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RUCNDT/USMISSION USUN NEW YORK 1664

UNCLAS SECTION 01 OF 09 TOKYO 002555 
 
SIPDIS 
 
DEPT FOR E, P, EB, EAP/J, EAP/P, EAP/PD, PA; 
WHITE HOUSE/NSC/NEC; JUSTICE FOR STU CHEMTOB IN ANTI-TRUST DIVISION; 
TREASURY/OASIA/IMI/JAPAN; DEPT PASS USTR/PUBLIC AFFAIRS OFFICE; 
SECDEF FOR JCS-J-5/JAPAN, 
DASD/ISA/EAPR/JAPAN; DEPT PASS ELECTRONICALLY TO USDA 
FAS/ITP FOR SCHROETER; PACOM HONOLULU FOR PUBLIC DIPLOMACY ADVISOR; 
CINCPAC FLT/PA/ COMNAVFORJAPAN/PA. 
 
E.O. 12958: N/A 
TAGS: OIIP KMDR KPAO PGOV PINR ECON ELAB JA
 
SUBJECT:  DAILY SUMMARY OF JAPANESE PRESS 09/17/08 
 
INDEX: 
 
(1) Japan fears spillover effect of Lehman's failure (Asahi) 
 
(2) FSA officials mulled over response to Lehman failure by giving 
up their holiday (Nikkei) 
 
(3) Editorial: Decisive measures urged to prevent financial crisis 
that originated in U.S. from spreading (Nikkei) 
 
(4) DPJ makes first move for political realignment (Asahi) 
 
ARTICLES: 
 
(1) Japan fears spillover effect of Lehman's failure 
 
ASAHI (Page 3) (Slightly abridged) 
September 17, 2008 
 
The collapse of Lehman Brothers, a major U.S. securities house, may 
have adverse spillover effects not only on the monetary market but 
even on many other areas in Japan. Economic woes in the U.S. will 
push the Japanese economy into a more serious recessionary phase. A 
political vacuum could make it impossible for Japan to quickly come 
up economic stimulus measures. The ruling coalition expects to hold 
a general election under the effect of the party being buoyed up in 
the aftermath of the Liberal Democratic Party's presidential 
election, but this strategy might also be undermined by Lehman's 
failure. 
 
Leading banks calculate losses; some companies worry about 
fund-raising 
 
After learning the news of Lehman Brothers' failure on Sept. 15, a 
Japanese leading financial institution operating in New York 
promptly began collecting information on its transactions with 
Lehman. After examining the contents of its deals with Lehman, the 
institution informed its business partner of the amount that it 
should bear, but the no reply has come yet. 
 
On the 16th, major banks were pressed to report their losses in 
dealings with Lehman. The total amount of these banks' loan claims 
on Lehman is approximately 210 billion yen, some of which are 
expected to become unrecoverable. 
 
Mizuho Trust & Banking announced that about 11.8 billion yen worth 
of debt claims have turned into bad loans. The Mizuho Financial 
Group expects to suffer a loss of about 20 billion yen. The Sumitomo 
Mitsui Financial Group will also post a loss of about 10 billion 
yen, a portion that is not covered with collaterals. 
 
The spillover effects of the Lehman failure will also spread to 
local financial institututions. According to Daiwa Securities SMBC 
Co., Lehman issued yen-denominated Samurai bonds worth 195 billion 
yen, many of which were purchased by local banks. In case of default 
on these bonds, its scale will be as large as the one on samurai 
bonds issued by the Argentine government in 2001. 
 
More than 20 banks announced the state of their holdings of bonds 
issued by Lehman, such as 7.1 billion yen worth of bonds held by the 
Kiyo Holdings Inc. and 3.9 billion yen by the Fukuoka Financial 
Group. If redeeming the bonds becomes difficult, "the banks will 
 
TOKYO 00002555  002 OF 009 
 
 
find it difficult to make up for the losses incurred just before 
Sept. 30 midyear settlement of accounts," said Toshiyasu Ohashi, a 
chief analysis on credits at Daiwa Securities SMBC.  A local bank 
employee commented: "It was inconceivable for this big leading 
financial institution to file for bankruptcy protection." 
 
Concerns are also growing among companies that have procured funds 
from Lehman. The Windsor Hotel Toya Resort & Spa, which was used as 
the hall of the Hokkaido Toyako Summit this summer, planned to open 
a condominium-type super-deluxe hotel in 2011, with about 20 billion 
yen to be invested by SECOM General Insurance Co., Lehman, and other 
companies. But the plan is now "stuck for funds," as a management 
company executive said. 
 
Anrakutei Co., a barbeque restaurant chain, has borrowed about 1.7 
billion yen from Lehman with share warrants as a mortgage. It plans 
to renew the debt on the 29th. The company issued this comment last 
night, in an effort to dispel public concerns: "We concluded a 
contract on the 12th." 
 
Lehman Brothers Japan, based in Roppongi Hills, Tokyo, does business 
intended mainly for corporations. The company provided moving strike 
convertible bonds (MSCB) to Livedoor Co. for its acquisition of 
Nippon Broadcasting System Inc. in 2005. 
 
The MSCB product tends to bring down stock prices and have a major 
impact on other shareholders, so some see MSCB as a problem item. A 
foreign securities company employee said: "Lehman Brothers Japan 
might have been trying to survive by handling services that cannot 
be handled by other leading companies, for instance, such unique 
financial products as MSCB and investment in real estate." 
 
Lehman also dealt with a variety of derivatives. There are many 
companies that have purchased derivatives with the aim of preventing 
such risks as an interest rate change and default. Given this, more 
companies might be pressed to unexpectedly report losses from now. 
 
Ruling camp eagerly trying to avoid negative effect 
 
Economic ministers and Bank of Japan Governor Masaaki Shirakawa 
urgently met yesterday morning after a cabinet meeting to discuss 
how to respond to the failure of Lehman Brothers. Prime Minister 
Fukuda, in an effort to dismiss public anxieties, emphasized to 
reporters last evening: "The impact (of Lehman's failure) will be 
rather small. We will have to take action in a calm manner." 
 
The ruling coalition has been eagerly trying to dismiss any 
anxieties about a political vacuum. 
 
Secretary General Taro Aso stressed in a meeting at party 
headquarters yesterday: "If we depend only on market mechanisms, 
there will surely be negative effects. We are not allowed to leave 
the situation intact. First, we must take measures to pump up the 
economy and then make efforts to reconstruct the nation's 
finances." 
 
State Minister for Economic and Fiscal Policy Yosano, a candidate 
for the LDP presidential election, also emphasized: "If we think it 
is improper to continue canvassing tours, we should decide to cancel 
them." Policy Research Council Chairman Kosuke Hori called in 
policymaking officials from all LDP factions yesterday and said: 
"Each presidential candidate does not fully understand the problem. 
 
TOKYO 00002555  003 OF 009 
 
 
I would like the candidates to reflect their views on this issue in 
their campaign speeches." 
 
The presidential candidates and party executives are concerned about 
the impact of the Lehman failure on the ruling camp's strategy 
eyeing the dissolution of the House of Representatives for a snap 
election. 
 
The ruling coalition prepare this strategy: Draw public attention to 
the LDP presidential race, submit a supplementary budget bill that 
includes expenses to fund economic pump-priming measures, and 
dissolve the Lower House when support for the new prime minister is 
high. 
 
But if the ruling side focuses only on this election strategy 
without making efforts to stabilize the financial market, the ruling 
camp will be certainly criticized as paying attention not to public 
interests but to party interests. Meanwhile, if Lower House 
dissolution is delayed to sometime after the supplementary budget 
bill clears the Diet, the ruling camp may be exposed to attacks from 
the opposition camp in the upcoming Diet session. 
 
The Democratic Party of Japan has begun to grill the government over 
this issue. Azuma Koshiishi, chairman of the DPJ caucus in the House 
of Councillors, said: "Under this situation, is it acceptable that 
the LDP is devoting itself to the party presidential election 
campaign, which is just like a festival show?" 
 
The collapse of Lehman is also likely to affect policy debate. The 
government and the ruling camp have decided to compile an extra 
budget worth 1.8 trillion yen, but Prime Minister has insisted on 
maintaining the fiscal reconstruction policy without issuing 
deficit-covering bonds. This policy has been taken since the Koizumi 
administration. But calls are likely to grow louder in the ruling 
camp for measures to buoy up the economy while pushing the fiscal 
reconstruction policy backward. 
 
In the presidential election campaign, Aso has said that he would 
not hesitate to aggressive disburse government funds, saying: "I 
will give priority to boosting the economy." DPJ President Ozawa 
also expressed a willingness to make the people feel at ease with 
fiscal disbursements. A senior Finance Ministry official said: "The 
ruling and opposition camps might compete over economic stimulus 
measures." 
 
But pork-barrel-type economic measures might lead to cooling down 
the economy as more deficit-covering bonds are issued and as 
interest rates eventually rise. Now that a slowdown of exports is 
concerned due to economic deterioration in the U.S. and Europe, a 
market player is overheard saying: "Tax cuts and fiscal 
disbursements are expected to have just limited effects." 
 
(2) FSA officials mulled over response to Lehman failure by giving 
up their holiday 
 
NIKKEI (Page 4) (Abridged slightly) 
September 17, 2008 
 
Talks to bail out Lehman Brothers Holding Inc. involving U.S. 
authorities ended in failure on the morning of Sept. 15, Japan time, 
and the Financial Services Agency (FSA) sensed that the prestigious 
investment bank would collapse. This forced principal FSA officials, 
 
TOKYO 00002555  004 OF 009 
 
 
including Supervisory Bureau Director General Katsunori Mikuniya, to 
busy themselves searching for countermeasures by giving up their 
holiday. Securities Business Division Director Muneo Morita, for 
instance, swiftly decided to cancel his attendance at an 
international conference of securities business supervisory 
officials. 
 
The agency's main concern was how to prevent the assets held by 
customers of Lehman Brothers Japan Inc. from flowing out of the 
country after the firm collapsed. 
 
FSA officials closely checked similar past cases supervised by 
overseas authorities, such as Britain's Financial Services 
Authority. 
 
The agency took steps in rapid succession after it learned the news 
shortly after noon of Sept. 15 that Lehman had filed for Chapter 11 
protection. The agency issued an order at 15:00 Sept. 15 instructing 
Lehman Brothers Japan Inc. to retain certain assets within Japan and 
another order at 21:00 ordering it to halt operations for 12 days. 
The agency had been informed by the Japan unit of the U.S. 
securities house it would file for bankruptcy protection under the 
Civil Rehabilitation Law as early as Sept. 16. The FSA still took 
every possible means to protect assets held by Lehman Brothers' 
customers partly in the form of administrative penalty. "We used all 
ammunition at our disposal," an FSA official said late at night, 
looking exhausted. 
 
Planning and financial department executives of Mizuho Corp., which 
has invested 130 billion yen in Merrill Lynch & Co., Inc., also 
assembled at their Tokyo head office around noon Sept. 15. One of 
the members said: "Bank of America's acquisition of Merrill Lynch is 
likely to benefit our company." Officials of other major banks also 
analyzed the situation on Sept. 15, a Japanese holiday. Financial 
officers of still other banks worked through the night projecting 
their losses and calculating loans to Lehman Brothers. 
 
"We never expected that Lehman Brothers would go belly up so fast," 
an investment department official of Asahi Mutual Life Insurance Co. 
said in dismay. Asahi Mutual Life purchased Lehman bonds worth 10 
billion yen in 2004. The amount is the largest among life insurance 
companies in Japan. The company began looking for the timing to sell 
Lehman bonds in August, but it could not do so due to tumbling bond 
prices. 
 
In the wake of Lehman's bankruptcy, the Tokyo Stock Exchange (TSE) 
and Japan Securities Clearing Corp. (JSCC) made preparations 
throughout the night. Lehman Japan, which became the top securities 
firm in trading in fiscal 2007, had a strong presence in the 
Japanese markets. There were conflicting reports and the company's 
future was unclear. 
 
At 7:30 Sept. 16, shortly before Lehman Japan's filing for 
bankruptcy protection became public, the TSE ordered the company to 
halt securities and derivatives trading activities. The JSCC, too, 
was confident to settle outstanding trading activities within the 
deposits from Lehman. A senior TSE official still underlined the 
need to end the closed trade by minimizing Lehman's impact on the 
markets. 
 
At 8:30, the Bank of Japan released Governor Masaaki Shirakawa's 
statement reading: "The bank will endeavor to ensure smooth fund 
 
TOKYO 00002555  005 OF 009 
 
 
settlements and the stability of financial markets while keeping a 
close eye on the environment surrounding U.S. financial institutions 
and its impact." 
 
The exchange market reacted to Shirakawa's three-line statement to a 
certain extent, with a foreign bank dealer saying, "Knowing that the 
BOJ is watching the markets, I momentarily hesitated to take a 
dollar-selling/yen-buying step." 
 
At 9:06, the Bank of Japan injected 1.5 trillion yen into money 
markets. A call loan dealer predicted: "Many regional banks are 
cautious about operating funds in short-run markets today. The Bank 
of Japan would have to provide more funds. There may be an 
additional injection of money," 
 
The Bank of Japan added another 1 trillion yen to money markets at 
12:50 and policy interest rates that had been relatively high 
finally settled near the target of 0.5 PERCENT . 
 
Lehman Brothers Japan president offered apology at night 
 
Following the collapse of its parent firm in the United States, 
Lehman Brothers Japan Inc. filed for bankruptcy protection under the 
Civil Rehabilitation Law on the morning of Sept. 16. Holding 
liabilities totaling 3.4314 billion yen, Lehman Japan became the 
second-largest postwar corporate failure following the 4.52 trillion 
yen left by Kyoei Life Insurance Co. (currently Gibraltar Life 
Insurance), which failed in 2000. 
 
President Akio Katsuragi held a press conference in Tokyo on the 
night of Sept. 16 in which he offered an apology, saying: "Unable to 
catch up with the rapid changes in the markets, we have caused 
tremendous trouble to our customers and the markets." 
 
What will become of Lehman Japan? President Katsuragi revealed a 
plan to search for sponsors while holding talks with the parent 
company, saying: "We want to speedily produce a revival plan and 
start looking for sponsors." 
 
The company had 1,300 employees, including many experts in stock, 
bond, real estate, and investment bank. It was also scheduled to 
hire slightly less than 20 new employees nest spring. Katsuragi 
indicated that the company would consider the handling of the new 
employees in the days ahead. 
 
The Lehman issue would have a significant impact not only on the 
financial and capital markets but also on the job market. Fallouts 
of the "Lehman shock" are likely to spread to a wide range of 
areas. 
 
(3) Editorial: Decisive measures urged to prevent financial crisis 
that originated in U.S. from spreading 
 
NIKKEI (Page 2) (Full) 
September 17, 2008 
 
A situation that might only occur once in 50 or 100 years is about 
to occur in the U.S. as former Federal Reserve Board Chairman 
Greenspan put it. Of the four major securities firms in the U.S, one 
of which has collapsed and another has been bought out. The largest 
insurance company also is in trouble. All of these events occurred 
while Japan was enjoying a three-day holiday weekend. 
 
TOKYO 00002555  006 OF 009 
 
 
 
If the financial crisis in the U.S. continues without control, the 
global economy could be affected immeasurably. US monetary 
authorities should look into decisive measures, including the 
drastic use of public money, instead of resorting to stopgap 
measures each time a problem occurs. 
 
Prevent expansion for bailout measures from spreading 
 
Lehman Brothers, the fourth largest securities house in the U.S., 
whose management had been in bad shape, has filed for bankruptcy 
because the U.S. government refused to bail it out. The government 
in effect took bail-out measures when a management crisis involving 
Bear Sterns and two mortgage financing companies surfaced this year. 
The U.S. government has decided not to bail out Lehman Brothers out 
of concern that if it bails out that company, leading companies 
would think that the government would always bail out failed 
financial firms, if their size were big enough, bringing about a 
lack of management discipline among them. 
 
Compared with the situation in March, when Bear Sterns ran into 
financial difficulty, concern about banks facing bankruptcy all of a 
sudden due to cash-flow problems has weakened. This is because the 
FRB has set up a system of directly injecting funds into battered 
securities companies. This time, the U.S. government has decided to 
strengthen this system and allow the company to deposit high-risk 
negotiable securities, such as stocks, as security. 
 
The government has tolerated the bankruptcy of Lehman Brothers, 
after taking those measures. However, some creditors or business 
partners of the company could suffer a major blow. Merrill Lynch, 
the third largest company in the industry, has been integrated into 
the Bank of America, a major U.S. bank, as a kind of bailout 
measure. Chances are that other securities houses or banks are 
facing management instability. 
 
The major focus for the time being is on how the American 
International Group (AIG), which is already in financial trouble, 
can procure funds. If AIG, which has many customers not only in the 
U.S. but also all over the world, collapses, the impact would be 
immense. The financial crisis the U.S. is now facing reminds us of 
the dismal state of the financial industry in Japan around November 
1997, when Sanyo Securities and Hokkaido Takushoku Bank failed and 
Yamaichi Securities voluntarily went out of business. 
 
At the time, various foreign countries, starting with the U.S., 
criticized Japan, noting that a Japan-induced global financial 
crisis would occur. In the end, it took five to six years for Japan 
to settle its non-performing loan issue. If the U.S. financial 
crisis becomes drawn out, its impact would be far greater than the 
impact of Japan's financial crisis at the time. U.S. monetary 
officials should make an all-out effort to settle the crisis so that 
a global financial crisis originating in the U.S. will not occur. 
 
The root-cause of the problem is to be found in the fact that U.S. 
monetary officials remained reluctant to take proactive measures 
until the crisis approached. 
 
The U.S. Treasury Department has urged embattled banks and 
securities firms to make a voluntary effort. However, it has 
neglected to make a quick response to the failure of Lehman 
Brothers. As a result, the company was unable to procure funds on 
 
TOKYO 00002555  007 OF 009 
 
 
its own. There is a possibility of similar cases continuing. 
 
The government refusal to bail out Lehman Brothers may help stop 
prevent banks from relying on the government. However, it appears 
that leaving the matter like this to the private sector has just 
about reached its limit. The U.S. government should take the lead in 
creating a bailout mechanism, including the establishment of an 
organ tasked with non-performing loans, instead of putting off the 
settlement of the issue. 
 
It is not someone else's misfortune 
 
Japan cannot afford to rest assured, regarding the Lehman Brothers' 
collapse as someone else's misfortune. 
 
Lehman Brothers' major creditors include many Japanese banks. Many 
banks are also the firm's business partners regarding its 
derivatives. Monetary officials should take extreme care so that the 
collapse of the company will not cause turmoil to Japan's money 
market. 
 
A financially-strapped AIG has actively sold insurance products, 
such as cancer insurance products, through its Japanese subsidiary. 
It is now trying to procure funds from private-sector banks in an 
effort to reconstruct its management. It should work together with 
U.S. monetary authorities and consider seeking indirect assistance, 
if necessary. 
 
What is more worrisome than the problems individual financial 
institutions are facing is the adverse effect of the U.S.-induced 
financial crisis on the global economy. The housing industry is in a 
slump in the U.S. Industrial output and the employment situation are 
also deteriorating. There is a strong likelihood that U.S.-bound 
exports will suffer a further blow. 
 
The financial crisis originating in the U.S. has repercussions for 
the financial and real estate industries in Japan. There is fear 
that its adverse effect would widely affect export-oriented 
manufacturers. 
 
Unlike the U.S., the Japanese economy itself is not beset with 
issues that require adjustment over the short term. However, it is 
necessary to carefully monitor what effect the U.S.-induced 
financial crisis will have on the Japanese economy. 
 
(4) DPJ makes first move for political realignment 
 
ASAHI (Page 4) (Full) 
September 17, 2008 
 
As if waiting for a respite from the recent flurry of festivity in 
the ruling Liberal Democratic Party (LDP), Ichiro Ozawa, president 
of the main opposition Democratic Party of Japan (DPJ), has now 
again moved into action. Ozawa is now pushing ahead with a merger 
between his party and the People's New Party (PNP), while 
brandishing the threat of switching to another electoral district, 
from which he will run. He plans to field high-profile candidates 
for the next House of Representatives election. 
 
Ozawa takes initiative in DPJ-PNP merger 
 
DPJ Secretary General Yukio Hatoyama yesterday expressed the high 
 
TOKYO 00002555  008 OF 009 
 
 
expectations of a merger between the DPJ and PNP, saying to 
reporters: "It's good to be big in order to give more momentum to 
the election." 
 
Hatoyama has a memory of the merger of his party and the now-defunct 
Ozawa-led Liberal Party, which allowed the new party to leap ahead 
in the 2003 Lower House election. Since the PNP is strongly 
supported by voters engaged in the postal services, the DPJ-PNP 
merger would generate a significant effect. As it stands, there is a 
possibility of the DPJ becoming the largest party in the Lower House 
as well. 
 
Ozawa is the person who suggested the merger plan. He told a press 
meeting on Sept. 15: "A merger is one option." Ozawa and his PNP 
counterpart Tamisuke Watanuki yesterday held a signing ceremony of 
an agreement on policy platforms for their parties. Although Ozawa 
did not sound Watanuki out about the merger plan, he reportedly 
whispered to Watanuki while shaking hands: "Let's work together, 
again." 
 
There is a sense of alarm among PNP members. A senior member said: 
"It is necessary for us to make our position clear. Unless we win 
the next election, it will be too late to fundamentally review 
postal privatization." Some PNP members are, however, strongly 
opposed to the merger plan. After his meeting with Ozawa, Watanuki 
placed on hold his decision, just saying: "Once I formally receive 
the proposal, I will respond after hearing views of my fellow 
members." DPJ and PNP lawmakers favoring the merger plan aim to 
demonstrate the unity of opposition parties, reaching an agreement 
on Sept. 22, when LDP Secretary General Aso Taro will be elected as 
the new LDP president. 
 
The DPJ expects not only to increase its Lower House seats but also 
to win over independent lawmakers, who have close ties with the 
ruling camp. 
 
New Party Daichi leader Muneo Suzuki praised Ozawa at a meeting in 
Sapporo on Sept. 11, saying: "Hearing Mr. Ozawa's enthusiastic 
speech, I felt that I was drawn toward the DPJ." The DPJ has called 
on Takeo Hiranuma, an independent lawmaker, who has looked for a 
possibility of forming a new party, for election cooperation. 
 
The DPJ appears to be getting the edge over other parties, by taking 
the initiative in possible "political realignment," which will 
likely to move into full swing. 
 
Psychological strategy of sending "assassin" candidates 
 
The DPJ plans to send "assassin candidates" to electoral districts 
for which the ruling parties are expected to file powerful 
candidates. 
 
Ozawa met yesterday with Watanuki in the Diet building. After that, 
he moved to DPJ headquarters later in the day. He then held a joint 
press conference with New Party Nippon leader Yasuo Tanaka. Tanaka 
said meaningfully: "The dream I have is to confound conventional 
wisdom. There will be surprises, including to myself. The election 
will be my last political battle." 
 
There has been a rumor that Upper House member Tanaka, who has a 
ep-seated belief in Ozawa, may run in the next Lower House election. 
All the more because Tanaka said that there would be "surprises," 
 
TOKYO 00002555  009 OF 009 
 
 
some political observers have taken his remark as his indication of 
running in the general election. 
 
Eriko Fukuda, hepatitis C infected Kyushu plaintiff, has firmed up 
her intention to run as a DPJ candidate from the Nagasaki No. 2 
district, which is former Defense Minister Fumio Kyuma's home 
constituency. Yesterday Ozawa asked local TV announcer Takako Nagae, 
who is well-known in Ehime Prefecture, to run from the Ehime No. 1 
district as a DPJ candidate against former Chief Cabinet Secretary 
Yasuhisa Shiozaki. 
 
The DPJ announced on Sept. 12 a list of 187 candidates as its first 
picks for the 300 single-seat constituencies. The largest opposition 
party, however, has yet to file candidates for the districts from 
which five LDP presidential candidates will run and the Tokyo No. 12 
district, which is New Komeito leader Akihiro Ota's home 
constituency. The question is for which constituencies the DPJ will 
send high-profile "assassin candidates," including Ozawa. The 
psychological warfare will continue between the DPJ and the ruling 
coalition. 
 
SCHIEFFER