VZCZCXRO6868
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #3104/01 3142253
ZNR UUUUU ZZH
R 092253Z NOV 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8642
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAWJA/JUSTICE DEPT WASHDC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC
RUEHFR/AMEMBASSY PARIS 6306
RUEHUL/AMEMBASSY SEOUL 2262
RUEHBJ/AMEMBASSY BEIJING 6278
RUEHOK/AMCONSUL OSAKA KOBE 4634
RUEHFK/AMCONSUL FUKUOKA 0849
RUEHKSO/AMCONSUL SAPPORO 1421
RUEHNAG/AMCONSUL NAGOYA 8897
RUEHNH/AMCONSUL NAHA 3210
RUEHGH/AMCONSUL SHANGHAI 0494
RUEHHK/AMCONSUL HONG KONG 6619
RUEHGV/USMISSION GENEVA 3429

UNCLAS SECTION 01 OF 05 TOKYO 003104 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP - AMBASSADOR HASLACH 
DEPT ALSO FOR EAP/J AND EEB/OIA 
DEPT PASS USTR FOR CUTLER, BEEMAN, KALLMER 
NSC FOR LOI 
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 PREL OECD JA
SUBJECT: U.S.-JAPAN INVESTMENT WORKING GROUP CALLS FOR POSITIVE 
TRADE AND INVESTMENT AGENDA 
 
Sensitive but Unclassified - Not for the Internet 
 
¶1.  (SBU) Summary: The eighth round of talks under the U.S.-Japan 
Bilateral Investment Working Group (IWG) took place October 29 in 
Tokyo co-chaired by U.S. Ambassador to APEC Patricia Haslach and 
Ministry of Economy, Trade and Industry (METI) Deputy Director 
General Makoto Shiota.  The two sides exchanged views on the current 
turmoil in global financial markets and its impact on cross-border 
investment flows, and agreed on the need to cooperate to fight trade 
and investment protectionism.  The IWG continued its examination of 
the each country's FDI review processes, including the U.S. FINSA 
law and Japan's Foreign Trade Control Act.  The GOJ provided a 
clarification of the term "risk to public order", the legal 
provision on which it blocked a proposed foreign investment in 
J-Power Corporation in May 2008.  METI presented a non-paper with 
recommendations to the U.S. on implementation of enhanced marine 
cargo security reporting requirements.  Both sides exchanged views 
on the status of bilateral investment negotiations with third 
countries.  At the conclusion of the talks, the co-chairs issued a 
joint press release reaffirming both countries' commitment to 
maintaining open investment regimes. End Summary. 
 
Re-emphasizing the Importance of Open FDI Regimes 
--------------------------------------------- ---- 
 
¶2.  (SBU) Shiota opened the session by noting that over the eight 
years of the bilateral Investment Initiative Japan's stock of 
foreign direct investment (FDI) has more than doubled from 6.6 
trillion yen to more than 16 trillion yen today.  Nevertheless, 
Japan is concerned the global economic slowdown resulting from 
recent turmoil in world financial markets could reduce cross-border 
investment flows and jeopardize Japan's achievement of it target of 
FDI stock equivalent to five percent of GDP by FY 2010.  Ambassador 
Haslach agreed that because of the market turmoil this is an 
excellent time to acknowledge once again the important contribution 
of cross-border investment to economic prosperity in both countries. 
 
 
¶3.  (SBU) Ambassador Haslach described the decisive actions the U.S. 
Government is taking to stabilize the U.S. banking system, maintain 
liquidity in credit markets, and restore market confidence as 
quickly as possible.  The G-20 meeting set for November 15 would be 
another opportunity to strengthen cooperation on policies toward 
national financial market.  However, the best way to restore 
confidence, Haslach noted, was to maintain a robust trade and 
investment agenda. 
 
¶4.  (SBU) Shiota agreed the current global financial turmoil 
requires a global response and emphasized the GOJ continues to seek 
foreign direct investment, in particular FDI from the U.S., which 
accounts for 40 percent of all Japanese inward FDI and is 
"indispensable" for the promotion of on-going economic and 
technological development in Japan.  Noriyuki Shikata, Director, 
Second North Americas Division, Ministry of Foreign Affairs (MOFA), 
added both countries need to cooperate to fight against trade and 
investment protectionism. 
 
¶5.  (SBU) Ambassador Haslach proposed -- and DDG Shiota immediately 
agreed -- the two governments issue a joint press release following 
the IWG meeting reaffirming commitment of both countries to 
maintaining an open investment regime.  The text of the joint 
statement is contained in paragraphs 25-29. 
 
Implementation of Investment Expert Report 
-------------------------------------------- 
 
 
TOKYO 00003104  002 OF 005 
 
 
¶6.  (SBU) Hiroaki Hara, Director of Foreign Investment Promotion, 
Cabinet Office, briefed the Working Group on the implementation of 
the May 2008 recommendations of the GOJ ad-hoc Investment Experts 
Committee report.  The Cabinet incorporated the recommendations into 
the GOJ's annual report on the government's Basic Economic and 
Fiscal policies issued in June 2008. 
 
¶7.  (SBU) METI had begun implementing the experts committee's 
recommendation to identify and clarify Japan's M&A rules with the 
July 2008 report of METI's Corporate Value Study Group.  In the 
meantime, the Cabinet Office will review the grounds and scope for 
discriminating between domestic and foreign investors on security 
grounds.  The Cabinet Office plans to hold hearings on this subject 
in the coming weeks with an aim of issuing a report by the end of 
¶2008. 
 
¶8.  (SBU) Hara added internal discussion of the other 
recommendations continues.  The Cabinet and ruling coalition will 
need to address the most controversial recommendation -- reducing 
Japan's 40 percent corporate tax rate -- within the context of other 
changes to Japan's tax system, including Japan's consumption tax 
rate.  However, Hara anticipated the ruling party will discuss 
corporate tax rates during the review of possible FY-2009 tax 
changes, a process which will be completed by December 2008. 
 
Security Reviews Should Not Unreasonably Hinder FDI 
--------------------------------------------- ------ 
 
¶9.  (SBU) Michael Carr, Senior Policy Analyst from the U.S. Treasury 
Department, told the working group that implementation of the U.S. 
Foreign Investment and National Security Act of 2007 (FINSA) is in 
its final stage.  Issuance of final rules is imminent.  At each 
stage of implementation, the USG's key objective has been to 
reinforce its long-standing commitment to an open investment regime. 
 The Treasury-led CFIUS committee, which reviews selected FDI 
transactions, had hoped to have completed the final rule already, 
but the need to review a large volume of public comments has 
necessitated a delay.  The comments have been generally positive, 
Carr noted, but many emphasized the importance of greater 
transparency in the CFIUS review process. 
 
¶10.  (SBU) Carr also discussed the concept of "control", which 
governs whether CFIUS has authority to review a potential 
transaction.  CFIUS' definition of "control" is based on whether the 
new owners would be in a position to direct corporate decisions. 
The concept of control is embedded in the law and, Carr noted, is a 
"functional" test and not based on a simple numerical level of 
shareholding. 
 
¶11.  (SBU) Treasury also plans to publish guidelines and a narrative 
discussion of the national security criteria set out in the FINSA to 
provide greater clarity to the process.  The overall aim of the 
CFIUS review is to resolve concerns to the extent possible and allow 
transactions to proceed, not to block transactions. 
 
METI Clarifies Meaning of "Risk to Public Order" 
--------------------------------------------- --- 
 
¶12.  (SBU) Yasuhito Nii, Director of METI's Trade and Investment 
Facilitation Division, briefed on recent GOJ reviews under the 
Foreign Exchange and Trade Act (FEFTA), specifically addressing U.S. 
concern about the definition of "risk to public order", which was 
the rationale used to block a proposed foreign investment in 
electricity wholesaler J-Power Corporation in May 2008. 
 
¶13.  (SBU) Nii explained "public order" is one of three criteria for 
 
TOKYO 00003104  003 OF 005 
 
 
investment restriction contained in the OECD Code on Liberalization 
of Capital Movements.  The GOJ decision to block the investment in 
J-Power, Nii insisted, was not taken easily or lightly.  But the GOJ 
decided that Japan had an overriding public interest in maintaining 
the current level of operation in certain critical public 
infrastructure, in this case, J-Power's power grids and the planned 
Ohma Nuclear power plant.  Nii added such a determination was made 
on a case-by-case basis and the decision on the J-Power case does 
not imply the GOJ seeks to wall off whole industrial sectors from 
foreign investment. 
 
¶14.  (SBU) In response to a specific U.S. question, Nii confirmed 
the risk to public order determination in the J-Power case was 
intended to ensure that Japan maintained control of certain critical 
technological infrastructure, and was not aimed at protecting that 
technology from falling into foreign hands.  In other words, the GOJ 
did not determine the proposed foreign investment was threat to 
Japan's national security. 
 
Mitigation Strategies 
--------------------- 
 
¶15.  (SBU) Carr briefly explained the rationale behind CFIUS use of 
mitigation strategies in certain cases.  CFIUS views such mitigation 
agreements as a "proportionality tool", which should be used in 
cases where other laws are inadequate or inappropriate to achieve 
the desired outcome.  The number of mitigation agreements CFIUS has 
entered into is low relative to the number of cases handled, has 
declined in recent years.  METI's Nii noted that Japan does not have 
a provision for mitigation strategies in the FEFTA.  In large part, 
he said, this reflected the fact the Japanese law, in contrast to 
the U.S. or UK, establishes a pre-notification system rather than an 
ex-post facto system.  Nii then asked how the U.S. enforces such 
agreements and what legal authority the USG has in cases where the 
agreement is breeched.  Carr noted that CFIUS has authority to take 
action in cases of breaches of mitigation agreements, and would look 
to existing law to enforce such agreements. 
 
¶16.  (SBU) In response to a question, Nii added the Cabinet Office 
review of the FEFTA system, as called for in the Expert Committee 
report, will be focused on how to improve the transparency of the 
system.  The GOJ has no plans to amend the list of sectors subject 
to the notification and pre-approval requirement. 
 
FEFTA Impact on Mutual Funds 
---------------------------- 
 
¶17.  (SBU) The USG submitted a paper outlining the negative impact 
of the increasing compliance burden of FEFTA on passive investors 
such as mutual funds.  The U.S. noted this appears to be a case of 
unintended consequences of investment regulations that potentially 
inhibit portfolio investment Japan says it wants to attract to make 
Tokyo an international financial center.  Ambassador Haslach 
indicated the U.S. also plans to make specific recommendations in 
this area in the Financial Services Working Group of the Regulatory 
Reform Initiative. 
 
Cargo Security 
-------------- 
 
¶18.  (SBU) Yasushi Akahoshi, Director of METI's Americas Division, 
presented a non-paper outlining specific recommendations on 
implementation of U.S. Customs and Border Protection (CPB) proposal 
to strengthen cargo security reporting requirements (the "10 plus 2" 
program.)  Embassy faxed a copy of the non-paper to EAP/J. 
 
 
TOKYO 00003104  004 OF 005 
 
 
¶19.  (SBU) The non-paper urges CPB to conduct a pilot project to 
test the desirability and impact of the new rules and to postpone 
final implementation of the rule to allow CPB to evaluate the 
feasibility and impact of the new rule.  The GOJ also urges the USG 
to exempt companies "certified and validated" as Customs-Trade 
Partnership against Terrorism (C-TPAT) participants from the 
importer security filing requirement. 
 
¶20.  (SBU) Ambassador Haslach assured the GOJ that "the U.S. hears 
your concern" about 10 plus 2.  She promised to pass the non-paper 
to the Embassy CPB attach.  She added that release of a final rule 
in this area is expected soon, but the exact date is uncertain.  She 
also said the USG expects there will be a phased period of 
implementation, and urged the GOJ to present its non-paper as well 
at the next digital video conference of the Study Group on Secure 
and Efficient Trade planned for early November. 
 
Bilateral Investment Treaties 
----------------------------- 
 
¶21.  (SBU) Continuing a discussion begun in previous working group 
meetings, the two sides briefed on recent developments in 
negotiations of bilateral investment treaties (BIT) with third 
countries.  Noriyuki Mita, Director of METI's Economic Partnership 
Agreement Division, reviewed the history of Japan's BIT strategy. 
Since early 2007, Japan has actively pursued BITs with individual 
trading partners not currently ready to enter into negotiations on 
full-scale Economic Partnership Agreements.  Japan will seek to 
expand such agreements, especially with countries in the Middle 
East, Africa, and Central Asia, where there is increased Japanese 
investment in resources sectors. 
 
¶22.  (SBU) Ambassador Haslach explained the United States is 
actively pursuing BITs with numerous economies.  This year, the U.S. 
formally launched BIT negotiations with China, India, and Vietnam 
and held BIT-related discussions with Brazil, Gabon, Georgia, Ghana, 
Indonesia, Mauritius, and Pakistan.  The U.S. and Japan, she 
emphasized, should cooperate to promote a global web of 
high-standard international investment agreements.  Such agreements 
could set positive precedents for future investment agreement 
negotiations worldwide.  The July 2008 G8 Declaration underscored 
the importance of these objectives. 
 
¶23.  (SBU) Ambassador Haslach explained the status of the U.S. 
ongoing BIT negotiations with China, which were launched at the 
fourth U.S.-China Strategic Economic Dialogue.  Two negotiating 
rounds have taken place, and based on the content of the talks to 
date, there appears to be significant common ground with China on 
core investor protections -- such as those on expropriation and 
"fair and equitable treatment" -- as well as on investor-State 
arbitration.  However, there are fundamental differences in the area 
of national treatment and exceptions to the national treatment 
obligations on a negative list basis.  Mita reported Japan's 
negotiations on a trilateral Japan-China-Republic of Korea BIT were 
meeting similar obstacles. 
 
Looking Ahead 
------------- 
 
¶24.  (SBU) Both sides agreed to hold the next IWG meeting in the 
first quarter of 2009.  Before then, the two sides will consult 
internally as well as with each other on possible new items to add 
to the working group agenda that might spur expanded cross-border 
FDI. 
 
Text of Joint Press Statement 
 
TOKYO 00003104  005 OF 005 
 
 
----------------------------- 
 
¶25.  (U) Joint Press Statement by the Co-Chairpersons of 
Japan-United States Bilateral Investment Working Group 
 
¶26.  (U) The Japan-United States Bilateral Investment Working Group 
was held on October 29, 2008 in Tokyo.  The Working Group was 
co-chaired by Mr. Makoto Shiota, Deputy Director-General of Trade 
Policy Bureau, METI (Ministry of Economy, Trade and Industry) and 
Ambassador Patricia Haslach of the U.S. Department of State. 
 
¶27.  (U) The two chairs expressed the common view on the importance 
of continuing to promote foreign direct investment, taking careful 
note of the current economic downturn caused by the recent financial 
market turmoil.  A positive trade and investment agenda will 
contribute to rapid return to prosperity and economic growth. 
 
¶28. (U) In today's meeting, both sides exchanged and updated 
information and views on: 
 
-- Our respective investment climates, including the recommendations 
of the Expert Committee on FDI Promotion on the Japanese side; 
 
-- Cargo Security issues, including "10 plus 2" rules, and 100% 
scanning; 
 
-- Security Related Investment Reviews, including updates on the 
U.S. FINSA (Foreign Investment and National Security Act) and 
implementation of Japan's FEFTA (Foreign Exchange and Foreign Trade 
Act); 
 
-- Negotiations toward a U.S.-China Bilateral Investment Agreement 
and other Bilateral Investment Treaties as well as Japan's global 
strategy on negotiating Bilateral Investment Treaties. 
 
¶29.  (U) The Investment Working Group is one aspect of the 
Japan-U.S. Investment Initiative, which is a key component of the 
cooperative framework of the Japan-U.S. Economic Partnership for 
Growth.  This framework was launched by then Prime Minister 
Junichiro Koizumi and President George W. Bush in 2001.  The 
Japan-U.S. Investment Initiative is aimed at promoting bilateral 
direct investment between the two countries, by holding wide-ranging 
discussions related to investment climate and investment rules and 
regulations.  (End text) 
 
¶30.  (U) Ambassador Haslach cleared this cable subsequent to her 
departure from Tokyo. 
 
SCHIEFFER