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RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #0821/01 0850725
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R 250725Z MAR 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 2857
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAWJA/JUSTICE DEPT WASHDC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC
RUEHFR/AMEMBASSY PARIS 6023
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RUEHBJ/AMEMBASSY BEIJING 2389
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RUEHFK/AMCONSUL FUKUOKA 6844
RUEHKSO/AMCONSUL SAPPORO 7440
RUEHNAG/AMCONSUL NAGOYA 5318
RUEHNH/AMCONSUL NAHA 9227
RUEHGH/AMCONSUL SHANGHAI 0367
RUEHHK/AMCONSUL HONG KONG 6467
RUEHGV/USMISSION GENEVA 3272

UNCLAS SECTION 01 OF 05 TOKYO 000821 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP - AMBASSADOR HASLACH 
DEPT ALSO FOR EAP/J AND EEB/OIA 
DEPT PASS USTR FOR CUTLER, BEEMAN, KALLMER 
NSC FOR TONG 
TREASURY DEPT FOR DAS NOVA DALY, AND IA/CARNES 
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB 
USDOC FOR 4410/ITA/MAC/OJ 
GENEVA FOR USTR 
 
E.O. 12985: N/A 
TAGS: EINV ECON OECD JA
SUBJECT: INVESTMENT WORKING GROUP TARGETS JAPAN'S DETERIORATING 
INVESTMENT CLIMATE 
 
Sensitive but Unclassified - Not for the Internet 
 
¶1.  (SBU) Summary: There is no change in Japan's policy of promoting 
foreign direct investment (FDI), according to the Japanese co-chair 
of the U.S.-Japan Investment Working Group (IWG), which met March 17 
via digital videoconference.  The GOJ will continue to showcase 
Japan as an investment destination, through seminars and enhanced 
outreach programs.  The IWG agenda this time included two new items 
-- the deteriorating global investment climate and Japan's M&A 
regime.  Treasury officials briefed the group on the new Foreign 
Investment and National Security Act, which reformed the U.S. CFIUS 
process.  Japan agrees with the U.S. that investment security 
reviews should be focused narrowly -- important in light of recent 
discussions of a possible law to limit foreign investment in 
Japanese airports.  METI and MOFA officials stated, except for one 
recent case, the GOJ has approved all investment applications in 
sensitive sectors in under 30 days.  Both sides agreed to continue 
the IWG's business outreach efforts and the U.S. put forward a 
proposal for a seminar to examine differing U.S. and Japanese 
attitudes toward M&A.  The IWG will prepare a joint report for 
submission to the President and Prime Minister in time for their 
expected meeting on the margins of the G-8 summit.  End Summary. 
 
¶2.  (U) The U.S.-Japan Bilateral Investment Working Group met via 
digital videoconference March 17.  State Department East Asia and 
Pacific Affairs Bureau Economic Coordinator, Ambassador Patricia 
Haslch, chaired the U.S. side from Washington.  The GOJ co-chair in 
Tokyo was Ministry of Economy, Trade and Industry (METI) Deputy 
Director-General for Trade and Economic Cooperation Nobuhiko Sasaki. 
 Paragraphs 18-19 contain full lists of the participants. 
 
Impact of Deteriorating Global Investment Climate 
--------------------------------------------- ----- 
 
¶3.  (SBU) Ambassador Haslach acknowledged Japan increased its FDI 
stock almost 20 percent in 2007, including through a record number 
of inward M&A transactions targeting Japanese firms.  She noted the 
concerns, however, that some observers have expressed over recent 
GOJ proposals to limit foreign investment in newly privatized 
airport operators.  Japan's challenge at this time of bearish 
financial market sentiment worldwide is to retain the confidence of 
the investor community, Haslach concluded, and one way to do this 
would be for senior Japanese policymakers, including Prime Minister 
Fukuda, to reaffirm publicly the government's pro-FDI policies. 
 
¶4.  (SBU) Sasaki stated there was no change in the GOJ's policies to 
promote inward foreign investment.  The Prime Minister had 
reaffirmed the GOJ's target of raising FDI stock to the equivalent 
of 5 percent of GDP by 2010 at the January World Economic Forum in 
Davos, he noted.  In order to accelerate progress toward that 
target, the GOJ has also established an Eminent Persons Investment 
Council, under the Cabinet Office, whose members includes the 
president of American Chamber of Commerce (ACCJ) and the chairman of 
the European Business Council, to examine concrete measures the 
government can take to increase inward investment.  This committee 
will report to the Council on Economic and Fiscal Policy (CEFP), 
chaired by the Prime Minister, and its deliberations will be 
reflected in the annual Basic Economic Policy White Paper, which the 
Cabinet will issue in June.  The government will continue its 
efforts to showcase Japan as an investment destination, through 
seminars and enhanced outreach programs, and explain to investors 
that Japan welcomes FDI. 
 
Security Related Investment Reviews 
----------------------------------- 
 
 
TOKYO 00000821  002 OF 005 
 
 
¶5.  (SBU) Treasury's Deputy Assistant Secretary for Investment 
Security Nova Daly briefed the working group on the Foreign 
Investment and National Security Act (FINSA), which President Bush 
signed into law in July 2007.  DAS Daly also noted the President 
signed an additional executive order in January 2008 strengthening 
the CFIUS process and imposing new disciplines by assigning 
designated responsibility to specific CFIUS agencies.  The U.S. will 
issue additional regulations later this spring to clarify further 
the process.  In the USG's view, security examinations of inward FDI 
should be limited to the actual risks posed by a specific 
transaction.  If a transaction raises national security 
sensitivities, the U.S. will try to address the problem through 
effective mitigation, such as divestment of sensitive subsidiaries. 
DAS Daly agreed to stay in touch with METI as FINSA implementation 
proceeds.  Although the public comment period on the new rules 
closed in December, the USG will again solicit comments when new 
implementing regulations are issued in April 2008. 
 
¶6.  (SBU) DAS Daly underscored the CFIUS process is explicitly 
designed to avoid excessive restrictions on FDI.  Such investment is 
vital to the U.S. economy, with foreign owned firms accounting for 6 
percent of U.S. GDP, 14 percent of U.S.-based R&D spending, and 19 
percent of U.S. exports.  Following the controversial Dubai Ports 
case, DAS Daly noted, President Bush had issued a statement 
reiterating the USG's commitment to welcoming FDI, the first 
Presidential statement on investment in 19 years.  In 2007, out of 
nearly 2000 inward FDI cases, only 147, or about 8 percent, were 
reviewed under CFIUS.  Historically, the annual ratio of CFIUS cases 
to total cross-border M&A transactions was even lower, running 5-6 
percent. 
 
¶7.  (SBU) Kawakami briefed the IWG on Japan's system of security 
reviews.  Japan agrees a minimal level of security-related 
regulation helps promote foreign investment.  For that reason, he 
said, Japan's 1991 Foreign Exchange and Foreign Trade Control Law, 
as amended through a 2007 Cabinet Order, covers a narrow set of 
sensitive sectors.  Foreign investment in those sectors above a 
specified level is subject to prior notification and approval.  In 
the past three years, investors have submitted approximately 700 
prior notifications and, except for the pending application by 
UK-based Children's Investment Fund to increase its stake in 
electric power wholesaler J-Power, the GOJ approved all applications 
in less than 30 days. 
 
M&A Related Issues 
------------------ 
 
¶8.  (SBU) Justice Department Special Counsel for International Trade 
Stuart Chemtob noted both Japanese and foreign experts have 
expressed concerns that recent Japanese court cases have caused 
confusion among investors about the proper use of defensive 
measures.  More than 400 listed companies have adopted defensive 
measures in the past three years.  The rise in cross-shareholdings 
as a de facto takeover defense is especially worrying because, 
unlike formal defense measures, company boards do not need to obtain 
shareholder approval for these purchases.  Consequently, there is no 
effective check on board actions and no way to ensure that the 
purchases enhance corporate value.  The U.S., Chemtob added, is not 
alone in its concerns.  Tokyo Stock Exchange President Atsushi Saito 
in December 2007 criticized the practice of cross-shareholdings and 
non-transparent third-party allotments as a possible conflict of 
interest on the part of corporate boards.  Chemtob expressed hope 
METI or its Corporate Value Study Group (CVSG) would examine the 
impact of these developments on corporate value and Japan's climate 
for M&A. 
 
 
TOKYO 00000821  003 OF 005 
 
 
¶9.  (SBU) METI's Director of the Corporate Systems Division Hiroaki 
Niihara explained METI does not have direct authority to control 
adoption of defensive measures or cross-shareholding.  Nor does the 
CVSG have the competence to recommend changes to law, although it 
can examine the appropriateness of defensive measures and the impact 
on corporate value.  With that caveat, Niihara continued, he 
personally shares U.S. concerns about the confusion resulting from 
recent court rulings.  The CVSG's 2005 recommendations on the use of 
defensive measures were based on the assumption these measures would 
serve only to suspend temporarily progress on an unsolicited 
takeover bids to give all parties time to determine whether they are 
in the best interests of the company.  However, when the Japanese 
firm, Bull-Dog Sauce Co. implemented a poison pill defense in July 
2007, paying out 2.1 billion yen to the U.S.-based hostile acquirer, 
it raised serious concerns about the impact of such actions on 
corporate value.  Niihara said he hoped the Cabinet Office 
investment group would take up these issues. 
 
¶10.  (SBU) Niihara also agreed most cross-shareholdings lack 
adequate transparency.  However, he attributed the rise in this 
behavior by Japanese listed companies to the confusion over proper 
use of formal defensive measures.  He agreed on the need for greater 
transparency for all defensive measures and said METI would work to 
that end.  He advised the USG to raise these issues in the annual 
Regulatory Reform Initiative.  Chemtob assured him the USG had done 
so in the past and would continue to do so. 
 
¶11.  (SBU) Niihara noted further that, despite the rise in defensive 
measures, the total value of foreign acquisitions of Japanese 
companies in 2007 was 3.019 trillion yen, up 380 percent over 2006, 
and the number of such cases, 308, was an all-time high for inward 
M&A in Japan.  He also observed only 10 percent of companies listed 
in Japan have adopted defensive measures, compared to 40 percent of 
U.S. listed companies.  It was unlikely, he asserted, this figure 
will increase significantly. 
 
Business Outreach 
----------------- 
 
¶12.  (SBU) Both sides expressed satisfaction with past business 
outreach programs.  Ambassador Haslach tabled a proposal for the IWG 
to sponsor a seminar to examine differing attitudes toward M&A among 
Japanese and U.S. executives.  Sasaki agreed METI would discuss the 
USG proposal with interested parties and suggested the IWG also 
examine new outreach targets, including Tokyo-based offices of U.S. 
state governments. 
 
Bilateral Investment Treaties 
----------------------------- 
 
¶13.  (SBU) Following up on a formal "information exchange" on 
bilateral investment treaties (BITs) by an IWG experts committee in 
February 2007 and a subsequent informal exchange of views, METI 
Americas Division Director Noriyuki Mita briefed the IWG on changes 
to Japan's BIT policy.  Previously, Japan had focused on building a 
network of Economic Partnership Agreements (EPAs) that covered trade 
as well as investment.  However, the GOJ has begun to recognize many 
of its trading partners were not ready for a full EPA while Japanese 
companies were pushing for greater protection of their overseas 
investments.  Japan, therefore, is increasing the list of countries 
with which it is considering negotiating BITs. 
 
¶14.  (SBU) The GOJ has already initiated discussions with 
Uzbekistan, where Japanese companies were increasingly making 
resource sector investments, and will likely announce opening of 
negotiations with Peru soon.  The fourth round of negotiations 
 
TOKYO 00000821  004 OF 005 
 
 
between Japan, China, and the Republic of Korea on a trilateral BIT 
took place in early March, but progress remains slow.  The Japanese 
side expressed interest in hearing about the U.S. experience 
negotiating with China and understood that the USG experiences many 
of the same challenges Japan faces. 
 
¶15.  (SBU) The State Department's Office of Investment Affairs BIT 
Coordinator Michael Tracton briefed the IWG on recent developments 
in discussions with China.  The U.S. and China agreed to begin 
discussions on a possible BIT at the bilateral Strategic Economic 
Dialogue meetings in December 2007.  Since then, two rounds of 
meetings had taken place.  While some progress has been made, like 
Japan, the U.S. still sought to make progress with China on the 
principle of national treatment.  The next session of U.S.-China BIT 
negotiations is scheduled for April. 
 
¶16.  (SBU) Deputy Assitant USTR for Investment Affairs Josh Kallmer 
briefed the group on U.S. exploratory talks with Russia and India. 
Both Russia and India have said they want a BIT with the U.S., but 
talks have not moved beyond the exploratory phase.  Meetings with 
both countries took place in February, but there is no date yet for 
follow-on meetings.  Talks with Brazil, on the other hand, were at a 
very preliminary stage.  Brazil continues to have both 
constitutional and political objections to a number of the 
provisions on the U.S. model treaty.  Mita noted Japan had initially 
considered pursuing a BIT with Brazil, but had ultimately concluded 
doing so would be too difficult and had abandoned the effort. 
 
Comment 
------- 
 
¶17.  (SBU) The most significant success of the current round of the 
IWG was the discussion of Japan's deteriorating investment climate 
and M&A issues.  The GOJ's strong re-affirmation of its pro-FDI 
policies, including the 2010 FDI target, was a positive step.  While 
METI admitted Japan faces negative market factors and needs to do 
more to reassure investors -- and acknowledged recent court rulings 
cases have sowed confusion about Japanese M&A rules -- it remains 
reluctant to agree to undertake a formal study of the problem or to 
take specific countermeasures.  Nonetheless, with these issues on 
the agenda, we have a solid basis for continued discussion both in 
future IWG sessions and through business outreach programs.  Pending 
issues, including labor mobility, Article 821, visas and cargo 
security were covered in an exchange of papers ahead of the formal 
session. 
 
Working Group Participants 
-------------------------- 
 
¶18. (U) USG Participants: 
Ambassador Patricia Haslach, Senior Economic Official, East Asian 
and Pacific Affairs Bureau, State, (co-chair) 
Nova Daly, Deputy Assistant Secretary for Investment Security, 
Treasury 
Josh Kallmer, Deputy Assistant U.S. Trade Representative for 
Investment, USTR 
Robert Cekuta, Economic Minister, U.S. Embassy Tokyo 
James Zumwalt, Director, EAP/J, State 
Stuart Chemtob, Special Counsel for International Trade, Justice 
Michael Tracton, Coordinator, Bilateral Investment Treaties, 
EEB/OIA, State 
Jessica Webster, Economic Unit Chief, EAP/J 
David DiGiovanna, Economic Officer, U.S. Embassy Tokyo 
Michael Carr, Senior Policy Analyst, Open Investment Policy Group, 
Treasury 
Chris Winship, Deputy Director, Office of East Asia 
 
TOKYO 00000821  005 OF 005 
 
 
Matthew Poggi, Office of East Asia, Treasury 
Tapio Thuomas, Office of Economic Policy, Treasury 
Eric Kennedy, Office of Japan, Commerce 
Eric Holloway, Director for Japan Affairs, USTR 
Ted Bryan, Trade Affairs Officer, EAP/J, State 
Meeta Yajnik, Financial Economist, EEB/OIA, State 
 
¶19. (U) GOJ Participants: 
Nobuhiko Sasaki, Deputy Director-General, Trade and Economic 
Cooperation, METI (co-chair) 
Kenji Goto, Commercial Minister, Embassy of Japan 
Noriyuki Mita, Director, Americas Division, METI 
Hiroaki Niihara, Director, Corporate System Division, METI 
Keiichi Kawakami, Director, Trade and Investment Facilitation 
Division, METI 
Noriyuki Shikata, Director, 2nd North America, MOFA 
Satoshi Miura, Economic Counselor, Embassy of Japan 
Osafumi Kio, Deputy, Corporate System Division, METI 
Shinichi Kihara, Deputy-Director, Americas Division, METI 
Kenichi Kobayashi, Trade and Investment Facilitation Division, METI 
Yuko Chikazoe, Americas Division, METI 
Hiromi Otsuki, Embassy of Japan 
Takayuki Kobayashi, Embassy of Japan 
Koichiro Nishimatsu, Researcher, 2nd North America, MOFA 
 
¶20.  (U) This cable has been cleared in substance with Working Group 
participants. 
 
SCHIEFFER