VZCZCXRO5269
OO RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHKO #0762/01 0532301
ZNR UUUUU ZZH
O 222301Z FEB 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0925
INFO RUEHGV/USMISSION GENEVA 3015
RUEHFR/AMEMBASSY PARIS 5312
RUEHFK/AMCONSUL FUKUOKA 9955
RUEHNH/AMCONSUL NAHA 2420
RUEHOK/AMCONSUL OSAKA KOBE 3441
RUEHKSO/AMCONSUL SAPPORO 0933
RUEHNAG/AMCONSUL NAGOYA 9375
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHBS/USEU BRUSSELS
RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC

UNCLAS SECTION 01 OF 05 TOKYO 000762 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT PLEASE PASS TO USTR MICHAEL BEEMAN 
DEPT PLEASE PASS TO USDA 
GENEVA ALSO FOR USTR 
PARIS FOR USOECD 
 
E.O. 12958:  N/A 
TAGS: PGOV ECON EFIN EAGR ELAB EINV ETRD JA
SUBJECT: DIET ECONOMIC AGENDA 
 
 
TOKYO 00000762  001.2 OF 005 
 
 
¶1. (SBU) Summary.  The 2007 Diet convened on January 25 and will run 
150 days to June 23 during which it will consider a number of 
economic bills with potential impact on this summer's Upper House 
election, particularly those designed to bolster PM Abe's "Second 
Chance" initiative to close a perceived widening of the income gap, 
such labor and local revitalization legislation.  Some of the 
legislation also has bearing on US interests.  For example, on the 
plus side, local economic revitalization legislation may result in 
more incentives for investment; anti-money laundering provisions 
will be extended to more sectors; telecom mutual recognition 
agreement legislation will be enacted; and, the special regulatory 
reform zone law will be extended.  The government: has backed off 
plans, at least temporarily, to do away with overtime for certain 
white collar workers; seems set to allow a ministerial cooperative 
to compete more with private sector insurance; and will create too 
high a value for express mail to receive expedited customs 
treatment. 
 
Table of contents: 
 
Para 2 -- Fiscal 2007 budget Para 2-3 
Para 4 -- Tax change legislation Para 4 
Para 5 -- Labor reform proposals Para 5-8 
Para 9 -- Local economic revitalization legislation 
Para 13 -- An anti-money laundering bill 
Para 14 -- Consumer cooperative legislation 
Para 15 -- Telecommunications equipment Mutual Recognition Agreement 
(MRA) 
Para 16 -- Special zones for structural reform 
Para 17 -- Basic maritime law 
Para 18 -- Customs law 
Para 19 -- The opposition party's planned attack on agricultural 
legislation 
 
End Summary. 
 
Fiscal 2007 Budget 
------------------ 
 
¶2. (SBU) The Diet ordinary session began January 25 with 
deliberations on a supplemental budget for the current FY2006, which 
was approved on February 6, thus clearing the way for disbursement 
of funds. The supplemental budget called for net additional 
expenditures of 3.8 trillion yen ($32 billion, or 0.7 percent of 
GDP) and sets aside disaster relief and disaster prevention programs 
(878 billion yen or $7.4 billion), international contributions such 
as peace keeping operations (163 billion or $1.37 billion), and 
measures to support disabled (96 billion yen or $808 million). 
 
3.(SBU) Immediately after completing work on the supplemental 
budget, the Diet began deliberation of the regular budget for 
FY2007.  Total budget expenditures call for 82.9 trillion yen ($691 
billion, or 16 percent of GDP), representing an increase of 4.0 
percent from the initial FY2006 budget.  Almost all of this growth 
(3.9 percentage points) is caused by an increase in mandatory 
spending items: debt service costs, social security spending, and 
revenue sharing with local governments.  Mandatory spending items 
account for about 70 percent of total outlays.  The remaining 30 
percent is discretionary spending, including public works and 
non-investment discretionary programs.  On the revenue side, tax 
receipts are estimated to reach 53.5 trillion yen ($446 billion), 
the highest level since FY1997, while non-tax receipts are projected 
to amount to 4.0 trillion yen ($33 billion).  In order to cover the 
shortfall, MOF plans to issue 25.4 trillion yen ($212 billion) of 
new government bonds in FY2007, the smallest bond issuance in 10 
years and a decrease of 4.5 trillion yen ($38 billion) from the 
initial FY2006 budget 
 
Tax Change Legislation 
---------------------- 
 
¶4. (SBU) Tax change legislation for FY2007 includes the first net 
tax cut in four years, which lowers the corporate tax burden, 
particularly on depreciable assets.  This change would allow 
corporations beginning in April, 2007, to deduct as a tax-exempt 
 
TOKYO 00000762  002.2 OF 005 
 
 
expense 100 percent of the acquisition cost of newly-acquired 
depreciable assets, rather than the current rate of 95 percent. 
With Company Law provisions on cross-border triangular mergers 
taking effect in May, 2007, the legislation also proposes that using 
a parent company's shares as consideration in such a merger or 
acquisition be added to the eligible list of qualified tax deferrals 
for capital gains, although related regulation will determine if 
this can be a viable vehicle for new investors in Japan.  As a 
fiscal matter, these tax changes are minor modifications to Japan's 
tax system, reflecting a consensus among policymakers that 
deliberations on major tax reforms, including a consumption tax 
hike, should be shelved until after Upper House elections in July, 
¶2007. 
 
Labor Reform Legislation 
------------------------ 
 
¶5. (SBU) The government has announced plans to introduce legislation 
to reform several existing labor-related laws.  The changes are 
intended to increase labor mobility and workplace flexibility and to 
recognize long-term demographic changes.  Some of the proposals are 
part of the government's "second chance" initiative to assist 
workers and business owners who have been hurt by economic changes. 
 
 
¶6. (SBU) Top of the list of labor-related draft legislation is a 
proposal to amend the Labor Standards Law to raise the premium rate 
for overtime pay that exceeds 80 hours a week to 150 percent, a key 
demand of labor unions.   The measure also encourages companies to 
"make efforts" to raise the rate for overtime in excess of 45 hours 
to 25 percent.  In a nod to small and medium size enterprises 
(SMEs), the government would delay application of the new rate to 
firms with less than 300 employees for three years.  Prime Minister 
Abe explicitly stated that the aim of the bill is to reduce the 
amount of overtime worked by Japanese employees. 
 
¶7. (SBU) Meanwhile, the government has withdrawn its proposal to 
expand the range of white-collar workers above a certain salary 
level who are ineligible for mandatory overtime pay.  Employers 
pushed for such an exemption, claiming that current overtime 
regulations date from a time in which the bulk of Japanese were 
factory workers.  Such requirements are inappropriate given the 
growing proportion of knowledge-based white collar employees in the 
Japanese workforce, according to the legislation's advocates.  Labor 
unions and opposition lawmakers argued, however, that given the 
nature of Japan's labor-management relations, the proposal would 
lower employees' take home pay without reducing the amount of hours 
worked.  The government has said it intends to introduce the bill 
again next year. 
 
¶8. (SBU) A second draft bill would require employers to provide 
equal treatment to part-time workers if they work under the same 
conditions as regular employees.  There has been growing concern 
over the increasing number of younger workers who are unable to find 
regular full time employment. 
 
Local Economic Revitalization 
----------------------------- 
 
¶9. (SBU) As part of its new economic growth strategy, the Japanese 
government has proposed changes to the Industrial Revitalization Law 
and to a new Local Industrial Invigoration Law that could have a 
positive impact on Japan's investment climate.  In the past, the 
Industrial Revitalization Law only focused on revitalizing the 
manufacturing sector.   A revision of this law would broaden the 
scope of the existing preferential measures, such as exemption from 
certain inspection requirements and mitigation of certain corporate 
taxes and licensing fees, for companies that undertake corporate 
restructuring or transfer of intellectual property for the purpose 
of increasing research and development capacity or increasing 
industrial productivity.  The revision would also focus on 
increasing productivity in the service sector by offering, for 
example, tax exemptions and other special treatment that previously 
had been available only to the manufacturing sector.  Whereas the 
service sector accounts for 70 percent of Japan's GDP, its 
 
TOKYO 00000762  003.2 OF 005 
 
 
productivity remains low compared to the manufacturing sector.  This 
bill would also help facilitate M&A between companies specializing 
in different business fields -- e.g. a cell phone operator and a 
credit card company. 
 
¶10. (SBU) The second bill, the Local Industrial Invigoration Law, 
would introduce measures to revitalize local economies by allowing 
local governments greater flexibility in setting criteria for 
industrial location regulations.  Among the incentives, local 
authorities would be allowed to grant special amortization rules and 
increases in small business insurance and indemnification rates. 
The purpose is to allow local governments to provide special 
incentives to attract new industrial investment to their localities. 
 For example, local municipal governments would have the authority 
to relax regulations that currently force companies to set aside 
some land as green space, thus giving businesses more incentive to 
relocate to the region. 
 
¶11. (SBU) A related piece of legislation called the SME Regional 
Resources Revitalization Bill targets the revitalization of SMEs in 
rural areas by encouraging, through tax exemptions, preferential 
loan rates or credit guarantees the development of new services and 
products using regional resources -- for example, technology or farm 
commodities unique to the region. 
 
¶12. (SBU) These bills are part of the Ministry of Economy, Trade and 
Industry's (METI's) "Economic Growth Initiative," which was 
announced in July 2006.  The goal of the Initiative is to tackle 
issues hindering economic growth in Japan such as the declining 
birthrate, the huge budget deficit and the escalation of 
international competition, most notably in Asia.  The press has been 
critical of these bills, however, calling them "jumbled," and has 
questioned whether they will encourage any substantive growth. 
 
Anti-Money Laundering Bill 
-------------------------- 
 
¶13. (SBU) The Cabinet has already approved - and the Diet is 
expected to pass -- the so-called anti-money laundering bill to 
prevent the illegal use of profits from crime and terrorist-related 
funds.  This law would mandate private businesses such as real 
estate agents, jewelry dealers and private mailbox agencies, to 
confirm a customer's identity, to retain identity verification 
records, and to produce suspicious transaction reports (STRs) for 
the Financial Intelligence Unit(FIU) -- actions only financial 
institutions currently are required to do.  The law would also 
require professionals such as certified public accountants and 
certified tax accountants to confirm a customer's identity and to 
retain identity verification records; lawyers were dropped from the 
legislation at the last moment, due to bar association protests over 
client confidentiality. The FIU is currently under the jurisdiction 
of the Financial Services Agency (FSA) but will be moved to the 
National Police Authority (NPA) jurisdiction in April 2007.  The NPA 
will continue to analyze STRs and provide Japan's Prefectural police 
headquarters and overseas FIUs with its analysis. 
 
Consumer co-operatives 
---------------------- 
 
¶14. (SBU) The Ministry of Health, Labor and Welfare (MHLW) plans to 
submit a bill to overhaul the 60-year old law governing its consumer 
co-operatives.  One of the amendments proposed by MHLW would enhance 
protection for its cooperative insurance (Kyosai) policy holders. 
The US insurance industry is concerned that while MHLW may develop 
stricter policyholder protection measures, such as mandatory third 
party auditing, it may also ease regulations on restricting 
membership.  The industry also is worried that the insurance unit of 
the consumer co-operatives may sell its insurance products inside 
banks in direct competition with private insurance companies' 
products.  The USG has repeatedly reminded GOJ that the goal of 
consumer co-operatives is to provide aid only to its members and 
that, as non-profit organizations, they enjoy various tax breaks 
that give them advantages not enjoyed by private companies.  Thus, 
absent the creation of a "level playing field," membership 
restrictions should remain strict and co-op sales should remain 
 
TOKYO 00000762  004.2 OF 005 
 
 
within the concept of mutual aid. 
 
Telecommunications Equipment MRA 
-------------------------------- 
 
¶15. (SBU) After years of talks, U.S. and Japanese negotiators signed 
a Mutual Recognition Agreement (MRA) for Telecommunications 
Equipment in Washington on February 16.  This is the first MRA in 
any sector between the U.S. and Japan.  The agreement will allow 
U.S. and Japanese regulators to accept the results of testing labs 
and certifications on telecommunications equipment obtained in 
either country, leading to easier market access for manufacturers 
wishing to sell in either Japan or the United States. In 2005 the 
United States exported about $1 billion in telecommunications 
equipment to Japan and Japan exported about $1.6 billion in 
telecommunications equipment to the United States.  Ministry of 
Foreign Affairs (MOFA) sources tell us that the Cabinet will submit 
the MRA to the Diet during the second week of March alongside other 
treaties.  MOFA expects the bill to pass both houses in summer 2007. 
The agreement will not go into effect until MIC finishes writing up 
the regulations needed to comply with the agreement, probably in 
late 2007. 
 
Special Zones for Structural Reform 
----------------------------------- 
 
¶16. (SBU) Launched in 2002, the Special Zones for Structural Reform 
have served as a way around Japan's tough regulatory environment by 
allowing regulation exemptions in a particular "zone".  As of 
November, 2006, the number of Special Zones had reached 604.  A new 
bill before the Diet will extend the system for another five years 
to March 31, 2012.  The Diet may also review the method by which the 
"exemptions" are extended nationwide after a certain period. 
 
Basic Maritime Law 
------------------ 
 
¶17. (SBU) Politician-initiated legislation on the Basic Maritime Law 
is expected to be introduced during this Diet session.  The purpose 
of this bill is to define Japan's basic principles for the safety of 
the marine environment, development and use of ocean resources, and 
maintenance and control of oceanic security.  The bill is also meant 
to hold accountable the national and regional governments, along 
with private businesses and citizens, by defining basic measures for 
preserving the ocean and for promoting and implementing these 
measures comprehensively.  If passed, the Basic Maritime Law would 
establish a Minister responsible for executing and promoting 
comprehensive national maritime policy.  The bill would also 
establish a Maritime Policy Council including the Prime Minister as 
chair, the Minister for Maritime Policies as vice chair, the Chief 
Cabinet Secretary, ministers of other relevant agencies, and 
academics. 
 
Customs Law 
----------- 
 
¶18. (SBU) The Ministry of Finance (MOF) has introduced a bill with 
Cabinet approval that would revise Japan's Customs Laws.  The 
proposed bill makes changes to the customs clearance procedures for 
international postal items that the Japan Fair Trade Commission and 
the USG considered to be competitive, market-based, express mail 
system (EMS) products.  The bill introduces a duty declaration 
system for EMS with values greater than 200,000 yen.  The bill 
should be finalized by the end of FY2006 and implemented within a 
year to a year and half.  The bill does not specify a review system 
for the customs procedure, but a MOF official told the Embassy that 
the bill likely can be amended whenever necessary.  US stakeholders 
have lobbied against setting such a high threshold because the 
majority of items of lesser value will continue to be assessed by 
the existing duty assessment system.  USG and US companies have 
requested through the Regulatory Reform Initiative recommendations 
and other channels that EMS be regulated the same way as private 
express delivery firms. 
 
Agriculture 
 
TOKYO 00000762  005.2 OF 005 
 
 
----------- 
 
¶19. (SBU) No agricultural legislation affecting US interests looms 
during the current Diet session, but the main opposition Democratic 
Party of Japan (DPJ), with an eye to the Upper House elections in 
July, plans to attack agricultural legislation passed during last 
year's ordinary session that may have an impact on Japan's growing 
income gap. Last session's legislation aims to consolidate farmland 
and increase competitiveness in the farming sector by offering 
cross-commodity payments to a limited number of farms and farming 
institutions that exceed given criteria.  The opposition party has 
indicated it would like to repeal the legislation and that it will 
submit ideas for new subsidies for all farms, regardless of size. 
Under the DPJ proposal, a direct subsidy would be paid to the farmer 
to make up the difference between the farmer's production costs and 
the market price for staple crops such as rice, wheat, etc.  The 
opposition parties hold only around 30 percent of the seats in the 
House of Representatives, however, so the current legislation is 
unlikely to be repealed. 
 
¶20. (SBU) In addition, the DPJ may also raise food safety in order 
to tap into ongoing public concern over beef and genetically 
modified commodities. The DPJ may raise, for example, the need to 
enhance traceability systems. On quarantine measures, they may 
discuss increasing the number of inspectors, which currently total 
around 300.