FDI.  AMB 
participated in the summer 2006 GNI Economic Symposium.  Working 
through the GNI, Kasugai City assisted AMB with preliminary site 
negotiations, in particular helping smooth relations with 
neighbors concerned about an influx of cargo trucks. 
 
¶22. (U) FCS-Sponsored Export Controls Conference a Big Success 
------------------------------ 
 
Over 300 businesses signed-up to participate in a February 2 - 3 
export control conference sponsored by FCS.  Experts from 
Commerce, Treasury and State explained their respective control 
regimes and answered a myriad of questions.  On the second day, 
businesses had an opportunity to have one-on-one consultations 
with these experts.  This is the first export control conference 
to be held in Tokyo in three years. 
 
SCHIEFFER