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RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #1701/01 1080506
ZNR UUUUU ZZH
R 180506Z APR 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 2758
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5424
RUEHFK/AMCONSUL FUKUOKA 0732
RUEHNAG/AMCONSUL NAGOYA 0040
RUEHNH/AMCONSUL NAHA 3181
RUEHOK/AMCONSUL OSAKA KOBE 4265
RUEHKSO/AMCONSUL SAPPORO 1651
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 06 TOKYO 001701 
 
SIPDIS 
 
PARIS PLEASE PASS TO USOECD 
STATE PLEASE PASS TO USTR 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ETRD ECON EAGR ZO JA
 
SUBJECT: JAPAN ECONOMIC SCOPE - APRIL 13, 2007 
 
¶1.  (U) This cable contains the Japan Economic Scope for April 13, 
¶2007. 
 
¶2.  (U) Table of Contents 
------------------------- 
 
¶3.  GOJ for Joint Study for a U.S.-Japan Free Trade Agreement? 
¶4.  U.S. Chamber Chief Cites FTA and Autos as Key Issues 
¶5.  Has Reg Reform "Peaked Out?" 
¶6.  Government Advisor Speaks on Broad Economic Reforms 
¶7.  Amakudari Reform Proposals Watered Down 
¶8.  Investment Working Group DVC 
¶9.  Japanese Labor Productivity Lagging 
¶10. Japan's Cyber University Becomes A (Virtual) Reality 
¶11. Toyota Officials' Concerns and on U.S. Production Plants 
¶12. Lessons for Reg Reform?  EPA Auto Visit Exemplar of 
Transparency 
¶13. Honda Saitama Production Plant Visit 
¶14. Meeting with MLIT Policy Official on Asia Gateway Initiative 
¶15. Asia Gateway Panel Member on the Asia Gateway Initiative 
¶16. Sendai Airport Hub for China Flights 
¶17. Japan Foreign Steamship Association and Japanese Port 
Operations 
¶18. Summary of Selected GOJ Documents Released for Public Comment 
through April 6, 2007 
 
¶3.  (SBU) GOJ for Joint Study for a U.S.-Japan Free Trade 
Agreement? 
--------------------------------------------- --------- 
 
As we have reported previously, a subcommittee of the Council on 
Economic and Fiscal Policy (CEFP) studying Japan's strategies for 
bilateral / regional trade agreements and agricultural reform will 
issue an interim report on its discussions later this April. 
 
On April 11, the subcommittee posted on the CEFP's website a 
reference document reflecting on-going discussions among its members 
that will be used as the basis for the interim report.  On free 
trade agreements, the discussion covered a range of topics, 
including the now traditional argument that Japan should first sign 
a pact with the Association of Southeast Asian Nations (ASEAN). 
 
It shows that Japan should set out to pursue regional trade 
agreements, naming as examples ASEAN plus 3, ASEAN plus 6 and 
APEC-wide FTAs, while noting Japan will host APEC in 2010. 
 
In addition it recommends a joint study on a U.S. - Japan Free Trade 
Agreement that would cover not only trade, but also investment and 
services.  Several Japanese business leaders have argued that Japan 
should pursue an FTA with the United States, including the heads of 
Keidanren, the Japan Chamber of Commerce and Industry, and the Japan 
Association of Corporate Executives (Keizai Doyukai). 
 
However, according to a subcommittee member, the Ministry of Foreign 
Affairs and the Ministry of Agriculture are still cautious about a 
possible FTA with the United States. 
 
On agriculture, the document suggested creating a five year road map 
on enhancing productivity. 
 
The subcommittee leader, Professor Urata of Waseda University, 
revealed to the press his views that "gaiatsu, i.e., foreign 
pressure" would be needed to leverage agriculture reform.  He 
mentioned politicians who prefer the current situation are the 
reason why agricultural reform does not proceed, and requested Prime 
Minister Abe to show the same attitude toward agricultural reform as 
former Prime Minister Koizumi showed for Postal Privatization. 
 
According to the Cabinet Office, the final version of the report 
should come out by June and be incorporated into the CEFP's "Basic 
Policies 2007", after being taken up and discussed by the full CEFP. 
 Our contact also revealed that whether the joint study on 
U.S.-Japan FTA will be reflected in the "Basic Policy 2007" is still 
subject to discussion within the CEFP. 
 
¶4.  (SBU) U.S. Chamber Chief Cites FTA and Autos as Key Issues 
--------------------------------------------- --------- 
 
The U.S. Chamber of Commerce currently does not support a U.S. - 
Japan FTA, its president Tom Donahue told the Ambassador April 2. 
 
TOKYO 00001701  002 OF 006 
 
 
Instead, the Chamber wants both governments to focus on completing 
the Doha Round negotiations first.  Donahue said he now gives Doha a 
60 percent chance of success, up from just 20 percent in January. 
 
The Ambassador expressed hope that Donahue's optimism would be 
fulfilled, but cautioned against linking Doha to a possible 
bilateral FTA negotiation.  This argument is being used in Japan by 
those seeking a narrow agreement containing items of interest to 
Japanese industry while dodging a comprehensive undertaking 
including agriculture. 
 
On autos, Donahue said U.S. labor and the big three manufacturers 
believe they can apply their China currency argument to Japan and 
has launched a campaign in Congress along these lines.  The evidence 
of yen/dollar manipulation is nil, however, and Donahue quoted the 
Tokyo GM representative as denying that the yen is to blame for the 
U.S. industry's difficulties. 
 
¶5.  (SBU) Has Reg Reform "Peaked Out?" 
-------------------------------------- 
 
PM Abe's lack of interest in economic policy and a mistaken notion 
that regulatory reform has led to income disparity has dampened 
enthusiasm for continued reform efforts said a member of the Council 
for the Promotion of Regulatory Reform (CPRR) during an April 11 
meeting with EMIN. 
 
As a result, stodgy bureaucrats are regaining confidence and putting 
up more resistance to change than in the Koizumi era.  CPRR's only 
allies are the U.S. Embassy and the Japanese Business Federation 
(Keidanren), and indeed CPRR members are viewed as USG "spies," the 
member joked.  It is unlikely that the situation will improve after 
the July elections as the LDP probably will not win big and the DPJ 
and Komeito parties are not pro-reform. 
 
The Council member stated he is not overly optimistic that the 
Japan-Australia FTA negotiations will have a large impact on the 
agricultural sector as the farm lobby is exceedingly strong. 
Without a change in the tax code that would levy a tax on 
uncultivated land, there is no incentive for farmers to sell or rent 
their small plots and therefore no way to increase efficiency 
through consolidation.  Agricultural reform may be achieved in 
fifteen or twenty years, however, as elderly farmers become unable 
to work the fields and slowly leave the scene, he predicted. 
 
Perhaps a more fruitful area of U.S. focus is the medical services 
sector, he suggested.  The Japanese public is dissatisfied with the 
level of medical care available and also with the long wait times to 
get an appointment.  The excitement over the recent opening of the 
Johns Hopkins Medical Clinic could be evidence of the public's 
willingness to have high-quality, U.S. medical service providers in 
Japan.  The Council member added, however, that the medical lobby is 
also quite strong. 
 
For more information, please contact Sally Behrhorst. 
 
¶6.  (SBU) Government Advisor Speaks on Broad Economic Reforms 
--------------------------------------------- -------- 
 
Naoki Tanaka, Chairman of the Postal Services Privatization 
Committee, advisor to PM Abe, and head of the newly established 
Center for International Public Policy Studies, gave a policy speech 
April 11 on broad reforms necessary for the Japanese economy. 
 
Given the challenges of a rapidly aging society, a declining number 
of workers, international financial imbalances, and global warming, 
Tanaka identified fiscal consolidation, increased productivity, 
health care reform, governmental decentralization, and pension fund 
reform as key goals for the Japanese government.  He singled out 
increased openness to trade and foreign direct investment as tactics 
through which to foster development in his target areas. 
 
Asked about postal privatization after his presentation, Tanaka 
stated that some Diet members were saying Japan should retreat from 
that reform, but that "we will not permit that."  He then connected 
the re-routing of funds from postal savings away from government 
bonds (and, thereby, a source of cheap funds for municipalities) as 
a step that would increase Japanese receptivity to foreign direct 
investment over the next seven to eight years. 
 
 
TOKYO 00001701  003 OF 006 
 
 
¶7.  (SBU) Amakudari Reform Proposals Watered Down 
--------------------------------------------- ---- 
 
Reform proposals for the amakudari ("descent from heaven") 
retirement system, whereby senior bureaucrats are placed in plum 
private sector jobs, continue to be watered down as they move 
forward.   The government and ruling coalition came to internal 
agreement April 12 to establish a government-wide job bank for 
bureaucrats that was initially proposed as an effort to remove line 
ministries from the outplacement of its own bureaucrats.  Official 
acceptance of the policy is expected April 13. 
 
The agreed plan, according to newspaper reports, will create the job 
bank and prohibit ministries from making direct outplacements, but 
will allow those line ministries' human resources departments to 
cooperate with the central job bank in the outplacement process. 
The agreement delays full implementation until 2011, weakens the 
role of an outside advisory body, and proposes the repeal of 
regulations that currently prohibit (for two years) officials from 
taking employment with certain companies their ministries regulate. 
 
Noting that the highest and most powerful bureaucrats face the 
biggest potential losses from meaningful reform, an embassy contact 
doubted the long-term significance of the proposed job bank.  He 
speculated that, while reform of the amakudari system is popular, 
making the reform effective would require a political effort on the 
scale of former PM Koizumi's push to realize postal privatization. 
 
¶8.  (SBU) Investment Working Group DVC 
-------------------------------------- 
 
The second session of the bilateral Investment Working Group for the 
current fiscal year took place April 13 via digital videoconference. 
The Working Group reviewed progress on all agenda items in advance 
of the annual report to leaders in June. 
 
The two sides expressed satisfaction with the results of the 
February information exchange on BIT's and FTA's and agreed both 
countries took similar approaches to negotiating investment 
chapters.  We agreed to begin reaching out to the private sector for 
its views on the investment climate, possibly as early as May. 
 
On educational services, the Ministry of Education, Culture, Sports, 
Science and Technology announced, as of April 1, it had expanded 
nationwide, existing regulations limited to special zones for 
structural reform that allow universities to lease, not own, their 
physical facilities.  This should facilitate market entry of new 
foreign universities by reducing start-up costs. 
 
On merger and acquisitions, the Ministry of Economy, Trade and 
Industry (METI) announced the promulgation of final rules on tax 
deferral for triangular merges on April 13. (The rules closely 
follow the draft that the Embassy shared with Washington last 
month.)  Both sides agreed the market would be the final judge of 
whether triangular mergers become an effective tool for increasing 
investment flows. 
METI resisted U.S. calls to conduct a formal study of the impact of 
the tax deferral rules sometime before the end of 2008 but said it 
would constantly "monitor" the merger and acquisitions situation 
going forward and emphasized there had been no change to the GOJ's 
policy of actively encouraging inward FDI. 
 
¶9.  (SBU) Japanese Labor Productivity Lagging 
--------------------------------------------- 
 
Japan's labor productivity is just 71 percent that of the United 
States, according to a recently released Cabinet Office report.  It 
is also lower than Europe's (87 percent), Britain's (83 percent), 
and the OECD average (75 percent).  Moreover, the gap in 
productivity between the United States and Japan, which had narrowed 
in the 1970s and 1980s, held steady in the late 1990s, and has 
slightly widened since. 
 
The report dings Japan's service sector for the country's lagging 
performance, noting that productivity in the transport sector, which 
was about half of the United States' in 1980, fell to less than 35 
percent by 2005.  Relative retail sector productivity is also low 
and declining, at less than 60 percent. 
 
The Council on Economic and Fiscal Policy is expected to take up the 
 
TOKYO 00001701  004 OF 006 
 
 
topics of productivity and deregulation as it charts a new national 
economic strategy.  Likely in preparation for that discussion, the 
Cabinet Office report highlights how productivity increases in the 
distribution, financial services, transport, and business services 
sectors have driven U.S. growth since 2000. 
 
¶10. (U) Japan's Cyber University Becomes A (Virtual) Reality 
--------------------------------------------- ------- 
 
On April 1, Japan's first online university, Cyber University, held 
its inaugural ceremony in Fukuoka's Yahoo Dome, with students 
attending both in person and via computer. 
 
Operated by Japan Cyber Education Institute in Fukuoka, Cyber 
University was approved in November 2006 as part of the GOJ's 
deregulation program to revitalize economic and business 
activities. 
 
The university currently has two departments, information technology 
and world heritage, and offers non-traditional students the 
opportunity to earn a four year bachelor's degree online.  Among 
other options, students can "attend" classes by using a personal 
computer connected to a broadband communication network. 
 
A total of 516 students are already enrolled at the university and 
each department hopes to eventually have 600 students each. 
 
The tuition for a four-year online education is 2.7 million yen (USD 
23,000). 
 
Internet and telecom conglomerate Softbank Corp owns a 71 percent 
stake in the university, with the remainder held by Kyushu Electric 
Power Co. and RKB Mainichi Broadcasting Corp. 
 
¶11. (SBU) Toyota Officials' Concerns and on U.S. Production Plants 
--------------------------------------------- --------- 
 
We met with two executives from Toyota's Global External Affairs 
division to discuss general issues and Toyota's U.S. operations on 
April 9. 
 
The Toyota officials were concerned about possible U.S.-Japan auto 
frictions; the change in power in the Congress; the comfort women 
issue clouding the Abe-Bush summit; and the impact of the Korea - 
U.S. FTA agreement on Japanese automakers, particularly in regards 
to trucks.  They predicted that the KORUS FTA would give impetus to 
Japanese thinking about a U.S.-Japan FTA. 
 
We also discussed the pros and cons of putting an auto plant in 
Michigan, but they emphasized Toyota made decisions on locations 
based on production needs not politics.  For more information on the 
meeting please contact Josh Handler. 
 
¶12. (SBU) Lessons for Reg Reform?  EPA Auto Visit Exemplar of 
Transparency 
--------------------------------------------- --------- 
 
EPA Assistant Administrator for Enforcement and Compliance Assurance 
Granta Nakayama and EPA Director of Air Enforcement Division Adam 
Kushner came to Tokyo on April 9-11 for meetings with Ministry of 
Environment officials and the automobile industry to explain EPA's 
enforcement and compliance work. 
 
Under the rubric of an "ounce of prevention is worth a pound of 
cure," Nakayama invited Japanese automakers in meetings with the 
Japanese Automobile Manufactures Association and at an all day visit 
to Honda's Saitama production plant to have more contact with 
Nakayama's office so any questions with compliance could be 
addressed early on in their design and production process, thus 
heading off potential enforcement problems. 
 
Nakayama said that his office hears frequently from U.S. industries 
of all sorts including the U.S. automakers, but rarely from the 
Japanese automakers despite their significant presence in the United 
States. 
 
Nakayama and Kushner also met with the Japanese Automobile Importers 
Association to learn about enforcement and compliance issues in 
Japan. 
 
 
TOKYO 00001701  005 OF 006 
 
 
Initial suspicions on the part of JAMA and Honda gave way to relief 
and then appreciation for the high-level EPA delegation for making 
the trip and effort to reach out.  Both promised future cooperation 
and follow-up.  The EPA delegation was encouraged by the positive 
response.  EPA will be following up in Washington, DC, with the auto 
industry and tentatively plans to return to Japan in a year. 
 
Econoff who attended the meetings with the auto industry was struck 
by the contrast between the EPA approach to transparency and some of 
the GOJ ministries we deal with here regularly.  It would be a 
red-letter day if Ministry of Land, Infrastructure and Transport 
officials flew to the United States to ask U.S. airlines to have 
more of a dialogue about Japanese aviation policy. 
 
¶13. (SBU) Honda Saitama Production Plant Visit 
--------------------------------------------- - 
 
Econoff toured Honda's Saitama plant along with the EPA officials on 
April 11 and participated in an afternoon long meeting on compliance 
issues. 
 
Located about an hour north of Tokyo, Honda's Saitama plant, 
although only one football field by three in area, is the largest of 
three Honda car plants in Japan, producing some 540,000 vehicles a 
year, a substantial portion of Honda's 3,630,000 worldwide vehicle 
production. 
 
The plant operates two lines, one for CRV production for export to 
the United States, which produces 1,120 cars a day, and a second 
which produces 1,050 vehicles of several different models for the 
U.S. and Japanese markets.  Seventy-two percent of the production is 
for export.  Thirty-three percent of the vehicles are sedans, 41 
percent are SUVs and 26 percent are MPVs. 
 
The line operates at a fast clip and, from start to finish, it takes 
about three hours to produce a vehicle.  The vehicles only sit on 
the limited sized parking lot for a few hours before being whisked 
off by truck to Narashino Port in Chiba prefecture for shipment. 
 
The plant employs 6,856 associates of which 1,412 are temporary 
staff.  Plant managers say the plant's strong points are a highly 
efficient manufacturing process in a limited space and highly 
motivated workforce which utilizes good communications to achieve 
its high production targets. 
Notable are the energy efficiency improvements the plant has made 
since 1992 when Honda adopted a declaration on the environment which 
called for saving energy and reducing toxic emissions.  In the early 
1990s, 172 liters of crude oil equivalent were needed to produce a 
vehicle.  In 2006, it was 129 liters, a reduction of 25 percent. 
The Honda officials did not know if this energy saving was 
representative of Japanese industry as a whole, but they felt their 
plant was better than those of Toyota or Nissan. 
 
¶14. (SBU) Meeting with MLIT Policy Official on Asia Gateway 
Initiative 
--------------------------------------------- --------- 
 
We met with an official of the Ministry of Land, Infrastructure and 
Transport's (MLIT) Policy Division on March 30, who is the point of 
contact with the Cabinet for issues related to PM Abe's Asia Gateway 
Initiative at MLIT and will be coordinating MLIT's response to the 
Asia Gateway Panel's interim report. 
 
The official said MLIT is critical of the open skies proposals in 
the Asia Gateway Panel's interim report and those made by 
non-governmental members of the Council for Economic and Fiscal 
Policy's.  MLIT is wary of the term open skies as it is associated 
with U.S. policy initiatives to open the aviation market in Japan, 
while what is under discussion is not liberalization of air traffic 
with Japan, but deregulation of regional airports.  For more 
information on the meeting please contact Josh Handler. 
 
¶15. (SBU) Asia Gateway Panel Member on the Asia Gateway Initiative 
--------------------------------------------- --------- 
 
We met with a member of PM Abe's Asia Gateway Council on March 29 to 
discuss the Gateway Initiative.  The panel member is a specialist on 
relations with Asia and had had conversations with former PM 
Koizumi, PM Abe and former Chief Cabinet Secretary Yasuo Fukuda 
about Japan-Asia relations, before being selected to serve on the 
 
TOKYO 00001701  006 OF 006 
 
 
council. 
 
The panel member discussed Abe's attitudes towards Asia, the 
political future of the Asia Gateway initiative, Open Skies, and the 
debate over Haneda Airport's internationalization.  He said that, 
although the Asia Gateway and Opens Skies initiative is usually 
talked about in the context of Asia only, he is hopeful that the 
Asia Gateway initiative will expand to the rest of the world.  For 
more information on the meeting please contact Josh Handler. 
 
¶16. (U) Sendai Airport Hub for China Flights 
-------------------------------------------- 
 
On March 18, rail service opened between Sendai International 
Airport and Japan Railway's Sendai Station.  Previously, travelers 
from downtown Sendai could only reach the airport by a 40-minute bus 
or car ride. Now, they can arrive in less than 20 minutes for a 
reduced fare using the government-funded Sendai Airport Access Line. 
 In addition, the rail line provides a convenient means of transfer 
for Shinkansen passengers from outside of Sendai who use the 
region's largest airport. 
 
The new rail service is part of a larger strategy by Miyagi 
Prefecture to encourage increased use of Sendai Airport as a hub for 
travel to northern Japan's Tohoku region. Other plans include 
expanding the number of international direct flights between Sendai 
and China as well as developing the area surrounding the airport 
into a new business and entertainment district. 
 
In February, the Diamond City Airy, Tohoku's largest shopping mall, 
opened just two rail stations away from Sendai airport. 
 
¶17. (SBU) Japan Foreign Steamship Association and Japanese Port 
Operations 
--------------------------------------------- --------- 
 
We met with representatives of the Japan Foreign Steamship 
Association (JFSA) on March 20 to discuss port operations in Japan 
and their views on recent changes in Japanese law governing port 
operations. The JFSA has 28 member companies and is a voluntary 
nonprofit organization that seeks to help its members do business in 
Japan. 
 
The JFSA representatives described their concerns with Japanese port 
operations - primarily the lack of competition for stevedoring 
operations for international shippers and high costs.  They 
acknowledged they are reluctant to press their concerns for fear of 
jeopardizing business.  They supported the EU and U.S. regulatory 
reform positions, but were unsure of what additional steps foreign 
governments could take.  For more information on the meeting please 
contact Josh Handler.