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INFO RUEHFR/AMEMBASSY PARIS 5897
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UNCLAS SECTION 01 OF 07 TOKYO 005641 
 
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PARIS PLEASE PASS TO USOECD 
STATE PLEASE PASS TO USTR 
 
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SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope--December 21, 2007 
 
¶1. (U) This cable contains the Japan Economic Scope from 
December 21, 2007. 
 
¶2. (SBU) Table of Contents 
 
International Assistance 
¶3.  Japan to Provide Humanitarian Protection Assistance in Chad 
¶4.  Japan Increases Donation to International Development 
Association 
 
Taxation 
¶5.  Ruling Parties Announce Limited FY 08 Tax Proposals 
¶6.  Aichi Asked to Give Up 40 Billion Yen of Corporate Tax 
Revenue 
 
Medical Issues 
¶7.  CPRR Backs Down on Medical Mixed Treatments 
 
Planes and Trains 
¶8.  International Airfare Liberalization in Japan? 
¶9.  Kitakyushu Airport to Expand Cargo Services 
¶10. Japan Central Rail Touts Eco-Friendly Trains 
 
Investment Issues and Corporate Concerns 
¶11. Lawyers More Cautious Than Execs on Invoking Defensive 
Measures 
¶12. Citigroup Completes First Cross-border "Triangular" Stock 
Deal 
¶13. BOJ "Tankan" Survey: Deterioration in Large Firms' Business 
Sentiment 
¶14. Eco Products Trade Show Hits Record High Number of Visitors 
 
Energy 
¶15. No Oil Refinery Project in Libya 
¶16. Iraq to Purchase Electrical Transformers from Toyoda Tsusho 
 
Reforming Regulations 
¶17. TSE's Saito Calls for Better Corporate Governance, 
Oversight 
¶18. Insurance Advocacy Pays Off for U.S. Companies 
 
Economic Impact 
¶19. Economic Policy Under a Divided Diet 
¶20. FSA Measures Good Start to Improved Financial Market 
 
Competitiveness 
¶21. Hokkaido City Pleased With Economic Impact of Kitty Hawk 
Port Call 
 
Sports 
22.Dodgers Sign Kuroda to Three-Year Deal 
 
¶23. This Week's Cables 
 
------------------------ 
INTERNATIONAL ASSISTANCE 
------------------------ 
 
¶3.  (U) Japan to Provide Humanitarian Protection Assistance in 
Chad 
 
Japan will grant some $2.2 million to launch the Chadian Police 
for Humanitarian Protection (PTPH) according to a MOFA official. 
The monies will be used to provide facilities and equipment for 
a PTPH headquarters in N'Djamena and an academy to train 
Chadian police. 
 
Once trained, personnel will protect refugees in eastern Chad 
under the supervision of UN police officers.  UNSC resolution 
1778 endorses the concept of the PTPH as part of 
multidimensional peacekeeping efforts in Chad and the Central 
African Republic (ECON: Sally Behrhorst/Eriko Marks) 
 
¶4.  (U) Japan Increases Donation to International Development 
 
Japan will donate $3.2 billion to the International Development 
Association (IDA) over a three-year period, according to a 
December 14 MOF press release.  This represents a 30 percent 
increase over current levels.  Japan's total share of IDA 
funding will nevertheless drop to 10 percent from the present 
12.2 percent. 
 
 
TOKYO 00005641  002 OF 007 
 
 
The IDA had asked the GOJ for $4.0 billion, but the government 
demurred citing fiscal constraints.  According to the IDA, 45 
nations, including six first-time donors, pledged a record 
$25.1 billion to the World Bank affiliate to help fight poverty 
over the upcoming three-year term. (ECON: Sally Behrhorst) 
 
-------- 
TAXATION 
-------- 
 
¶5.  (U) Ruling Parties Announce Limited FY 08 Tax Proposals 
 
The ruling coalition--the Liberal Democratic and New Komeito 
parties--announced its FY08 tax reform proposals on December 
¶13.  The package calls for extending the present provisional 
cuts in the tax rates on both capital gains from share sales 
and limited dividend income for another two years.  The 
coalition parties also proposed measures to narrow tax revenue 
disparities between local governments, and extend surcharge 
rates on road-related taxes for ten years. 
 
As widely anticipated, the coalition party proposals represent 
only minor changes in Japan's tax system.  The proposals do not 
call for an imminent hike in the consumption tax from the 
present five percent, or a cut in the effective income tax rate 
for companies from the current 40 percent.  The proposed tax 
changes are estimated to result in a net tax cut of six billion 
yen ($54.5 million) in combined national and local tax revenues 
once fully in place. 
 
The Cabinet is set to approve the outline of legislation to 
implement the coalition's proposed tax changes around December 
¶19.  However, it is uncertain whether the government-proposed 
tax bills will become law in a timely fashion without amendment, 
due to the present Diet situation in which the opposition has a 
majority in the Upper House.  Please see the attachment for 
more information.  (FINATT: Shuya Sakurai/Maureen Grewe) 
 
¶6.  (SBU) Aichi Asked to Give Up 40 Billion Yen of Corporate 
Tax Revenue 
 
Aichi prefecture is, not surprisingly, unhappy with the ruling 
coalition taxation committee's December 13 proposal to transfer 
a portion of its corporate tax revenue to help decrease 
regional economic disparity.  Aichi has been asked to give up 
about 40 billion yen (approx. $354 million).  In 2006 Aichi's 
corporate tax revenues totaled about 487 billion yen (approx. 
$4.3 billion), of which some 20 percent came from Toyota and 
its affiliated companies. 
 
Although the amount Aichi is asked to give up was reduced to 
half of the 80 billion yen originally suggested by the 
committee, Aichi continues to negotiate to minimize the amount 
it will give up and/or to get corresponding compensation from 
the central government in other areas -- for example, GOJ 
support to build a second runway at Nagoya's Centrair 
International Airport.  Aichi Prefecture Financial Section 
staff told us on December 18 that, among other complaints, they 
feel the proposal goes against the government's 
decentralization policy in that it takes back funds from a 
prefecture to redistribute according to central government 
priorities. 
 
The Metropolitan Tokyo Government has reached a separate 
agreement with the central government on returning some of its 
tax revenues.  Osaka is reportedly the only other prefecture on 
the hit list.  (Nagoya:  Tamiki Mizuno) 
 
-------------- 
MEDICAL ISSUES 
-------------- 
 
¶7.  (U) CPRR Backs Down on Medical Mixed Treatments 
 
The Council for the Promotion of Regulatory Reform (CPRR) will 
not include a recommendation to fully lift restrictions on 
mixed medical treatments (kongo shinryo) in its interim report, 
according to Japanese press reports. 
 
Under the current system, patients bear the entire cost of 
medical treatment if a portion of that treatment is not covered 
by Japan's national health insurance.  The Tokyo District Court 
 
TOKYO 00005641  003 OF 007 
 
 
ruled this policy illegal on November 7. 
 
The CPRR has long supported kongo shinryo but backed down on 
calling for the lifting of restrictions in the face of fierce 
opposition from the Ministry of Health, Labor and Welfare 
(MHLW) and others. 
 
Some media reports claim the final decision was left to PM 
Fukuda who demurred citing the issue's complexity.  The lack of 
Kantei support could be further evidence of the CPRR's waning 
influence.  (ECON: Sally Behrhorst) 
 
----------------- 
PLANES AND TRAINS 
----------------- 
 
¶8.  (U) International Airfare Liberalization in Japan? 
 
On December 5, Japan's Fair Trade Commission (FTC) formally 
requested the transportation ministry, MLIT, to review the 
current Aviation Law which exempts price cartels by the 
International Air Transport Association (IATA) from antitrust 
law, saying there is no rationale to maintain the current 
practice. 
 
FTC issued same request in 1999, but MLIT rejected the request 
at that time arguing other countries practices are in line with 
Japan's on IATA pricing laws.  However, this time FTC says 
there is no rationale for continuing the practice as active 
movements are taking place to abandon IATA cartels in the EU, 
U.S., and Australia. 
 
According to Sankei Shinbun, IATA fares are applied to all 
first-class tickets and 90 percent of business-class tickets 
for flights in and out of Japan. 
 
MLIT's Vice Minister Minehisa as well as the Director-General 
of the Civil Aviation Bureau said they will thoroughly study 
the matter and will not rush to any conclusion.  However, 
comments from MLIT officials indicate they believe the current 
system is working fine and a decision by Japan to abolish the 
current system might invite confusion in Asia's aviation market. 
(ECON:  Junko Nagahama) 
 
¶9.  (SBU) Kitakyushu Airport to Expand Cargo Services 
 
Galaxy Airlines, a new Tokyo-based cargo airline, announced 
December 14 plans to begin regular service (six roundtrips 
weekly) between Kitakyushu and Kansai International Airport 
(KIX) starting December 21.  The decision was based on the 
success of the firm's Kitakyushu-Haneda operations, which began 
in October 2006.  The airline delivered 4,800 tons of cargo 
over the past year, most home delivery services and mail-order 
sales.  Galaxy expects similar demand for the Kitakyushu-KIX 
services. 
 
Kitakyushu Airport began operations in March 2006 and its 
future course is unclear until the long-standing debate over 
whether to build a new airport for Fukuoka is settled.  The 
president of Kitakyushu Air Terminal told post that, for 
Kitakyushu Airport to achieve long-term success, it must 1) 
expand its cargo services by taking advantage of the airport's 
24-hour operations, and 2) cultivate niche markets untapped by 
Fukuoka Airport.  In an effort to promote Kitakyushu's cargo 
business, Fukuoka Governor Wataru Aso recently told the 
prefectural assembly he welcomed the August 2007 Japan-Korea 
Aviation Agreement and would work to cultivate the Kitakyushu- 
Korea cargo market.  (Fukuoka: Yuko Nagatomo/James Crow) 
 
¶10.  (U) Japan Central Rail Touts Eco-Friendly Trains 
 
With Lord Nicholas Stern as a keynote speaker, Japan Central 
Railway--together with the Institute for Transportation Policy 
Studies--held a day-long symposium December 14 on climate 
change and the transport strategy.  The symposium looked at 
what actions Japan can take and the benefits of rail over other 
forms of transportation, particularly air, in terms of lowering 
greenhouse gases (GHG). 
 
Lord Stern, currently professor at the London School of 
Economics, stressed the importance of cost effectiveness in 
reducing GHG.  To date many policies chosen have been high cost, 
 
TOKYO 00005641  004 OF 007 
 
 
but without correspondingly high effectiveness.  Policies such 
as maintaining correct tire inflation and eco-driving can have 
strong, positive impacts.  Other key points made at the 
conference include encouraging policy makers in the EU, US, 
China, and India as well as in Japan to look at rail as a means 
of moving people and goods with lower per-mile emissions, 
particularly if nuclear power is used to generate the 
electricity to run the trains. 
 
A number of the speakers participated in the next day's 
inaugural meeting of a Japanese committee to study 
transportation and the global environment.  The group will 
report its findings in about a year.  (ECON: Robert 
Cekuta/Keiko Kandachi) 
 
---------------------------------------- 
INVESTMENT ISSUES AND CORPORATE CONCERNS 
---------------------------------------- 
 
¶11.  (U) Lawyers More Cautious than Execs on Invoking Defensive 
Measures 
 
According to a Nikkei survey, lawyers and company executives 
have differing views of the necessary procedures to invoke 
defensive measures against hostile takeover bids.  35.3 percent 
of responding lawyers said a shareholders' resolution is 
necessary to activate the measures, while only 11 percent of 
executives agreed.  An August Supreme Court decision in the 
Bull-Dog Sauce case that confirmed the legality of that 
company's poison pill defensive measure - in large part because 
the company  had won shareholder approval - seems to have 
influenced the thinking of the lawyers.  62.8 percent of 
corporate respondents, meanwhile, said the decision could be 
made by a third-party committee or board of directors. 
 
Similarly, 39.3 percent of lawyers said it is necessary to give 
financial compensation to the acquirer when invoking defensive 
measures, while only 12.8 percent of company officials thought 
likewise.  (ECON: Satoshi Hattori) 
 
¶12.  (SBU) Citigroup Completes First Cross-border "Triangular" 
Stock Deal 
 
Nikko-Cordial Corporation shareholders at a December 19 
extraordinary general meeting approved Citigroup's plans to 
acquire the remaining 23 percent of the troubled brokerage in a 
cross border stock deal.  This will be the first use of the 
triangular transaction provisions of Japan's new Company Law, 
which took effect May 1.  The deal is technically not a 
triangular "merger" since Nikko Cordial will continue to exist 
as a separate 100 percent-owned subsidiary of the U.S. 
financial giant. 
 
Nikko's remaining 31,000 shareholders will receive Citigroup 
shares in place of their current Nikko-Cordial stock. 
NikkoCitigroup equity analyst Tsutomu Fujita recently told the 
Embassy Citigroup could have used cash to complete the 
transaction, as it did in acquiring its initial 68 percent 
share of the company in a February tender offer.  However, 
since Citigroup relisted its shares on the Tokyo Stock Exchange 
in June 2007, it wanted to use this deal, in part, to expand 
its Japanese shareholder base.  (ECON: David DiGiovanna) 
 
¶13.  (U) BOJ "Tankan" Survey: Deterioration in Large Firms' 
Business Sentiment 
 
The Bank of Japan's quarterly "tankan" survey of business 
sentiment, a closely watched business cycle indicator and a 
principal input in the central bank's monetary policy 
deliberations, reported a notable deterioration in business 
sentiment among large firms, largely reflecting concerns about 
high crude oil prices and volatile financial markets.  The 
survey's "headline" business sentiment diffusion index (DI) for 
large manufacturers was well below market expectations.  The 
survey revealed mixed sentiment among small and medium-sized 
firms.  The survey also reported an upward revision of capital 
spending plans for all sizes of firms, and a slight tightening 
of labor market conditions.  The BOJ Policy Board will hold its 
first post-"tankan" meeting on December 19/20.  Many market 
observers are expecting the BOJ to maintain the present 
monetary policy stance for the time being.  See attached paper 
for details.  (FINATT: Shuya Sakurai) 
 
TOKYO 00005641  005 OF 007 
 
 
 
¶14.  (U) Eco Products Trade Show Hit Record High Number of 
Visitors 
 
Due to emerging consumer interest in choosing environmental- 
friendly commodities, the "Eco Products 2007" trade show in 
Tokyo saw the largest number of visitors (164,903 persons) 
since the annual event began in 1999.  According to the Nihon 
Keizai Shimbun newspaper (Nikkei), a co-organizer of the show 
along with the Japan Environmental Management Association for 
Industry (JEMAI), about half the visitors were consumers and 
the rest came for business purposes.  On December 15, the final 
day of the three-day occurrence, PM Fukuda attended the show. 
 
Among the 632 exhibitors, Japanese automobile manufacturers 
attracted particular attention.  Honda showcased a concept fuel 
cell car, which the company plans to lease to a limited number 
of clients beginning late 2008.  Nissan displayed an array of 
technologies to help reach its goal of reducing CO2 emissions 
of its fleet by approximately 70 percent from its 2000 level by 
¶2050.  The Narita International Airport publicized its "eco- 
airport" initiatives, such as reusing restaurant-emitting water 
for toilets in terminals, and composting garbage for flower 
gardens. 
 
At a side event held by the Ministry of the Environment, Dr. 
Mitsumasa Okada, professor of green process engineering at 
Hiroshima University, stressed that Japan should introduce 
stricter environmental regulations in response to the rising 
public ecological awareness. (ECON: Keiko Kandachi) 
 
------ 
ENERGY 
------ 
 
¶15.  (U) No Oil Refinery Project in Libya 
 
On December 14, Nikkei reported five Japanese companies will 
build an oil refinery in Libya at a cost of nearly 500 billion 
yen.  However, at a press conference later that morning, 
Economy, Trade and Industry Minister Amari denied the report. 
"The deal did not come through because Libya does not allow 
Japanese companies to be involved in upstream development 
rights.  Japanese companies were only asked to invest in a 
refinery, which was not very profitable," he said. 
 
Koji Yamaguchi of IPEX Corporation, one of Japan's leading oil 
developers and reported investor in the Libyan refinery project, 
confirmed Minister Amari's statement.  The project is currently 
on hold and there is no prospect of restarting the negotiations, 
Yamaguchi stated.  He said he was surprised by the news report, 
as were the other four companies cited in the article.  In fact, 
the project was only in its infancy and had not even undergone 
a feasibility study, he added.  Company representatives 
wondered where Nikkei had gotten its information, particularly 
with regards to the reported 500 billion yen price tag.  "The 
deal has been standing still since February or March, and why 
this news report appears now on the front page of Nikkei is a 
mystery," Yamaguchi marveled.  (ECON: Eriko Marks) 
 
¶16.  (U) Iraq to Purchase Electrical Transformers from Toyoda 
Tsusho 
 
SIPDIS 
 
Japanese trading house Toyoda Tsusho Corporation announced on 
December 6 it has received an order for 30 electrical 
transformers and peripheral devices from Iraq's Electricity 
Ministry.  The contract is valued at approximately 4.4 billion 
yen ($ 38.9 million).  The project will replace old, 
deteriorated transformers with new ones in order to ensure a 
stable supply of electricity in and around Baghdad. 
 
The project also includes training for Iraqi engineers who will 
maintain the transformers.  According to Mr. Yusuke Chino of 
Toyoda Tsusho's public relations office, the training will be 
done in Japan, as the security situation in Iraq will not allow 
company personnel to travel to Baghdad. (ECON: Eriko Marks) 
 
--------------------- 
REFORMING REGULATIONS 
--------------------- 
 
¶17.  (SBU) TSE's Saito Calls for Better Corporate Governance, 
 
TOKYO 00005641  006 OF 007 
 
 
Oversight 
 
Tokyo Stock Exchange (TSE) President Atsushi Saito in a 
December 13 speech to the Foreign Correspondents Club of Japan 
said Japan had to address serious problems in its corporate 
governance if Tokyo is to become a leading global financial 
center.  Saito, the former head of the Industrial 
Reconstruction Corporation of Japan and, before that, a senior 
executive with Nomura Securities, has long been a voice for 
liberalization of Japan's financial markets and a critic of the 
closed nature of Japan's business elites. 
 
In his FCCJ remarks, Saito called on government agencies such 
as the FSA to do more to police abuses by Japanese corporate 
boards that put shareholders interests below those of other 
"stakeholders."  He was especially critical of the use of 
private placement of shares to third parties and cross- 
shareholding by Japanese firms as defenses against unwanted 
takeover bids. 
 
Unfortunately, Saito was pessimistic about the ability of the 
TSE, as a quasi-private corporation, to effectively address the 
 
SIPDIS 
problem. Unless there is criminal activity, he said, "the most 
(the TSE) can do is issue a warning."  This contrasts with the 
views of other observers, such as Pension Fund Association 
Executive Director Tomomi Yano, who told us recently he 
believes the best way to force changes in Japan's corporate 
governance include requiring more independent directors on 
Japanese corporate boards through stronger TSE rules. 
Although, international outlets such as The Wall Street Journal 
and the Financial Times covered Saito's remarks, there was no 
coverage in the leading Japanese dailies.  (ECON: David 
DiGiovanna) 
 
¶18.  (SBU) Insurance Advocacy Pays Off for U.S. Companies 
 
Over the past several months, U.S. insurers have struck deals 
to market products through Japan's extensive postal network, 
taking advantage of Japan Post's privatization.  They are also 
poised to capitalize on deregulation measures, set to go into 
effect December 22, which will allow banks to sell a full range 
of insurance products.  One U.S. industry official estimated 
liberalization of bank sales alone will generate hundreds of 
millions of dollars in revenue for U.S. companies.  The U.S. 
government has been working closely with U.S. industry in a 
multi-year push for these opportunities.  Please see the 
attached cable for details.  (ECON:  Marc Dillard) 
 
--------------- 
ECONOMIC IMPACT 
--------------- 
 
¶19.  Economic Policy Under a Divided Diet 
 
The ruling Liberal Democratic Party's loss in July 2007's Upper 
House election resulted in a divided Diet and legislative 
gridlock, which has undercut economic reform advocates and 
pushed economic policymaking away from the prime minister's 
office.  The result is a tougher environment for regulatory 
reform.  Please see the attached cable for details.  (ECON: 
Marc Dillard) 
 
¶20.  (U) FSA Measures Good Start to Improved Financial Market 
Competitiveness 
 
On December 14, Financial Services Minister Watanabe submitted 
to the Council on Economic and Fiscal Policy a one-page rough 
outline of the Financial Supervision Agency's (FSA) plan for 
enhancing the competitiveness of Japan's financial and capital 
markets. 
 
The plan consists of measures in four areas: (1) Creation of 
energetic and reliable markets; (2) Improvement of systems to 
promote various and advanced financial services; (3) Building a 
better regulatory environment; and (4) Improvement of the 
circumstances surrounding markets (see attachment for the 
listing of measures in each area).  A more fully fleshed out 
report will be released by FSA next week. 
 
The response of foreign financial firms has been generally 
positive, particularly for proposals to ease firewall 
restrictions on sharing information and staff among affiliated 
 
TOKYO 00005641  007 OF 007 
 
 
entities. 
 
The outline provides no indication of the timing of 
implementation of the recommended measures.  A number of the 
proposals would require legislation, which makes the timing of 
implementation uncertain and opens up the possibilities of 
debate between the political parties.  Please see the 
attachment for more information.  (FINATT: Shuya 
Sakurai/Maureen Grewe) 
 
¶21.  (U)Hokkaido City Pleased With Economic Impact of Kitty 
Hawk Port Call 
 
In early December, the Muroran Chamber of Commerce and Industry 
(CCI) released its official report on the economic impact of 
the October 26-30 port visit by the American aircraft carrier 
USS Kitty Hawk and the destroyer USS Fitzgerald.  The Hokkaido 
port city estimates it received a $2.9 million (323 million 
yen) economic boost from the visit.  Sales of food, beverages 
and commodity goods generated by 5,800 sailors on the two ships 
and by 23,300 visitors during two days of public visitation 
accounted for $1.15 million (126 million yen) of the total. 
Port-related revenues came to about $1 million (110 million 
yen).  Benefits realized by Muroran's service sector (bus, taxi, 
gasoline stations, etc.) also topped $790,000 (87 million yen). 
Furthermore, the Muroran CCI says there were other positive 
spill-over effects difficult to calculate at this time. 
 
Muroran officials decided early on that a visit by U.S. Navy 
ships was an opportunity to promote local businesses.  They 
worked closely with ConGen Sapporo and the Navy to help make 
businesses more accessible to visiting sailors. During the 
visit, Muroran-based media also highlighted the economic boost 
experienced during the port call by publishing interviews with 
several happy business owners. (Sapporo: Ian Hillman/Yumi Baba) 
 
------ 
SPORTS 
------ 
 
¶22.  (U) Dodgers Sign Kuroda to Three-Year Deal 
 
The Los Angeles Dodgers scored the biggest prize of the current 
crop of Japanese baseball transplants with the December 15 
signing of right-hander Hiroki Kuroda to a three-year, $35.2 
million deal.  Kuroda, an 11-year veteran of the beloved but 
basement-dwelling Hiroshima Carp, is a multi-year All-Star in 
Japan with an overall 103-89 record and career 3.69 ERA. 
Combined with closer Takashi Saito, Kuroda should provide a 
powerful boost to the Dodger pitching staff similar to what the 
Matsuzaka-Okajima pairing did for Boston last year.  With new 
manager Joe Torre at the helm, the Dodgers have to be 
considered a strong favorite to take the NL West Division next 
year.  (ECON: David DiGiovanna) 
 
¶23.  (SBU) THIS WEEK'S CABLES 
 
5621 Takeover Defense Measures 
5620 Union Leader on Ozawa, Pensions, Base Strikes 
5613 Fukuda and Pensions 
5610 Insurance Advocacy Pays Off for U.S. Companies 
5609 Japan and Iran 
5608 Japan and APEC 
5559 Defense Reform 
5571 Host Nation Support 
5569 OEF Refueling Bill 
5568 Japan and Iran 
5553 HNS Agreement 
5552 Economic Policy and Diet 
 
¶24. (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 edited this week by Charlotte Crouch 
(CrouchCA@state.gov) and Joy Progar (ProgarJ@state.gov). 
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. 
DONOVAN