VZCZCXRO4702
PP RUEHFK RUEHGH RUEHKSO
DE RUEHKO #0721/01 0900708
ZNR UUUUU ZZH
P 310708Z MAR 09
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC PRIORITY 1912
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 8529
RUEHLO/AMEMBASSY LONDON PRIORITY 2396
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RUEHIN/AIT TAIPEI PRIORITY 7299
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
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UNCLAS SECTION 01 OF 04 TOKYO 000721 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP AND EAP/J 
DEPT ALSO FOR EEB/IFD 
DEPT PASS USTR FOR CUTLER, BEEMAN AND HOLLOWAY 
NSC FOR LOI 
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: JAPAN'S NEW NATIONAL INVESTMENT STRATEGY 
 
REF: A. 08 TOKYO 1421 
     ¶B. 08 TOKYO 1199 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary: The GOJ unveiled its new national 
investment strategy at a March 23 JETRO-sponsored investment 
seminar in Tokyo with little fanfare and no publicity.  The 
new strategy, in draft since December 2008, retains much of 
framework of the earlier strategy adopted in 2006, while 
incorporating the key recommendations of a 2008 Cabinet 
Office ad-hoc committee of investment experts (Ref A). 
Japan's national target of doubling its foreign direct 
investment (FDI) stock, as a percentage of GDP, by the end of 
FY2010 remains unchanged.  METI officials, however, publicly 
acknowledge this target will be difficult to achieve in the 
current recession.  The new strategy, while comprehensive, is 
simply a blueprint of actions the GOJ hopes to take.  It 
contains no timetable for implementation or assurances of new 
budget allocations.  In the absence of ministerial-level 
attention to investment issues, lacking since mid-2008, it is 
uncertain how effective implementation will be.  End Summary. 
 
¶2.  (SBU) The impetus to revise Japan's national investment 
strategy was the May 2008 report from the Cabinet Office's 
Expert Committee on FDI Promotion (known as the "Shimada 
report" after the name of the committee's chairman, Keio 
University Economics Professor Haruo Shimada).  Former State 
Minister for Economic and Fiscal Policy Hiroko Ota appointed 
the panel, whose members included the heads of the U.S. and 
European business chambers as well as several prominent 
pro-investment academics, in January 2008 in response to 
widespread public criticism that Japan's pro-FDI policies had 
weakened since the departure of aggressively pro-reform Prime 
Minister Junichiro Koizumi. 
 
¶3.  (SBU) Most importantly, METI and the Cabinet office in 
drafting the new strategy retained the government's long-term 
target of increasing Japan's FDI stock to the equivalent of 
five percent of GDP by the end of FY2010 (March 2011).  METI 
Director of Trade and Investment Facilitation, who unveiled 
the new strategy at the JETRO seminar, estimates meeting that 
target will require boosting Japan's FDI stock from its 
current level of 17.1 trillion yen (3.3 percent of GDP) to 
between 24-25 trillion yen over the next two years.  He 
admits, however, that goal will be difficult to achieve.  As 
of January 2008 (the latest figures available), Japan's net 
FDI inflows remain positive, although they have slowed 
considerably since mid-2008.  METI fears, however, Japan will 
experience a net FDI outflow in 2009 as a result of likely 
disinvestment by several financial multinationals.  The 
financial sector currently accounts for 41 percent of Japan's 
overall FDI, according to Ministry of Finance figures. 
 
A Revised National FDI Promotion Blueprint 
------------------------------------------ 
 
¶4.  (SBU) The core of the new investment strategy is a 
revision of the government's "Program for Acceleration of 
Inward FDI" last updated in June 2006.  The new strategy 
focuses, in part, on targeting inward FDI to support the 
government's parallel goal of revitalizing Japan's regional 
economies.  The government will encourage local governments 
to collaborate in drafting regional investment promotion 
programs and establishing "industrial development clusters", 
based on local industrial specializations.  Under JETRO's 
 
TOKYO 00000721  002 OF 004 
 
 
leadership, the central government will publicize these 
regional hubs to foreign investors.  JETRO's outreach efforts 
will target foreign firms with existing business operations 
in Japan and encourage them to consider secondary investments 
in beyond the capital.  At present, more than 75 percent of 
Japan's inward FDI ends up in the greater Tokyo area. (Ref B.) 
 
¶5.  (SBU) The revised program also lays out concrete steps 
the government intends to take to improve the overall climate 
for FDI and the market for cross-border mergers and 
acquisition (M&A).  Most of these proposals draw from 
recommendations in the Shimada Report. 
 
¶6.  (SBU) To facilitate increased M&A activity, the 
government, inter alia, will: 
 
-- publicize the July 2008 METI Corporate Value Study Group 
report on the appropriate use of corporate takeover defenses 
(a process which has already begun); 
 
-- promote dialogue between industry groups and private 
investment funds in order to "effectively utilize investment 
funds as an important source of risk capital;" 
 
-- actively collect and disseminate success stories of how 
cross-border M&A and other types of strategic alliances 
between foreign and Japanese firms have contributed to the 
revitalization of local business activities and improved job 
security at target Japanese companies.  The second half of 
the March 23 JETRO seminar consisted of presentations by 
academics on the benefits of M&A and video testimonials from 
several small and medium-sized high-tech firms, most based in 
Japan's regions, which have built strategic alliances with 
foreign partners or investment funds to obtain capital to 
expand their business activities or enter overseas markets. 
This portion of the program stimulated lively and mostly 
positive discussion among the more than 150 assembled 
business executives. 
 
¶7.  (SBU) The strategic plan also promises the government 
will undertake a study of the current M&A climate in Japan, 
including the number and value of recent cases, and will 
disseminate the results widely both domestically and abroad. 
This proposal is consistent with the USG recommendation in 
the current round of the Regulatory Reform Initiative that 
asks Japan to undertake a study of the reasons for the 
limited number of cross-border deals since the coming into 
force of the triangular merger provisions in Japan's 2006 
Company Law. 
 
¶8.  (SBU) The plan also states the government will seek to 
enhance Japan's cross-border investment flows by accelerating 
negotiation of bilateral investment treaties and Economic 
Partnership Agreements (Japan's version of FTAs) with 
investment chapters.  The government will also promote 
greater transparency of investment policies among its major 
regional trading partners in line with APEC's Investment 
Facilitation Action Plan. 
 
¶9. (SBU) Finally, the government commits to "review the 
effective corporate tax rate" in line with another of the 
Shimada report's recommendations.  The timing and size of any 
changes to tax rates is left undefined, although the FY2009 
budget does include a specific measure to reduce tax rates 
for the next two fiscal years for certain small and 
medium-sized firms. (See paragraph 13.) 
 
TOKYO 00000721  003 OF 004 
 
 
 
Sector Specific Measures 
------------------------ 
 
¶10.  (SBU) The revised strategy also includes a proposal to 
develop an action plan for the acceleration of the 
examination of new medical devices (as called for in the 
Shimada report) and to create "Super Special Zones" for 
state-of-the-art healthcare development to facilitate 
"cutting-edge medical technology", in particular, in the 
fields of regenerative medicine, pharmaceuticals, and medical 
devices. 
 
¶11.  (SBU) The plan also promises the government will 
facilitate the internationalization of Haneda airport and 
24-hour operation of international airports in Japan's major 
metropolitan areas. 
 
Tax Code Changes 
---------------- 
 
¶12.  (SBU) The new investment strategy also references three 
tax changes included in the FY2009 budget that passed the 
Diet on March 27, in addition to the agreement to review the 
overall corporate tax rate.  The first change provides an 
exemption from Japanese taxation for passive investors who 
invest in Japanese companies through off-shore investment 
funds, provided the investor owns no more than 25 percent of 
the fund's total assets.  The second change will temporarily 
allow 100 percent deprecation in the first year for 
investments in energy-saving equipment or new energy 
development projects.  The third change will lower the 
applied tax rate from 22 percent to 18 percent rate through 
the end of FY2010 for the first 8 million yen in income 
earned by small and medium-sized enterprises. 
 
Venture Capital Fund 
-------------------- 
 
¶13.  (SBU) In a surprise move, METI also announced at the 
March 23 investment seminar the creation of an Innovation 
Corporation of Japan, a public-private consortium that will 
receive 400 million yen (USD 4.2 million) in government 
capital to partner with private investors to fund start up 
projects in the area of clean energy, life sciences, and 
other "green" projects.  The idea has not yet moved beyond 
the planning stage, according to the METI official who 
introduced the concept at the JETRO seminar.  The timing of 
the announcment, however, is fortuitous.  Japan's lack of 
secure sources of venture capital has become a topic of 
interest among Tokyo's foreign investor community.  The 
chairman of ACCJ's FDI Committee, in a February 26 Asian Wall 
Street Journal op-ed piece, called on the Japanese government 
to allocate part of its planned FY2009 stimulus spending to 
revitalize Japan's venture capital industry. 
 
Comment 
------- 
 
¶14.  (SBU) While the new investment strategy includes policy 
measures the USG and U.S. business community have long 
advocated, effective implementation of the strategy is 
uncertain.  None of the current cabinet lineup has taken an 
active interet in promoting increased FDI.  The Prime 
Minister and his senior economic policy officials are more 
focused on responding to Japan's export decline and the 
 
TOKYO 00000721  004 OF 004 
 
 
recent sharp rise in unemployment.  While working level 
officials at METI, JETRO and the Cabinet office with direct 
responsibility for promoting investment are serious and 
committed, how successful they can be in the absence of 
senior political support remains an open question. 
POST