VZCZCXRO6149
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHPB
DE RUEHKO #2715/01 1660751
ZNY CCCCC ZZH
R 150751Z JUN 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 4539
INFO RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHRL/AMEMBASSY BERLIN 1273
RUEHFR/AMEMBASSY PARIS 5543
RUEHPF/AMEMBASSY PHNOM PENH 0664
RUEHGO/AMEMBASSY RANGOON 2228
RUEHVN/AMEMBASSY VIENTIANE 1621
RUEATRS/TREASURY DEPT WASHDC
RUEHGV/USMISSION GENEVA 3096
RUEHBS/USEU BRUSSELS

C O N F I D E N T I A L SECTION 01 OF 05 TOKYO 002715 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS USTR FOR AUSTR CUTLER 
USTR ALSO FOR BEEMAN/MEYERS, NEUFFER 
PARIS FOR USOECD 
TREASURY FOR OFFICE OF EAST ASIAN NATIONS 
COMMERCE FOR OFFICE OF JAPAN - NMELCHER 
BERLIN FOR EMIN CEKUTA 
 
E.O. 12958: DECL: 06/15/2027 
TAGS: ECON ECIN ETRD PREL APECO JA
SUBJECT: JAPAN RECONSIDERS U.S. ROLE IN REGIONAL 
INTEGRATION; BILATERAL FTA 
 
REF: TOKYO 2481 
 
Classified By: Ambassador J. Thomas Schieffer. Reason: 1.4 (b,d). 
 
¶1.  (C)  Summary:  In contrast to a year ago, Japanese 
officials see the United States as a much more active and 
influential player in the discussion on regional economic 
integration.  A senior official of the Ministry of Foreign 
Affairs (MOFA) indicated that Japan's participation in 
various regional integration schemes is largely a "facade," 
with the main focus really on more substantive bilateral 
economic agreements.  Japanese support for ASEAN-driven 
regional proposals aims at buying time during which Japan can 
avoid having to choose among regional architectures dominated 
by other players.  The Ministry of Economy, Trade, and 
Industry (METI) takes a more positive view of economic 
integration, particularly the once-taboo idea of free trade 
agreements with the United States and other developed 
countries, but is balking at the idea of a Japan-China FTA. 
Private experts confirm that the economic impact of Japan's 
current set of agreements is limited and argue that it should 
start negotiations with China on an FTA soon while its 
negotiating leverage remains relatively strong.  End summary. 
 
--------------------------------------------- -------- 
The Context: FTAAP and KORUS FTA Put U.S. Back in the Game 
--------------------------------------------- -------- 
 
¶2.  (C)  As part of the regular consultations of the three 
Northeast Asia Chiefs of Mission, the economic 
minister-counselors of Embassies Tokyo, Seoul, and Beijing 
met June 7 in Tokyo with a series of interlocutors from MOFA, 
METI, the private sector, and academia on the topic of 
regional economic integration.  This year's consultations 
took place in a substantially changed policy environment.  In 
April 2006, the Japanese government, anxious to offer an 
alternative to the Chinese-sponsored study on a regional 
economic agreement centered on ASEAN Plus 3, endorsed the 
concept of the "Comprehensive Economic Partnership with East 
Asia" (CEPEA) formulated at METI under the direction of then 
METI Minister Toshihiro Nikai, which would include the 10 
countries of the ASEAN Plus 3 group along with Australia, New 
Zealand, and India (the so-called "ASEAN Plus 6").  At that 
point in time, the Japanese had determined that U.S interest 
and involvement in East Asian economic integration was 
waning. 
 
¶3.  (C)  Times have changed.  The U.S. proposal that APEC 
take on the long-term goal of establishing a Free Trade Area 
of the Asia-Pacific and, most importantly, the successful 
negotiation of a draft KORUS FTA has forced the Japanese to 
recognize the United States as once again an active player in 
process of economic integration in East Asia.  In particular, 
the Japanese government, under pressure from Japanese 
business groups worried by strengthened Korean competition in 
the U.S. arising from the KORUS FTA, has moved incrementally 
toward the previously taboo idea of launching a formal study 
of a U.S.-Japan free trade agreement.  In recent private 
meetings with a number of METI and MOFA officials, including 
those cited in this cable, a bilateral FTA is now typically 
discussed as an inevitability, not a possibility, while 
hinging in the short term on the outcome of the July Upper 
House elections. 
 
-------------------------------------------- 
MOFA: Regional Initiatives Simply a "Facade" 
-------------------------------------------- 
 
¶4.  (C)  In his June 7 meeting with the three 
minister-counselors, MOFA Economic Affairs Deputy Director 
General Sumio Kusaka noted that Japan had traditionally seen 
its relations with the United States and the other rich OECD 
countries and its ties to the less developed states in Asia 
as two separate "pillars" of its external economic policy. 
Although this concept remained the basis of Japanese policy, 
Kusaka said, this distinction, in practice, had become 
 
TOKYO 00002715  002 OF 005 
 
 
blurred over time as Japan's "indirect" economic relationship 
with the developed world through the fragmented regional 
production chains of Japanese firms had become increasingly 
important.  In addition, efforts toward greater cooperation 
between Japan and its neighbors had been "eroded" by the poor 
political relationship particularly with China and South 
Korea during the tenure of former Prime Minister Koizumi. 
The United States and Japan shared the goal of a more stable, 
prosperous, and democratic East Asia, Kusaka asserted, but 
also hinted that U.S. and Japanese approaches to the region 
might necessarily differ. 
 
¶5.  (C)  In particular, Japan's thinking with respect to 
regional economic integration, according to Kusaka, was to 
let ASEAN take the lead.  Japan, he stressed, could not 
ignore movement toward a regional economic agreement led by 
China, but the U.S. proposal for an FTAAP was simply too 
distant a prospect to address Japan's near-term concerns. 
Consequently, Japan sought to strengthen links with ASEAN as 
a way of counterbalancing China's growing influence in the 
region.  That said, Kusaka added, it would be a mistake to 
think that the Japanese government was inextricably wedded to 
the CEPEA ("ASEAN Plus 6") proposal.  "Maybe the ministry 
across the road (i.e. METI) said that," Kusaka observed, but 
such an arrangement, he noted, could be even more difficult 
to realize than the FTAAP or any of the other proposals 
currently in circulation. 
 
¶6.  (C)  According to Kusaka, the appeal of the ASEAN Plus 3 
or ASEAN Plus 6 proposals lies in their possible contribution 
toward realizing the political goal of an eventual "East 
Asian Community."  In terms of actual economic benefit to 
Japan, however, they would likely yield little, he 
acknowledged.  Even the Japan-ASEAN economic agreement 
currently under negotiation, which Japan hoped to conclude by 
December, would have no value added to trade liberalization, 
he said.  In fact, these regional efforts, Kusaka said, were 
really only a "facade."  Japan's bilateral "economic 
partnership agreements" were all much deeper and more 
economically beneficial to Japanese interests, Kusaka 
stressed. 
 
¶7.  (C)  Kusaka indicated that what Japan gained through its 
support for ASEAN-centered regional initiatives, however, was 
time -- time during which it will not be forced to choose a 
model of regional integration determined by others.  At 
present, he noted, the Japanese government itself lacked a 
clear consensus of what the next steps toward regional 
integration should be.  He cited as an example the Ministry 
of Finance (MOF) which had been enraged by the METI-driven 
CEPEA proposal because it undermined MOF's support for the 
Chiang Mai and Asian Bond Market Initiatives, both of which 
centered on the ASEAN Plus Three countries. 
 
------------------------------------------ 
U.S.-Japan Integration Inevitably but Slow 
------------------------------------------ 
 
¶8.  (C)  Second North American Affairs Division Director 
Koichi Mizushima reinforced Kusaka's points by emphasizing 
that Japan did not want to be bound to any particular model 
of economic integration.  Mizushima recounted a meeting he 
had had with representatives of the Japan Business Federation 
(Keidanren) who had asked whether the Japanese government 
believed a regional economic framework excluding the United 
States was possible.  Mizushima asserted that Japan's 
participation in the discussions of regional integration 
proposals that exclude the United States were primarily a way 
to keep good relations with its neighbors by expressing 
support for the Asian community concept.  The economic basis 
for an effective Asia-only agreement does not exist. 
 
¶9.  (C)  At the same time, however, Mizushima believed 
progress toward greater integration between Japan and the 
United States would inevitably be slow because of the need to 
address complex structural "behind the border" issues rather 
 
TOKYO 00002715  003 OF 005 
 
 
than the simpler task of just cutting tariffs.  Although 
acknowledging the pressure from business to shore up the 
relationship with the United States in light of the KORUS 
agreement, Mizushima said that the "sandwich argument" of 
being caught between two larger economies, which had led to 
support in Korea for the FTA with the United States, would 
obviously not work in Japan.  That said, Kusaka noted the 
"positive" discussion of a bilateral U.S.- Japan FTA during 
the Prime Minister's April 2007 meeting with the President. 
Separately, as reported reftel, VFM Yachi repeatedly has 
suggested the two countries consider launching a study of a 
bilateral FTA. 
 
--------------------------------------------- --- 
METI: Integration Should Include Large Economies 
--------------------------------------------- --- 
 
¶10.  (C)  The KORUS FTA has freed up discussion of the 
possibility of Japan beginning talks with other large 
developed economies, including the United States, according 
to Trade Policy Director General Masakazu Toyoda.  Also 
meeting with the economic minister-counselors on June 7, 
Toyoda said METI appreciated the "stimulation" provided by 
KORUS to the debate in Japan on a possible U.S.-Japan FTA, 
but he acknowledged that other agencies, notably the Ministry 
of Agriculture, Forestry, and Fisheries (MAFF), did not share 
METI's perspective.  The reason that most of Japan's existing 
"economic partnership agreements" have been concluded with 
developing Asian countries is because, even though Japan 
could expect relatively little from these countries in terms 
of concessions on services, investment, and intellectual 
property protection, they also did not make too many demands 
on Japan to liberalize agricultural trade.  From the METI 
perspective, however, Japan now needed to reach out to more 
developed economies both to ensure its access into major 
markets and, especially in the case of the Japan-Australia 
agreement under negotiation, to shore up Japan's supplies of 
essential commodities like coal and iron ore. 
 
¶11.  (C)  A broad regional agreement like the METI-sponsored 
CEPEA in combination with an eventual bilateral FTA with the 
U.S. would contribute to the eventual realization of the 
FTAAP proposed by the United States, Toyoda argued.  In 
contrast, an ASEAN Plus 3-based arrangement dominated by 
China and centered on tariff reductions only would probably 
not generate the degree of liberalization needed to allow for 
eventual U.S. participation.  The addition of Australia, New 
Zealand, and India -- all three of which are already engaged 
in bilateral negotiations with ASEAN -- will strengthen 
movement toward more a more meaningful agreement.  Even 
India, although difficult on trade, would bring to the 
discussions a relatively strong regime with respect to 
intellectual property protection and services, Toyoda noted, 
and effectively raise the level of ambition of the ASEAN Plus 
6 undertaking vis-a-vis the ASEAN Plus 3 version. 
 
¶12.  (C)  Within Northeast Asia, however, although the 
Chinese, Japanese, and Korean leaders had endorsed both the 
launching of negotiations on a three-way investment agreement 
and a study on a possible free trade agreement during their 
meeting in January, Toyoda indicated that greater integration 
among the three major economies of the region remains 
problematic.  China, he said, was reluctant to accept the 
terms of the "almost perfect" Japan-Korea investment 
agreement that would form the basis of the three-way pact. 
In addition, the Japanese themselves were unenthusiastic 
about the idea of a free trade agreement with China. 
According to Toyoda, not only was MAFF worried about the 
prospect of increased Chinese agricultural imports, but METI 
itself had concerns about the extent to which hidden 
subsidies might give Chinese manufactured products an 
advantage in the Japanese market.  As for the stalled 
Japan-Korea bilateral free trade agreement negotiations, 
Toyoda voiced the opinion that, while most observers had 
focused on Japanese unwillingness to meet the Koreans' demand 
that Japan liberalize 90 percent of its agricultural trade, 
 
TOKYO 00002715  004 OF 005 
 
 
the Koreans, in the METI view, harbored concerns over 
competition from Japanese manufacturers as well that had led 
to the impasse in the talks. 
 
¶13.  (C)  As for the United States, Toyoda asked that the USG 
continue to advocate for the Free Trade Area of the 
Asia-Pacific while at the same time pursuing its bilateral 
negotiations with other Asian countries such as Malaysia.  He 
hoped for quick congressional approval of KORUS as a boost 
for trade liberalizers in Japan.  Toyoda also suggested the 
United States should consider arranging for private experts 
to study the feasibility of a U.S.-Japan free trade agreement. 
 
--------------------------------------------- ----- 
Private Analysts: Japan Needs Agreement with China 
--------------------------------------------- ----- 
 
¶14.  (SBU)  According to Keio University Professor Fukunari 
Kimura, an expert on regional integration, the reason for the 
difficulty in achieving greater integration among the three 
Northeast Asian economies lies mostly with Japan, which is 
hesitant to negotiate an economic agreement with China.  He 
cited three types of Japanese interests that would resist 
free trade agreement negotiations with China:  farmers who 
hope to maintain their sheltered markets, manufacturers that 
want to gain greater investment protections from China before 
liberalizing trade, and individuals worried about adding to 
China's growing geo-strategic influence.  As a result, even 
the three-way investment agreement will take 2-3 years to 
negotiate, Kimura estimated.  Nevertheless, Nomura Securities 
economist C.H. Kwan noted that several studies had shown that 
the economic benefits of a China-Japan free trade agreement 
outweighed those of any other possible arrangement because of 
the large size of the two economies, their complementarity, 
and the high tariffs maintained by China on a number of 
goods.  Both Kimura and Kwan believed that the sooner Japan 
began negotiations on an free trade agreement with China the 
better as Japanese leverage would decline as China's rapid 
economic growth continued. 
 
¶15.  (SBU)  As for Japan's other "economic partnership 
agreements," Kimura indicated that his research had shown 
them to be of little significance.  Because Japan had chosen 
the trade volume rather than tariff line modality, the 
agreements generally covered less than 90 percent of tariff 
lines.  Even the agreement with Australia currently under 
negotiation will have a relatively small economic impact.  In 
Kimura's view, agreements that improve the investment climate 
in the region hold more potential for stimulating economic 
growth in the region than measures aimed at liberalizing 
trade in goods. 
 
--------------------------------------------- - 
Comment:  Now That We Have Their Attention.... 
--------------------------------------------- - 
 
¶16.  (C)  Although China's growing regional influence remains 
foremost in the minds of our Japanese interlocutors, it is 
clear that events over the past year have reaffirmed to them 
U.S. determination to have a role in whatever regional 
economic architecture emerges in East Asia.  For their part, 
however, the Japanese have yet to achieve a consensus among 
themselves on what the architecture should look like and want 
to keep their options open.  Although the Japanese will 
continue to make positive noises regarding the Asians-only 
models for regional architecture to show solidarity with 
their neighbors, the KORUS agreement in particular has raised 
the question of whether an agreement, either regional or 
bilateral, that includes the United States is not only 
possible but perhaps even necessary for Japan. 
 
¶17.  (C)  In recent private discussions with MOFA and METI 
officials, including some of those cited above, the ease with 
which a possible FTA with the U.S. is discussed has become 
astounding.  A year ago the topic was taboo; even six months 
ago the most favorably inclined raised the notion only with 
 
TOKYO 00002715  005 OF 005 
 
 
great caution.  Now it is casually bandied about in private 
conversation as an inevitability.  Publicly, however, the 
topic is still handled with great care due to political 
sensitivities especially in the agricultural community.  If 
the Upper House elections reaffirm an Abe administration, we 
expect the GOJ will approach us on an FTA, perhaps as VFM 
Yachi did to propose a joint study. 
SCHIEFFER