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RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #3798/01 2290455
ZNR UUUUU ZZH
R 170455Z AUG 07
FM AMEMBASSY TOKYO
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RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5683
RUEHFK/AMCONSUL FUKUOKA 2626
RUEHNAG/AMCONSUL NAGOYA 1650
RUEHNH/AMCONSUL NAHA 5050
RUEHOK/AMCONSUL OSAKA KOBE 6241
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 06 TOKYO 003798 
 
SIPDIS 
 
PARIS PLEASE PASS TO USOECD 
STATE PLEASE PASS TO USTR 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope--August 16, 2007 
 
¶1. (U) This cable contains the Japan Economic Scope from August 
16, 2007. 
 
2.(SBU) Table of Contents 
 
¶3. Tokyo Markets Respond to Global Turmoil 
¶4.  Limited Subprime Impact on Japanese Financial Institutions 
¶5.  Carry-Trade Unwind: More Bark than Bite (U) 
¶6.  Japan: Second Quarter Real GDP Grew Weaker-Than-Expected 0.5% 
¶7.  Japan's Cabinet Approves Restrictive Budget Request 
Guidelines for FY08 (U) 
¶8.  Sharp Makes Its Presence Felt in Osaka (SBU) 
¶9.  Corning and Sharp to Be Neighbors in Sakai (SBU) 
¶10. Diet Reviews Fundamental Space Law (U) 
¶11. Japan boasts Globe's Best Public Transport,8 Million People 
Ride Tokyo Metro Daily (U) 
¶12. MLIT Takes Steps Toward Sky Highway (U) 
¶13. End to Cost-Sharing Regime for NTT Fixed-Line Service (U) 
¶14. Telecommunications Accounting System Report--Public Comment 
Announcement 
¶15. Intellectual Property in Japan (U) 
¶16. U.S.-Japan Cyber-Security Bilateral Talks, 28-29 August (U) 
¶17. Fighting to be NFL's first Japanese player, Kinoshita says 
It's Tough (U) 
 
------------------------- 
FINANCE AND FISCAL POLICY 
------------------------- 
 
¶3.  (U) Tokyo Markets Respond to Global Turmoil 
--------------------------------------------- -- 
 
Tokyo's equity and foreign exchange markets reacted sharply to 
the subprime-generated turmoil in U.S. and European markets this 
week. 
 
The Nikkei 225 stock market index fell nearly six percent in the 
week ending August 16, and is down more than 11.5 percent since 
its recent high on July 9.  The benchmark 10-year Japanese 
government bond yield fell to 1.66 percent on August 16 from 1.78 
percent a week earlier, as expectations for a rate hike by the 
Bank of Japan next week dissipated. 
 
The yen strengthened against most currencies, as carry trades 
unwound, strengthening 2.6 percent against the U.S. dollar and 
5.1 percent against the Euro over the week. 
 
Nonetheless, short-term credit markets in Japan remained calm, 
largely unaffected by the liquidity concerns affecting U.S. and 
European short-term credit markets.  (FINATT: Maureen Grewe) 
 
¶4.  (U) Limited Subprime Impact on Japanese Financial 
Institutions 
--------------------------------------------- -- 
 
All indications point to quite limited exposure of Japanese 
financial institutions to U.S. subprime loans and securitized 
products.  Banks are likely the most exposed and a recent 
investment bank report analyzes that a negative impact on the 
creditworthiness of major Japanese banks is not expected. 
Without the benefit of any hard data, the limited exposure of 
Japanese financial institutions points to a low likelihood of a 
significant exposure by Japanese retail investors.  (FINATT: 
Maureen Grewe) 
 
¶5.  (U) Carry-Trade Unwind: More Bark than Bite 
--------------------------------------------- -- 
 
Fears that the unwinding of the yen carry-trade would be 
calamitous for financial markets appear to be excessive, 
according to Tokyo-based financial sector analysts. 
Reports that net non-commercial short-yen positions on the 
Chicago Mercantile Exchange have fallen by 80 percent since June 
as part of a broader unwinding of short-yen positions and 
accompanying moderation in the yen's value appear to show that 
the absolute size of those positions is not enough to have a 
significant impact on the exchange rate when they are closed. 
One explanation cited is the probability that capital outflows 
from Japan is deeper than the array of speculative futures 
positions, and as a result are not overly responsive to those 
positions' unwinding. 
 
 
TOKYO 00003798  002 OF 006 
 
 
The yen carry trade phenomena had prompted fears that a 
significant reversal in speculative short-yen positions could 
prompt a sharp change in exchanges rates, causing financial 
system distress, as in 1998 when the yen rose from Y137/US$ in 
late September to Y115 by mid-October; in this instance the 
exchange rate has risen by around five percent, which is not a 
significant change in macroeconomic terms.  (FINATT: Mateo Ayala) 
 
¶6.  (U) Japan: Second Quarter Real GDP Grew Weaker-Than-Expected 
0.5 percent 
--------------------------------------------- -- 
 
Japan's real GDP grew at a 0.5 percent annualized rate in Q2 2007, 
after a sizable increase in each of the previous two quarters, 
according to the preliminary data announced by the Cabinet Office 
on August 13. 
 
GDP growth in Q2 was weaker than private analysts' consensus 
forecast of a 0.9 percent increase.  Overall real GDP growth for 
Q2 reflected a 0.9 percentage-point (pp) contribution from final 
domestic demand, supported by firm business investment and 
personal consumption, and another 0.2pp contribution from net 
exports.  On the other hand, the contribution to overall growth 
from inventories was --0.5pp in the quarter.  The overall GDP 
deflator dropped 0.3 percent y/y in Q2, the same rate of decline 
as in the previous quarter. 
 
For the first half of 2007 as a whole, real GDP grew at a 1.8 
percent annual rate, in line with Japan's estimated potential 
growth rate of about 1.5-2.0 percent. (FINATT:  Shuya Sakurai) 
 
¶7.  (U) Japan's Cabinet Approves Restrictive Budget Request 
Guidelines for FY08 
--------------------------------------------- -- 
 
On August 10, the Abe Cabinet completed the first major phase of 
the FY08 budget formulation process by setting restrictive 
guidelines for budget requests from individual ministries and 
agencies. 
 
The formulation of FY08 budget request guidelines is the first 
major post-election test on the direction of fiscal policy for 
the Abe administration.  Under the guidelines, "ministerial 
budget" spending is estimated to total approximately Y47.3 
trillion, up about Y0.3 trillion, or 0.7 percent, compared to the 
present FY07 budget. 
 
Ministerial budget spending has been almost unchanged at roughly 
the Y47 trillion level since FY02.  If social security spending 
is excluded, the remaining ministerial budget spending has fallen 
by Y4.0 trillion, or 13.2 percent, from FY02.  Social security 
spending has increased Y3.7 trillion, or 21.6 percent, from FY02, 
due largely to demographic factors. 
 
The guidelines demonstrate the Abe Administration's continuing 
commitment to fiscal consolidation and its intention to place top 
priority on curbing discretionary government spending to achieve 
that consolidation.  (FINATT:  Shuya Sakurai) 
 
------------------ 
AROUND THE REGIONS 
------------------ 
 
¶8.  (SBU) Sharp Makes Its Presence Felt in Osaka 
--------------------------------------------- -- 
 
Sharp's decision to build a new plant in Sakai City is already 
producing palpable benefits in Osaka Prefecture.  Since Sharp's 
announcement in May, Osaka Prefecture government officials have 
received numerous inquiries about government-owned properties in 
Sakai.  These same properties attracted almost no interest prior 
to May.  Government officials have decided to sell the sites 
through a bidding process. 
 
The new LCD production facility in Sakai will be almost four 
times as big as Sharp's LCD plant in Kameyama city of Mie 
Prefecture and many local businesses in Sakai and the Kansai are 
vying to offer their services to Sharp. 
 
To maximize potential benefits, some companies are studying how 
businesses that relocated to areas nearby Sharp's LCD plant in 
Kameyama City were successful.  The new LCD plant is predicted to 
 
TOKYO 00003798  003 OF 006 
 
 
inject more than one trillion yen into Sakai's economy. 
The Chairman of Sharp, Katsuhiko Machida, announced this week 
that he would be appointed as the Vice Chairmen for the Osaka 
Chamber of Commerce and Industry (OCCI).  Previously, Sharp had 
refused offers to join local economic organizations, preferring 
to concentrate its attention on internal business matters. 
 
In contrast, Sharp's competitor in the digital appliance industry, 
Matsushita, has been active in local business activities in the 
Kansai.  With annual sales eclipsing 3 trillion yen this past 
year, Chairman Machida stated it is imperative for Sharp to join 
OCCI and carry out its corporate social responsibilities (and of 
course compete with Matsushita).  (Osaka-Kobe:  Phil 
Cummings/Scott Ravenhill/Naomi Shibui) 
 
¶9.  (SBU) Corning and Sharp to Be Neighbors in Sakai 
--------------------------------------------- -- 
 
According to Osaka government officials, Corning Japan K.K., a 
subsidiary company of Corning Incorporated based in New York 
(http://www.corning.com/), will open a plant near the site of 
Sharp's new LCD Plant in Sakai City.  Corning is one of the 
leaders in producing glass components used in LCD flat panel 
televisions.  The investment amount is estimated to be around 100 
billion yen. 
 
Organizers of the U.S. -- Japan Investment Initiative Seminar 
being held in Osaka on September 12-13 had sought to get an 
executive from Corning to speak at the seminar, but were 
unsuccessful.  (Osaka-Kobe:  Phil Cummings/Scott Ravenhill/Naomi 
Shibui) 
 
---------------------------- 
AEROSPACE AND TRANSPORTATION 
---------------------------- 
 
¶10.  (U) Diet Reviews Fundamental Space Law 
--------------------------------------------- -- 
 
The Japanese Diet is currently considering a "Fundamental Space 
Law" that would change Japan's policies on space development and 
use.  The legislation emphasizes a need for enhanced domestic 
aerospace sector competitiveness; more autonomous Japanese 
aerospace capabilities; stronger ties between industry, the 
government, and academy (San-Kan-Gaku); and potential use of 
space for defensive purposes. 
 
The legislation calls for these priorities to be incorporated in 
a new Japanese national space plan that would be coordinated and 
managed by a new "Space Minister" and associated staff within the 
Cabinet Office.  The legislation also calls for a review of the 
2003 law that established the Japan Aerospace Exploration Agency 
(JAXA). 
 
The 1969 and 2003 laws that established Japan's space program 
strictly limit Japan's use of space for peaceful purposes. 
Consequently, the domestic defense aerospace sector has been 
somewhat limited in size and capability.  The Fundamental Space 
Law appears to be driven in part by this sector seeking a larger 
role in the defense aerospace market.  The perception of 
increased regional threats from North Korea and China also appear 
to be a factor. 
 
Prior to the July 2007 Upper House election in which the 
opposition Democratic Party of Japan gained the Upper House 
majority, the Fundamental Space Law was expected to be passed by 
the Diet in the Fall session.  While still likely to be passed, 
the schedule is now unclear.  (NASA:  Justin Tilman) 
 
¶11.  (U) Japan boasts Globe's Best Public Transport, 8 Million 
People Ride Tokyo Metro Daily 
--------------------------------------------- -- 
 
Tokyo Metro subway officials detailed security improvements to 
counter attacks or natural disasters, the final phase of Tokyo 
Metro privatization and their strong financial balance sheet in a 
meeting at their offices on August 10. 
 
They highlighted the extraordinary percentage of Tokyo commuters 
using the subway/rail system, noting the positive impact of 
public transportation on the environment.  They detailed their 
technical assistance to Asia, Africa, Latin America and the 
 
TOKYO 00003798  004 OF 006 
 
 
Middle East. 
 
The subway officials were proud to tell us that they move a 
million passengers during the one hour of morning commute alone, 
eight million a day and nearly 3 billion a year over 880 
kilometers of rail. 
 
Compared to New York City's less than 400 kilometers of rail, it 
is more than twice as large and moves twice the volume of 
passengers.  Some 75 percent of all people and products moved in 
Tokyo are transported using a combination of subway and railway 
lines. 
 
Tokyo towers over other large metro systems, carrying about as 
many passengers as the rail systems in London and New York 
combined. (ECON:  Charlie Crouch) 
 
¶12.  (U) MLIT Takes Steps Toward Sky Highway 
--------------------------------------------- -- 
 
The Ministry of Land, Infrastructure and Transport (MLIT) 
announced on August 13 that a new system called RNAV for air 
traffic will be introduced on 75 domestic routes by the end of 
¶2012. 
 
The effort is part of the Sky Highway Plan which would allow more 
efficient flight plans, enabling reduced flight times, more 
aircraft to fly and CO2 reductions. 
 
RNAV will be implemented starting this fall at eight airports 
including Haneda and Kansai International Airport along with 
other regional airports.  (ECON: Junko Nagahama) 
 
-------------------------- 
TELECOMMUNICATIONS AND IPR 
-------------------------- 
 
¶13.  (U) End to Cost-Sharing Regime for NTT Fixed-Line Service 
--------------------------------------------- -- 
 
Nikkei reported on August 11 that MIC plans to abolish in 2009 
the cost-sharing framework designed to provide universal fixed- 
line phone service throughout Japan. 
 
Nippon Telegraph and Telephone (NTT), through its two regional 
units, have historically been required to offer fixed-line phone 
service across Japan, including to rural areas and remote islands. 
 
To compensate NTT for operating losses in remote areas, the 
government introduced in 2002 a framework under which other 
telecommunications service providers would share the costs. 
NTT's fixed-line losses have continued to widen, however, as 
consumers are increasingly using mobile phones.  As a result, 
wireless service providers, KDDI, Softbank, NTT DoCoMo, and other 
carriers have started passing on their share of the costs to 
consumers in the form of a seven yen per month per phone line 
charge. 
 
Consumer groups have complained about consumers having to bear 
the costs of universal service, pressing for NTT to continue to 
seek efficiency gains and bring down prices. 
 
As carriers extend the reach of cable and fiber-optic networks, 
and the government has set a goal of a nation-wide high-speed 
optical network by 2010, it is expected that the government will 
encourage other options to fixed-line telephony in order to help 
assure universal service.  (ECON:  Scott Smith/Kaoru Nakata) 
 
¶14.  (U) Telecommunications Accounting System Report --Public 
Comment Announcement 
--------------------------------------------- -- 
 
MIC announced a public comment period, until 10 September, on a 
report entitled 'Accounting System for Telecommunications 
Businesses'. 
The report's chapters include: 
     Need for Review of the Accounting System 
     Facility Categorizations in Interconnection Accounting 
     Service Categorizations in Telecommunications Business 
Accounting 
     Cost Allocation 
     Depreciation Costs 
 
TOKYO 00003798  005 OF 006 
 
 
     Transparency in Transactions with Subsidiaries 
     Increased Feasibility of an Accounting System Review 
     Development of Measures 
 
Annex: British Telecommunications Accounting System  (ECON: 
Scott Smith/Kaoru Nakata) 
 
¶15.  (U) Intellectual Property in Japan 
--------------------------------------------- -- 
 
Econ and FCS officers, and a British Embassy colleague, 
participated in an informal IPR seminar offered pro bono by a 
local law firm.  Lawyers from the firm Yamasaki & Partners 
presented on basic procedures and the legal framework covering 
patents, trademarks, and copyrights in Japan.  The firm, 
apparently hoping to attract future business with foreign firms, 
has reportedly provided the seminar for numerous other embassy 
colleagues over the past year. 
 
At this time, we would simply note some potentially interesting 
future topics that were identified in the accompanying discussion, 
including: evolution of the IP and innovation environment in 
Japan since the 2002 passage of a new IP Fundamental Law, the 
development of new copyright protection technologies, and the 
establishment in recent years of new private sector associations 
to advocate IP interests in Japan. (ECON: Scott Smith/Kaoru 
Nakata and FCS:  Dean Matlack) 
 
¶16.  (U) U.S.-Japan Cyber-Security Bilateral Talks, 28-29 August 
--------------------------------------------- -- 
 
DHS A/S Greg Garcia will lead a public-private sector U.S. 
delegation for U.S.-Japan bilateral talks on Cyber-Security on 
28-29 August.  The agenda will cover developments in information 
security, threats and vulnerabilities, critical infrastructure 
and cross-sector interdependencies, and areas for prospective 
future cooperation. 
 
Both in the U.S. and Japan, structures and institutions to assure 
cyber-security, protect critical infrastructure and respond to 
incidents are relatively new.  The National Information Security 
Center (NISC) is Japan's coordinating agency for information 
security and was founded only in 2005, partly as a result of 
U.S.-Japan Cyber-Security talks in Tokyo in 2003.  DHS has 
indicated that it would like to see tangible outcomes result from 
these talks, and one expected result is to lay the groundwork for 
further future cooperation. (ECON:  Scott Smith/Kaoru Nakata) 
 
------ 
SPORTS 
------ 
 
¶16.  (U) Fighting to be NFL's first Japanese player, Kinoshita 
says It's Tough 
--------------------------------------------- -- 
 
His smile disappeared on day one.  After practice Kinoshita 
muttered, "It's tough."  His first NFL camp demands more than he 
expected. 
 
For 30 minutes at the end of practice, wide receivers took turns, 
but Kinoshita got only three shots: precious little chance to 
impress the coach. 
 
With three years NFL Europe experience, he should be well 
prepared.  Yet Kinoshita felt as if he had stepped into a 
different dimension.  The playbook, handed out the day before 
camp started, is so packed that is hard for native English 
speakers to memorize.  The WR coach, Petrino, sympathized with 
Kinoshita. "It must have been tough to learn everything on the 
first day," he said. 
 
Cut from 90, the final 53 players for the roster will be 
announced on September 1, and the WR position will only have five 
or six players. Kinoshita's challenge to become the first 
Japanese NFL player has just begun.  (Summary translation by FCS: 
John Fleming) 
 
¶17.  (U) This SENSITIVE BUT UNCLASSIFIED e-newsletter from U.S. 
Embassy Tokyo's Economic Section, with contributions from the 
consulates, is for internal USG use only.  Please do not forward 
in whole or in part outside of the government.  The Scope is 
 
TOKYO 00003798  006 OF 006 
 
 
edited this week by Charlie Crouch (CrouchCA@state.gov) and Joy 
Progar (ProgarJ@state.gov). 
 
¶18. (U) Please visit the Tokyo Econ Intranet webpage for back 
issues of the Scope.  Apologies, this option is only available to 
State users.  Please contact Joy Progar if you are from a 
different agency and are interested in a back issue.