VZCZCXRO8536
PP RUEHFK RUEHGH RUEHKSO
DE RUEHKO #0099/01 0160805
ZNR UUUUU ZZH
P 160805Z JAN 09
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC PRIORITY 0080
INFO RUEHBJ/AMEMBASSY BEIJING 7262
RUEHBY/AMEMBASSY CANBERRA 2979
RUEHFR/AMEMBASSY PARIS 6379
RUEHUL/AMEMBASSY SEOUL 3275
RUEHGP/AMEMBASSY SINGAPORE 7322
RUEHFK/AMCONSUL FUKUOKA 1895
RUEHHK/AMCONSUL HONG KONG 6672
RUEHOK/AMCONSUL OSAKA KOBE 5683
RUEHKSO/AMCONSUL SAPPORO 2454
RUEHGH/AMCONSUL SHANGHAI 0517
RUEHGV/USMISSION GENEVA 3463
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBS/USEU BRUSSELS
RUEAWJA/JUSTICE DEPT WASHDC
RUEATRS/TREASURY DEPT WASHDC

UNCLAS SECTION 01 OF 04 TOKYO 000099 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP AMBASSADOR HASLACH AND EAP/J 
DEPT ALSO FOR EEB/IFD 
DEPT PASS USTR FOR CUTLER AND BEEMAN 
USDOC FOR 4410/ITA/MAC/OJ 
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB 
TREASURY DEPT FOR IA/CARNES AND POGGI 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: EINV ECON PGOV OECD JA
SUBJECT: FDI IS BRIGHT SPOT IN JAPAN'S ECONOMIC GLOOM 
 
REF: A. 08 TOKYO 3542 
     ¶B. 08 TOKYO 3417 
     ¶C. 08 TOKYO 2029 
     ¶D. 08 TOKYO 1421 
     ¶E. 08 TOKYO 1337 
     ¶F. 08 TOKYO 1950 
     ¶G. 08 TOKYO 402 
 
Sensitive But Unclassified.  Please protect accordingly. 
 
¶1.  (SBU) Summary.  Foreign direct investment (FDI) is a 
relative bright spot in the Japanese economy despite global 
economic difficulties.  Although recent financial market 
turmoil reduced the pace of Japan's FDI inflows, those flows 
remain positive.  The GOJ is quietly pursuing policy 
initiatives intended to improve Japan's investment climate 
that could, as the global economic picture improves, lead to 
greater FDI inflows.  The Cabinet Office and METI are 
drafting a new investment promotion strategy, Japan's first 
since 2006, in response to recommendations in the May 2008 
Investment Experts Report.  The Ministry's Corporate Value 
Study Group updated its guidelines on adopting corporate 
takeover defenses.  METI also established a study group to 
examine the issue of outside directors on corporate boards 
and to recommend whether the GOJ should revise the definition 
of "outside" and require all listed companies to have a 
minimum number of such directors, something the USG has long 
advocated in the Regulatory Reform Initiative.  End Summary 
 
¶2.  (SBU) Amidst Japan's recent gloomy economic outlook (Ref 
B), FDI has been a relative bright spot.  Although Japan's 
FDI inflows between January and November 2008 were down 13.2 
percent compared to the same period in 2007, those flows 
remain positive.  This deceleration of inward FDI largely 
reflects dramatically reduced global liquidity rather than 
Japan-specific factors. 
¶3.  (SBU) Meanwhile, Japan's overall FDI stock continues to 
rise.  As of September 2008, the latest figures available, 
Japan's FDI stock was 17.02 trillion yen, equivalent to 3.3 
percent of nominal GDP, according to preliminary Ministry of 
Finance (MOF) figures, and up 12 percent from the end of 
CY2007.  This figure does not reflect the November 2008 sale 
of combined 700 million dollars in stakes in Suzuki Motors 
and Mazda by U.S. automakers General Motors and Ford, 
respectively.  The GOJ continues to promote the national goal 
of raising Japan's FDI stock to the equivalent of five 
percent of GDP by the end of FY2010 (March 2011), although 
GOJ investment officials admit privately this goal may be 
difficult to achieve given the current economic climate. 
¶4.  (U) On the portfolio side, non-resident investors, both 
individual and institutional, were net sellers of 
Tokyo-listed stocks in 2008 for the first time since 2002. 
Between January and December, foreigners sold, on balance, 
7.38 trillion yen (USD 82 billion at current exchange rates) 
worth of shares in Japanese companies.  The most aggressive 
selling took place in March and April, when the Nikkei 225 
benchmark index was well above current levels, and again 
between July and November as the global credit crunch hit. 
M&A Also Down but Not Out 
----------------------- 
¶5.  (SBU) The severe tightening of global liquidity has had a 
similar effect on the value and volume of merger and 
acquisition (M&A) deals involving Japanese companies.  The 
total number of M&A transactions involving Japanese companies 
fell 11 percent to 2399 while the value of those deals was 
down marginally to 12.5 trillion yen, according to 
Tokyo-based M&A consultancy Recof.  The value of deals 
involving foreign purchases of Japanese companies -- always a 
 
TOKYO 00000099  002 OF 004 
 
 
small subset of the total amount -- fell even further, down 
82 percent to 503 billion yen.  Although the number and value 
of Japanese-related M&A deals in 2008 declined to its 2004 
level, it was still the fourth highest amount on record. 
Government Policy Quietly Positive 
---------------------------------- 
¶6.  (SBU) In the midst of this gloomy economic news, the GOJ 
has begun to take a number of positive steps to improve 
Japan's overall investment climate.  Although GOJ policies 
are by no means countering the impact of the global financial 
crisis on inward investment, they may have prevented an even 
worse outcome by reversing a string of negative international 
press reports about Japan's investment climate between 
January and May. 
¶7.  (SBU) Within the bureaucracy, officials continue quietly 
implementing the pro-FDI policy direction set out by 
then-Minister for Economic and Fiscal Policy Hiroko Ota in 
the first half of 2008.  Ota's chief success was establishing 
the Investment Experts Committee under prominent pro-reform 
economist Professor Haruo Shimada.  The group, which included 
the Presidents of the American Chamber of Commerce in Japan 
and the European Business Council, submitted a report in June 
2008 recommending measures the GOJ should take to 
dramatically expand inward FDI (Ref D).  The Committee's 
recommendations, all of which echoed proposals the USG has 
advocated in the Regulatory Reform and Investment 
Initiatives, urged the GOJ to: (1) Clarify rules governing 
the introduction of anti-takeover defense measures and to 
examine why foreign investors have not made more use of the 
triangular merger provisions in the 2006 Company law;" (2) 
Conduct a "comprehensive study" of the scope and grounds for 
national security or public order restrictions on foreign 
investment based, which were used in the May 2008 J-Power 
case; (Ref E-F); (3) Identify priority sectors for the 
promotion of inward FDI that have the potential to revitalize 
the Japanese economy or improve citizens quality of life, 
with special emphasis on improving citizens' access to 
advanced medical devices and pharmaceuticals; (4) Reduce 
business costs, in part by lowering corporate tax rates, and 
increase regulatory transparency; and 5) Develop strategies 
to promote regional economic revitalization through 
attraction of foreign capital.  Since the issuance of the 
Committee report, the GOJ has taken steps to implement each 
of the recommendations. 
Cabinet Office Preparing New Investment Strategy 
--------------------------------------------- --- 
 
¶8.  (SBU) The Council on Economic and Fiscal Policy 
incorporated the main thrust of the Shimada Committee report 
into the government's annual Economic and Fiscal Policy 
Strategy document issued in July 2008.  Since then, the 
Cabinet office has begun drafting a new national investment 
strategy, the first since June 2006, which should be complete 
by the end of January 2009. 
¶9.  (SBU) Two key pillars of that strategy, according to a 
top official in METI Trade and Investment Facilitation 
Division, are tax relief for certain types of portfolio 
investors and new programs to encourage FDI in Japan's 
regions.  The GOJ is concerned that currently 80 percent of 
inward FDI goes to Tokyo and its three neighboring 
prefectures.  As part of this strategy, METI and JETRO will 
organize up to six regional investment matching seminars in 
2009 focused on foreign companies with existing investments 
in Tokyo.  The aim is to encourage these companies to expand 
operations to other parts of the country.  This approach 
matches a pattern Toyota successfully followed in the 
mid-1980s when it expanded from its Nagoya base to set up 
manufacturing plants in Miyagi and Northern Kyushu. 
 
TOKYO 00000099  003 OF 004 
 
 
¶10.  (SBU) The Cabinet Office at the same time has begun to 
target seminars at regional government economic promotion 
officials, focusing on prefectures with little existing FDI. 
The aim is to accelerate inward FDI into Japan's regions, 
provide training to local economic development officials on 
investment promotion strategies, and disseminate information 
on past "success stories" of foreign investors in the 
Japanese market.  The first seminar takes place January 30 in 
Matsuyama, Ehime prefecture. 
¶11.  (U) Even before the new investment strategy is complete, 
the GOJ included in its annual year-end tax amendment 
legislation a proposal to eliminate capital gains for 
non-residents who own shares in Japanese firms through 
investment funds.  The aim is to promote additional portfolio 
investment.  The current withholding rate on such gains is 40 
percent.  To be eligible for the proposed exemption, the 
funds must hold the stake for a minimum of one year. 
METI Becomes Proactive on M&A Rules 
----------------------------------- 
 
¶12.  (SBU) Simultaneous with the drafting of the Shimada 
Committee report, METI reconstituted its Corporate Value 
Study Group (CVSG) to re-examine the issue of corporate 
takeover defenses.  Since the last CVSG report on the subject 
in 2005, more than 500 listed companies had adopted some form 
of takeover defense, a trend that foreign investors and 
equity analysts sharply criticized.  Mid-level METI officials 
recognized the defense measures many firms had adopted were 
inconsistent with joint METI-Ministry of Justice guidelines 
and were undermining investor confidence in Japan.  The study 
group issued its report in July 2008, immediately fulfilling 
one of the Shimada Committee's recommendations.  The report 
included the statement that shareholders and management have 
"common interests in increasing corporate value", and M&A, 
even if hostile, can have a potential positive impact on the 
corporate value of the target company.  The report emphasized 
that improper implementation of takeover defense measures 
"deprives shareholders who support a takeover bid of the 
opportunity to sell their shares to a potential acquirer" and 
that it is never acceptable to use takeover defenses for the 
purpose of entrenching management. 
 
¶13.  (SBU) Such a pro-FDI report from a ministry that at 
times had been publically critical of the increasing amount 
of hostile M&A since 2005 was a welcome change of tone.  A 
few months earlier, then-METI Vice Minister Takao Kitabata 
had publically criticized U.S-based investment fund Steel 
Partners as an example of the "greedy" and "irresponsible" 
behavior of activist shareholders (Ref G). 
¶14.  (SBU) In another sign of changing METI attitudes, 
foreign fund managers report ministry officials have begun 
engaging them to discuss Japan's investment climate.  While 
the two sides do not always agree, the fund managers say they 
are satisfied METI officials are at least willing to listen. 
A senior executive of Steel Partners Japan even credited the 
CVSG report and its active promotion by METI officials with 
triggering a more cooperative attitude among executives of 
companies in which the fund invests and an increased 
willingness of those managers to listen to Steel's 
suggestions for corporate improvement. 
Re-examining the Issue of Independent Directors 
--------------------------------------------- - 
¶15.  (SBU) The same METI Division Director who oversees the 
CVSG established a Corporate Governance Study Group in 
December 2008 tasked with examining Japan's current corporate 
governance structures and advising on possible changes to 
Japan's company Law.  Specifically, METI asked the new study 
group, chaired by Tokyo University Law Professor Hideki Kanda 
 
TOKYO 00000099  004 OF 004 
 
 
and including 21 business executives, lawyers, and academic 
experts on corporate law, to examine whether listed firms 
should have a minimum number of outside directors on their 
boards and whether the current legal definition of "outside 
director" is adequate to protect the interests of minority 
shareholders, especially in cases in which parent and 
subsidiary companies are separately listed.  The Study 
Group's mandate includes several issues the USG has included 
in its commercial law-related recommendations in recent 
Regulatory Reform Initiative reports.  The Study Group's work 
is expected to be completed by June 2009. 
Security Related FDI Rules 
-------------------------- 
¶16.  (SBU) Similarly, in response to another of the Shimada 
Committee's recommendations, the GOJ in late December 
established a director general-level inter-ministerial 
liaison group tasked with reviewing existing GOJ regulations 
that govern approval of FDI in sensitive sectors.  The group 
will review which sectors are covered by the Foreign Exchange 
and Foreign Trade Control Law and may also make 
recommendations regarding the review process for potentially 
sensitive transactions.  A report to the Council on Economic 
and Fiscal Policy is due by March 2009. 
ZUMWALT