VZCZCXRO5112
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #1113/01 1132252
ZNR UUUUU ZZH
R 222252Z APR 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3678
INFO RUEAWJA/JUSTICE DEPT WASHDC
RUEHNAG/AMCONSUL NAGOYA 5803
RUEHKSO/AMCONSUL SAPPORO 8012
RUEHFK/AMCONSUL FUKUOKA 7416
RUEHOK/AMCONSUL OSAKA KOBE 1090
RUEHNH/AMCONSUL NAHA 9795
RUEHBJ/AMEMBASSY BEIJING 2955
RUEHFR/AMEMBASSY PARIS 6059
RUEHGH/AMCONSUL SHANGHAI 0390
RUEHUL/AMEMBASSY SEOUL 8974
RUEHHK/AMCONSUL HONG KONG 6488
RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 TOKYO 001113 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR BEEMAN 
STATE ALSO PASS FEDERAL TRADE COMMISSION - DSHANAHAN 
JUSTICE FOR INTERNATIONAL ANTITRUST - CHEMTOB 
TREASURY FOR IA - POGGI 
COMMERCE FOR 4410/ITA/MAC/OJ 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EAIR PGOV PREL JA OECD
SUBJECT: Return to Fukushima: Reform Not Resonating at Japan's 
Grassroots 
 
Ref:  07 Tokyo 1522 
 
(U)  Sensitive but unclassified. Not for internet distribution. 
 
¶1.  (SBU)  Summary:  Despite shrinking populations and fiscal 
shortfalls, local authorities in one northern Japan jurisdiction 
remain fixated on developing manufacturing and on maintaining 
socio-economic equality. During recent meetings in Fukushima 
Prefecture -- to the extent our interlocutors could represent their 
counterparts elsewhere in Japan -- USG efforts to promote 
growth-oriented regulatory reform seemed to have had little 
resonance in the localities.  End summary. 
 
--------------------------------------------- - 
Industrial Sector Strong but Credit Demand Low 
--------------------------------------------- - 
 
¶2.  (SBU)  Industry remains the focus of Fukushima's economy, 
according to the head of the local Bank of Japan branch.  The BOJ 
official told visiting econoff Fukushima's FY06 manufactured goods 
shipments reached JPY5.8 trillion, 32 percent of the total 
manufacturing output of Japan's Tohoku Area (Fukushima, Miyagi, 
Yamagata, Iwate, Aomori and Akita Prefectures).  Plans by Denso, a 
Toyota affiliate producing auto parts, to establish a plant in 
Fukushima this year will add to the prefecture's manufacturing 
strength, the BOJ official observed.  Fukushima also benefited from 
some electrical component manufacturers' decisions to shift 
production to Japan's north for more efficient shipment to Russia, 
China, and Korea.  Fukushima's role as an electricity supplier to 
Tokyo also boosts the percentage of "manufacturing."  The BOJ 
official said nuclear plants in Fukushima generate 105.3 billion kWh 
of electricity annually, 30 percent of which is used in Fukushima; 
Tokyo consumes the remainder. 
 
¶3.  (SBU)  On the financial side, the BOJ official indicated the 
amount of bad loans in Fukushima's three main local banks has shrunk 
and asset quality has improved.  In addition, the banks' operations 
have stabilized, and because the deposit interest rate has risen, 
they want to increase their lending. However, local demand for loans 
remains weak.  As a result, the banks have turned to syndicated 
lending with five percent of their total loans lent in Tokyo in 
packages organized by the capital's "megabanks." 
 
---------------------------------- 
Not Even Ultraman Can Save the Day 
---------------------------------- 
 
¶4.  (SBU)  Fukushima Prefectural Government (FPG) officials stressed 
the current governor's efforts to attract new businesses.  The 
former governor -- a strong proponent of local autonomy who ran the 
prefecture for 18 years until he was forced to resign in a 2006 
bid-rigging scandal -- was an "idealist, very much interested in 
environmental protection," in the words of the FPG officials.  The 
current incumbent, they stated, is far more "realistic" and labels 
himself the "marketing manager" for Fukushima, even putting that 
title ahead of "governor" on his official name card. 
 
¶5.  (SBU)  Fukushima, the officials observed, has subsequently 
attracted more than 100 investments -- the best performance in 
Tohoku Area -- and has improved employment over the last two years. 
(Note:  As the Tohoku prefectures closest to Tokyo, Fukushima has an 
advantage in attracting businesses over its more northerly 
neighbors.  End note.)  The FPG officials acknowledged, however, the 
prefecture's population (2,091,319 in 2005) has been decreasing 
since 1995.  As a result, the current governor's aggressive business 
promotion efforts are needed to attract companies in hopes of 
maintaining or increasing the number of residents. 
 
¶6.  (SBU)  Fukushima's fiscal condition also continues to tighten. 
The FY08 budget outlays will decline 1.2 percent (JPY10.5 billion), 
with personnel expenses taking a cut of JPY8.0 billion. 
Consequently, the FPG will reduce civil service salaries -- five 
 
TOKYO 00001113  002 OF 003 
 
 
percent for bureaucrats in managerial positions and three percent 
for non-managerial personnel.  The FPG officials stated FY08 public 
works will center on road construction and not on other "public 
facilities" (i.e., buildings). 
 
¶7.  (SBU)  The fate of Fukushima's underutilized airport and the 
partially completed expressway to the facility exemplify the 
challenges the prefecture's declining population pose, according to 
local officials.  Japan's national media spotlighted an effort to 
increase use of Fukushima Airport through an exhibition of 
paraphernalia from the popular children's program "Ultraman" at the 
airport's terminal. 
 
¶8.  (SBU)  The FPG officials explained the purpose of the Ultraman 
exhibition at the airport is less to attract customers than to honor 
Ultraman's creator, a native of Fukushima's Sukagawa City.  A local 
non-profit organization took the lead in setting up the exhibition 
in cooperation with the Fukushima Airport Building Corporation 
(controlled by the prefectural government). 
 
¶9.  (SBU)  Regarding press reports that the Fukushima Airport 
expressway is one of Japan's most underutilized toll road, the 
problem centers on the fact the project remains incomplete, the FPG 
officials asserted.  The airport road, which runs east to west, was 
planned to connect to two adjacent north-south expressways.  At 
present, it intersects with only one of those highways, 
substantially limiting access for potential customers.  The FPG 
officials expected both road and airport usage would increase once 
the remaining portion of the road connecting it to the second 
expressway is completed. 
 
¶10.  (SBU)  The executive director of the Fukushima Chamber of 
Commerce and Industry (FCCI) was more critical of the problems with 
Fukushima Airport, tying them to bad policy and demographic decline. 
 The GOJ has invested an enormous amount building airports all over 
Japan without taking economic factors into account, the FCCI 
official observed.  He cited the GOJ's decision to construct a new 
airport on an Air Self-Defense Force base in nearby Ibaraki 
Prefecture despite declining usage in the region's other airports as 
an example of continued misguided policy.  The official believed 
Fukushima Airport should increase its international connections to 
boost traffic and felt a prospective tie-up with Kansai 
International Airport in Osaka/Kobe will yield good results. 
 
--------------------------------------------- ------- 
Concern over Reform's Social Impact and Slower Global Economy 
--------------------------------------------- ------- 
 
¶11.  (SBU)  The FCCI official strongly supported protecting small 
and medium enterprises and praised the GOJ decision to amend the 
Inheritance Tax Law to postpone 80 percent of the tax for small and 
medium enterprises.  He opposed USG recommendations on the 
Large-Scale Retail Stores Location Law.  Large-scale retail stores 
should be community-based and aim for a harmonious relationship with 
others -- not act like "black ships," the official stressed 
(referring to the U.S. fleet that ended Japan's seclusion in the 
mid-19th century).  The FCCI official also supported the prospect of 
the Japan Fair Trade Commission applying punitive surcharges (in 
effect, fines) against companies engaged in "excessive competition" 
such as aggressive price cutting, set out in recent proposed 
amendments to Japan's main competition law. 
 
¶12.  (SBU)  In the wake of the 2006 scandal, the FPG is promoting 
revision of local government public works procurement procedures to 
prevent bid rigging, though the results have not been positive, the 
FCCI official observed.  Because of "excessive competition" with the 
expansion of open bidding, winning bidders have been losing money. 
Also, as the ceiling for bids on public works projects has become 
lower, there have been cases where no company can make a successful 
bid, he said, because none can reduce their costs adequately. 
 
¶13.  (SBU)  According to the FCCI official, the labor structure in 
 
TOKYO 00001113  003 OF 003 
 
 
Fukushima has changed from regular (i.e., permanent) to non-regular 
(i.e., based on time-limited contracts) employment.  As a result, 
people have moved from Fukushima to Tokyo because of the limited 
number of openings for regular employment in the prefecture.  The 
labor structure should return, by law, to the old form where regular 
positions dominated employment offerings, the FCCI official 
insisted.  In addition, the GOJ should seriously look at addressing 
the general decrease in the working population and how to make the 
best use of housewives, part-time workers, and even "NEETs" (i.e., 
individuals "not in employment, education, or training" who have 
opted out of the labor force). 
 
¶14.  (SBU)  Fukushima also feels the pinch of rising international 
commodity prices and the prospect of a slower global economy.  Forty 
percent of the prefecture's businesses find it difficult to pass the 
additional oil and raw material costs on to their customers, 
according to hearings FCCI conducted with 70 local companies in 
February.  Furthermore, if the yen continues to rise, plants 
manufacturing export goods may close, with a recession to follow, 
the official argued.  He raised the possibility that corporate 
headquarters in Tokyo might find it easier to shut plants outside 
the capital area first, leaving localities like Fukushima to take 
the brunt of any slowdown. 
 
------- 
Comment 
------- 
 
¶15.  (SBU)  We initially visited Fukushima -- a jurisdiction that 
falls at or near the median of most of Japan's statistical indices 
-- a year ago following the 2006 bid-rigging incident (reftel).  The 
two greatest impressions at that time were the relative dynamism of 
firms and industries (like electronics) with international 
connections and the general lack of enthusiasm toward economic 
reform as advocated by former PM Koizumi. 
 
¶16.  (SBU)  This year's visit revealed Fukushima's focus remains on 
manufacturing, with scarcely any mention of services or other 
sectors.  The problems surrounding Fukushima's underutilized airport 
also highlight the chronic dilemma of a steadily shrinking 
population and the problems of the GOJ's policies and tactics for 
capital development.  As concerns over a slowing international 
economy have increased, resistance to further domestic reform seems 
to have strengthened.  Most notably, the FCCI official, a 2007 
interlocutor, was fairly open in his opposition to positions taken 
by the USG in the bilateral regulatory reform initiative.  If his 
views are widely shared among opinion leaders in Japan's hinterland 
-- and we suspect they are -- convincing the GOJ as a whole to adopt 
these reforms is likely to remain an uphill battle. 
 
Schieffer