Cablegate: Daily Summary of Japanese Press 09/27/06

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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 09/27/06

INDEX:

(1) Abe cabinet shifts policy weight to "economic growth", with
advocates of fiscal construction placed outside cabinet

(2) US hopes for Japan's continued reform

(3) Profiles of five prime ministerial assistants

(4) Profile of Internal Affairs and Communications Minister
Yoshihide Suga: Mastermind of Parliamentary League Supporting
Society with Second Chances

(5) Profile of State Minister in charge of Economic and Fiscal
Policy Hiroko Ota

(6) Profile of Foreign Minister Taro Aso: Joined forces with prime
minister over North Korea's missile issue

(7) Koizumi & America: Koizumi follows Uncle Sam without hesitation,
but what about Abe?

(8) Minshuto's "Next Cabinet" includes many junior members

(9) Uncertainty looming over prospect of making profit from first
Japan-made passenger plane with carriers remaining cautious about
introduction

ARTICLES:

(1) Abe cabinet shifts policy weight to "economic growth", with
advocates of fiscal construction placed outside cabinet

ASAHI (Page 11) (Slightly abridged)
September 27, 2006

Many business leaders and market players see the selection of the
new economic minister in the Abe cabinet as a result of "priority
given to economic growth," as said by Dai-ichi Mutual Life Insurance
Co. Economic Research Institute Chief Economist Hideo Kumano. Prime
Minister Abe appointed Liberal Democratic Party lawmakers lobbying
for commerce and industry interests as finance minister and economy,
trade and industry minister. Meanwhile, many of those giving
priority to fiscal reconstruction were left out of the cabinet.
Under such a situation, discussion of a hike in the consumption tax
is likely to be put off to sometime after next summer's House of
Councillors election.

Fiscal policy

In a speech he delivered after being appointed finance minister,
Koji Omi, even while touching on the importance of fiscal
reconstruction, indicated a willingness to reduce the corporate tax.
Omi said: "A tax system that helps promote investment in research
and development will contribute to bringing tax revenues to the plus
column over the long run." Omi used to be an official of the
Ministry of International Trade and Industry. In debates on tax
system reform held at every year's end, Omi proposed reducing the
tax burden on corporations in order to bolster their competitiveness
and revitalize small businesses. In discussion on tax reform at the
end of this year, the focus will be on whether the government would
decide on corporate tax cuts worth several hundred billion yen.

TOKYO 00005605 002 OF 011

Asked about a hike in the consumption tax, Omi said: "Full-scale
discussion will start next fall or later." The latest annual
economic and fiscal policy guidelines compiled under the previous
Koizumi administration noted: "A conclusion will be reached within
FY2006." But discussion on sweeping tax reform is now likely to be
put on hold.

Minister of Economy, Trade and Industry Akira Amari is also a member
of the LDP commerce and industry policy clique in the Diet, serving
such posts as LDP Commerce and Industry Division head. METI has
welcome Amari's assumption of office as METI minister, a senior
ministry official saying: "Now, we have a major ally in the process
of compiling next fiscal year's budget and revising the tax
system."

Over a review of tax revenues for highway building, it has generally
been decided that extra funds will be used for fiscal
reconstruction. But Land, Infrastructure and Transport Minister
Tetsuzo Fuyushiba stated in an inaugural speech: "Respect should be
paid to taxpayers' intentions." Fuyushiba indicated a cautious view
about reallocating fiscal resources for road construction for
general expenditures and understanding about tax cuts.

State Minister in Charge of Economic and Fiscal Policy Hiroko Ota
was picked from the private sector and will have jurisdiction over
the Council on Economic and Fiscal Policy. She once engaged in
drawing up the government's annual economic and fiscal policy
guidelines in the Cabinet Office. Recently, though, the leadership
for policymaking has been shifted from the policy panel to the
ruling camp. Attention is being focused on to what extent she will
be able to demonstrate her political presence in playing against LDP
Secretary General Hidenao Nakagawa and Policy Research Council

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Shoichi Nakagawa.

Financial policy

State Minister in Charge of Financial Services and "Second Chance"
Programs Yuji Yamamoto have the experience of serving as senior vice
minister for financial affairs, but his ability in dealing with
financial affairs remains unknown. With an eye on deliberations on a
bill amending the Loan Shark Control Law in the upcoming
extraordinary Diet session, Yamamoto said: "I am determined to
resolve the issue of multiple debts, a problem standing in the way
of promoting the second chance programs."

With the aim of accelerating the nation's economic growth, Yamamoto
may apply greater pressure to the Bank of Japan (BOJ) to ease its
monetary grip further. His predecessor, Kaoru Yosano, indicated
understanding toward the BOJ and contributed to the removal of the
monetary-easing policy and the zero-interest policy. The BOJ, which
is looking for the right timing for additional interest-rate raise,
might be driven into a difficult position.

(2) US hopes for Japan's continued reform

ASAHI (Page 11) (Slightly abridged)
September 27, 2006

Kaoru Nishizaki, Washington

The United States Bush administration hopes that the Abe government
will continue Koizumi's reform line. Treasury Secretary Paulson
said: "It is necessary for Japan to continue economic reform in

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wide-ranging areas, including telecommunications. Reform should be
continued, even not dramatically, as Prime Minister Koizumi did."

The favorable personal relationship between Koizumi and President
Bush was reflected in bilateral economic relations under the Koizumi
administration. However, the US, seeing the Abe administration's
economic management as unknown, has judged it necessary to remind
the new administration of the need to continue reform. The United
States also seems to be keeping in mind former Internal Affairs and
Communications Minister Heizo Takenaka's resignation as House of
Councillors member. Takenaka is credited in Washington with economic
recovery.

Some members in the US government have also begun to stress the need
to further strengthen dialogue over economic relations between Japan
and the US, taking the opportunity of the Abe government's
establishment.

With few trade disputes pending between Japan and the US for now, US
industrial circles and Congress set their harsh sights on China.
Even so, in Detroit, in which auto manufacturers are concentrated,
some have criticized Japan or have trust requests at Japan. A local
assembly member said: "By keeping a stronger yen, Japan has
encroached on the US market." On the beef issue, the assembly member
said: "A total ban should not be repeated."

(3) Profiles of five prime ministerial assistants

ASAHI (Page 4) (Abridged slightly)
September 27, 2006

Yuriko Koike, in charge of national security

As environment minister under the former Koizumi administration,
spearheaded the national "Cool Biz" drive encouraging business
people to wear cool and comfortable clothes, such as laid-back
Okinawa shirts, that were appropriate for business occasions,
shedding ties and jackets. The drive also encouraged people to
sprinkle water to stay cool, reducing urban heat island effects.

After serving as a television newscaster, entered the political
world as requested by former Prime Minister Morihiro Hosokawa.
Joined the Liberal Democratic Party in 2002 after the Japan New
Party, the New Frontier Party, the Liberal Party, and the New
Conservative Party. Served as an aide to Ichiro Ozawa during the
Liberal Party days. Voluntarily played the role of an "assassin"
candidate in the Lower House election last fall.

Age 54; Mori faction; served as environment minister; Cairo
University graduate, elected five times to the Lower House, once to
the Upper House; Tokyo No. 10 district.

Takumi Nemoto, in charge of economic and fiscal policy

On friendly terms with Prime Minister Shintaro Abe, Chief Cabinet
Secretary Yasuhisa Shiozaki, and LDP Acting Secretary-General

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Nobuteru Ishihara. During the 1998 "financial Diet session,"
attracted attention as a member of a new policy breed.

Believes that policies are most important for lawmakers. Although
generally regarded as a lawmaker representing the interests of the
health and welfare industries, worked hard for coordinating views in
the party over the question of reviewing road revenues.

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Likes swimming and climbing mountains. Holds a first-degree black
belt in Aikido. Likes ice cream, as well.

Abe 55; Niwa-Koga faction; served as Lower House Economy, Trade and
Industry Committee chairman and senior vice Cabinet Office minister;
University of Tokyo graduate; elected five times to the Lower House;
Fukushima No. 2 district.

Kyoko Nakayama, in charge of the abduction issue

Made strenuous efforts to support abductees and their families as
especial adviser to the cabinet for two years from the fall of 2002.
Those long and hard days are discussed in Prime Minister Abe's book
Toward a Beautiful Country. Families of abductees trusted her so
deeply that the Association of the Families of Victims of Kidnapped
by North Korea released a statement urging her not to resign as
cabinet adviser.

Served as the nation's first female Shikoku regional financial
bureau chief of the former Finance Ministry. Lower House member
Nariaki Nakayama is her husband.

Age 66; not a lawmaker; served as special adviser to the cabinet,
ambassador to Uzbekistan, and Foreign Ministry official; University
of Tokyo graduate.

Eriko Yamatani, in charge of education reform

Believes the failure to teach differences in the roles of the two
genders at school have resulted in extreme sex education. Hurled a
question at former Prime Minister Koizumi at the Diet by producing
teaching materials illustrating sexual intercourse. Served as
secretary general of a fact-finding team led by Abe. Also served as

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editor-in-chief of the publication Sankei Living. A mother of three
children. Unsuccessfully ran in the 2003 general election on the New
Conservative Party ticket, and won an Upper House proportional
representation seat in 2004 on the LDP ticket.

Age 56; Mori faction; served as Cabinet Office parliamentary
secretary and information magazine editor-in-chief; Sacred Heart

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University graduate; elected once each to the Upper House and the
Lower House; proportional representation.

Hiroshige Seko, in charge of public relations

After entering NTT, obtained a master's degree in public relations
and corporate communications from Boston University. Served as the
company's public relations section chief.

Won an Upper House seat for the first time in 1998 that was vacated
by the death of his uncle Masataka Seko. In the final days of the
Mori cabinet, which had been suffering from low support rates,
stressed the need to improve the government's public relations to
then Deputy Chief Cabinet Shinzo Abe.

Since then, constantly supported Abe in party reform and general
elections. Took charge of the party's media strategy in the Lower
House election last fall.

Age 43; Mori faction; served as Upper House General Affairs
Committee member and NTT public relations section chief; Waseda
University graduate; elected twice to the Upper House; Wakayama

TOKYO 00005605 005 OF 011

district.

(4) Profile of Internal Affairs and Communications Minister
Yoshihide Suga: Mastermind of Parliamentary League Supporting
Society with Second Chances

SANKEI (Page 4) (Full)
September 27, 2006

Distinguished himself as the leader of the Liberal Democratic
Party's (LDP) simulation team for economic sanctions against North
Korea. Became close to Prime Minister Shinzo Abe during the process
of drafting the legislation to ban the cargo-passenger ship Man
Gyong Bong from making port calls in Japan. Masterminded the
Parliamentary League Supporting Society with Second Chances.
Contributed to boosting the number of fellow supporters of Abe
behind the scenes using his solid channel to him.

Born as the eldest son of a farming family in Akita Prefecture. Has
been through the school of hard knocks, as can be seen in the fact
that after coming to Tokyo as part of a program in the early 1960s
of bringing in masses of middle or high school graduates from the
rural districts and finding jobs for them. He pulled himself up by
his bootstraps and entered a university. Worked as a salaried worker
and then served as a secretary to the late Lower House member
Hikosaburo Okonogi. Decided there to enter politics. First elected
to the Lower House in 1996, after serving as a Yokohama municipal
assembly member for two terms. Took a portfolio in the Abe cabinet
while in his fourth term as a Lower House member -- as is the case
with Sanae Takaichi, who became a Lower House member the same year
as he did and has just been appointed state minister in charge of
Okinawa and Northern Territories.

In the 1998 general election, left the faction he belonged to in
order to support the then Chief Cabinet Secretary Seiroku Kajiyama
for the premiership, countering the Obuchi faction's policy line.
Noted for being strong-willed, though he seemingly looks soft, and
for taking a good care of junior members.

Upgraded from being senior vice minister of the same ministry, he is
now challenged to promote financial decentralization. Can he parlay
his experience of being raised in a rural area and making a living
in an urban area into effective politics? He enjoys jogging and
fishing.

(5) Profile of State Minister in charge of Economic and Fiscal
Policy Hiroko Ota

SANKEI (Page 4) (Full)
September 27, 2006

Served as a researcher at the Life Insurance Culture Center
Foundation, an associate professor at Saitama University and a
professor at the National Graduate Institute for Policy Studies,
after graduating from the Hitotsubashi University Sociology
Department. Versed in financial affairs. Named as a candidate to
serve as a first female vice governor of the Bank of Japan (BOJ) in
the BOJ presidential race three years ago. Then State Minister in
charge of Economic and Fiscal Policy Heizo Takenaka selected her as
a Cabinet Office counselor (division director-level post) in 2002.
Was then promoted to director general for policy planning, the first
time a woman has served in that position. She was charge of drafting
white papers on the economy and public finance and monthly economic

TOKYO 00005605 006 OF 011

reports.

Appealing for the need to ease regulations, she served as a member
of a number of government councils and experts' panels. In private,
she has the image of being a gentle mother because of her soft
demeanor, as a Cabinet Office source put it. She may be well
qualified to serve as a poster minister for the new cabinet's
economic policy.

The Abe administration's spending cut policy, which is probably its
major economic policy, is expected draw criticism from some
lawmakers.

Since Ota has no experience as a politician, her coordination
capability is unknown. One veteran lawmaker noted: "There is fear
that she might fall into the same trap as Mr. Takenaka did. Mr.
Takenaka came under fierce fire from within the LDP, when he was in
charge of economic policy, for he had yet to become a lawmaker at
that time.

(6) Profile of Foreign Minister Taro Aso: Joined forces with prime
minister over North Korea's missile issue

SANKEI (Page 4) (Full)
September 27, 2006

He won the second largest number of votes in the Liberal Democratic
Party (LDP), garnering 136 in total -- 67 from rank-and-file members
and 69 from lawmakers; Abe took the no. 1 slot with 464. However,
the better than expected achievement has led to his reappointment as
foreign minister. During the past five years of the Koizumi
administration, he has served in key posts in the government and the
LDP, including LDP policy research council chairman, internal
affairs and communications minister, and foreign minister.
Reappointed as foreign minister, Aso has apparently managed to stay
as one of the candidates to succeed Prime Minister Abe in the
future.

Aso is hard-faced and has a tight-lipped mouth with one end turning
up. He is outspoken and speaks in an unpolished manner. Many gaffes
he has made are attributable to this manner of speaking. He is at
the same time a person with heart. He always cares about the people
around him. Since there is no way to recognize his charming points
unless one becomes close to him, he was called the man with a radius
or 2 meters during the LDP presidential race. However, he also
attracted enthusiastic devotees while campaigning.

In the face of the launches of ballistic missiles by North Korea
this July, he stood firm against Pyongyang along with then Chief
Cabinet Secretary Abe. He led the effort for the adoption of a
resolution condemning North Korea by the United Nations Security
Council. His cooperation with Prime Minister Abe was called the AA
coalition.

Aso is the grandson of former Prime Minister Shigeru Yoshida and the
scion of the Aso zaibatsu, which used to run the largest coal mine
in Kyushu. He studied at Stanford University in the US, after
graduating from Gakushuin University. He was first elected to the
Lower House in 1979, after serving as chairman of his family
business "Aso Industry," now Aso Cement, and chairman of the Japan
Junior Chamber of Commerce. He originally belonged to the Kochi-kai,
a faction led by former Prime Minister Kiichi Miyazawa, but later
formed the Daiyu-kai (Kono group), protesting Miyazawa's

TOKYO 00005605 007 OF 011

transferring his faction to former LDP Secretary General Koichi Kato
in 1999.

He is well known for enjoying reading comic books. He reads more
than 10 comic books a week. He once represented Japan in the
skeet-shooting competition at the Olympic Games. His motto is
"administration is for the sake of the public." His wife is the
third daughter of the late Prime Minister Zenko Suzuki. The couple
have one son and one daughter.

(7) Koizumi & America: Koizumi follows Uncle Sam without hesitation,
but what about Abe?

ASAHI (Page 13) (Full)
September 26, 2006

Hiroshi Hoshi, Asahi Shimbun senior writer

"Koizumi seems to be a nationalist," someone said. Another said, "He
might come out for Japan having an independent defense."

Such a conversation was going on in Washington in April 2001, when
Junichiro Koizumi survived the ruling Liberal Democratic Party's
presidential race and was soon to become prime minister. At the
time, eight Japan desk officials met to analyze Koizumi's career and
policy. Among the eight were officials from the Department of State,
the Department of Defense, and the Office of the US Trade
Representative. A week later, they worked out a report, which was
delivered to President Bush.

The report was wary of Koizumi, who was little known in the United
States. But it also stated that Koizumi, depending on the Bush
administration's response, could be a strong partner.

In June that year, two months later, Prime Minister Koizumi was
invited to the president's retreat, where Koizumi played catch ball
with Bush. The two leaders soon built a relationship of mutual
trust. Koizumi and Bush-far from being strong partners-continued
their honeymoon-like relationship. More than five years have passed
since then, and the Koizumi government has come to an end.

Why did Bush give high marks to Koizumi? I asked this question of a
former high-ranking US government official who took part in
preparing that report.

"After 9-11," the former official answered, "he sent troops and
cooperated with the United States as he promised." He added, "That's
the big reason." However, he also noted that Bush and Koizumi
"basically had the same position" and that Koizumi did not hesitate
to choose global values over Asian values.

The former official went on with the following commentary: When
talking about values like democracy, respect for human rights, and
market mechanism, Japanese political leaders often underscored
Asia's originality. They said they did not want us to force our
western-style values on them. They sometimes excused themselves for
accepting the delay of democratization and market liberalization in
China and Southeast Asia. Koizumi did not stick to Asian values...

In point of fact, "global" values overlap with "American" values.
Indeed, American market mechanisms held their own in the policies of
the Koizumi government. Koizumi followed US global
strategy-including the Iraq war-without hesitation. In the meantime,

TOKYO 00005605 008 OF 011

his visits to Yasukuni Shrine resulted in worsening Japan-China
relations, and he distanced himself from Asian values. He was "in
the same position" as Bush.

If the United States is honored by people around the world and keeps
its position as a superpower, Koizumi's way of following the United
States might remain in Japan's interests. However, the world
situation is changing. In particular, the United States, now bogged
down in Iraq since the war, has clearly shown its limits.

Kaname Saruya, a historian who has observed the United States for
over a half century, noted in his recently published Iwanami Shinsho
book, America, Why Don't You Get Old Beautiful: "America also peaked
after the Soviet Union collapsed. And now, Uncle Sam appears to be
in its autumn-gradually declining from the zenith of his power.
However, he may show the ugliness of old age if he gets into the
autumn of his life being disliked by other countries like now. He
probably cannot get old beautiful since he is so hated and disliked
all over the world."

The United States is now at a turning point, just when Shinzo Abe is
coming into office as Japan's new prime minister. In his Bunshun
Shinsho book, Toward A Beautiful Country, Abe talks about his view
of the United States. "The Japan-US alliance is the best choice,
when considering the United States' influence on the international
community as well as its economic power and its strongest military
power," Abe writes. He also notes, "Japan and America share
fundamental values in terms of freedom, democracy, human rights, the
rule of law, free competition, and market mechanisms."

Abe has something in common with Koizumi in their respective views
of the United States. However, Abe is positive about improving
Japan's relations with China and South Korea. Will this make Abe
approach Asian values or otherwise make him keep hanging on to
American values? At any rate, how to face this superpower in its
autumn is a major challenge for Abe and his administration.

(8) Minshuto's "Next Cabinet" includes many junior members

ASAHI (Page 4) (Full)
September 27, 2006

The main opposition Minshuto (Democratic Party of Japan) announced
yesterday a new lineup of its "Next Cabinet" composed of 20 members.
The cabinet is well balanced with the posts evenly distributed to
all groups, including the one led by former party head Seiji
Maehara. Nine posts -- about a half of the total -- have been given
to junior members in their thirties and forties.

Members of the Next Cabinet

Prime Minister
Ichiro Ozawa, age 64, member of the Lower House, elected to the Diet
13 times, president of the party

Deputy Prime Minister
Naoto Kan, 59, Lower House, 9, acting president

State Minister
Yukio Hatoyama, 59, Lower House, 7, secretary general

Minister of Internal Affairs and Communications
Koichi Takemasa, 45, Lower House, 3

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Minister of Foreign Affairs
Tsuyoshi Yamaguchi, 51, Lower House, 2

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Minister of State for Defense
Ryuzo Sasaki, 49, Lower House, 3

Minister of State for the Cabinet Office
Toshihiro Asahi, 63, Upper House, 2

Minister of Finance
Motohisa Ikeda, 65, Lower House, 5

Minister of State for Financial Services (Minister of State for
Economic and Fiscal Policy)
Naoki Minezaki, 61, Upper House, 3

Minister of Health, Labor and Welfare
Wakio Mitsui, 63, Lower House, 3

Minister of Economy, Trade and Industry
Yosuke Kondo, 41, Lower House, 2

Chief Cabinet Secretary
Takeaki Matsumoto, 47, Lower House, 3, policy research committee
chair

Justice Minister
Hideo Hiraoka, 52, Lower House, 3

Minister of Education, Culture, Sports, Science and Technology
Osamu Fujimura, 56, Lower House, 5

Minister of State (for Children's Policy
Kumiko Hayashi, 34, Upper House, 1

Minister of Agriculture, Forestry and Fisheries
Takashi Shinohara, 58, Lower House, 2

Minister of Land, Infrastructure and Transport
Yutaka Banno, 45, Lower House, 3

Minister of the Environment
Yoshinori Suematsu, 49, Lower House, 4

Deputy Chief Cabinet Secretaries
Goshi Hosono, 35, Lower House, 3Keiichiro Asao, 42, Upper House, 2

(9) Uncertainty looming over prospect of making profit from first
Japan-made passenger plane with carriers remaining cautious about
introduction

YOMIURI (Page 7) (Full)
September 26, 2006

The central government and private firms including Mitsubishi Heavy
Industries are forging ahead with a project to jointly develop a jet
airliner called "MJ" as the first Japan-made passenger jet plane.
The Japanese airline industry anticipates an introduction of the
product to replace the nation's first domestic passenger aircraft
"YS-11," which is scheduled to end its domestic regular services on
Sept. 30. Parties concerned, however, are worried about whether
enough orders will be secured amid development costs increasing.

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There is a high hurdle to clear before the product is
commercialized.

MJ stands for Mitsubishi Jet. Mitsubishi Heavy Industries President
Kazuo Tsukuda said in an advisory panel meeting of the Ministry of
Economy, Trade and Industry's (METI) in late August that the company
has continued discussion with Rolls Royce of Britain on engines for
MJ. He underscored that progress is steadily being made in
preparations for the project.

METI earmarked 2 billion yen in its budgetary request for next
fiscal year to subsidize the MJ project. This figure is four times
larger than in this fiscal year's budget.

However, domestic airlines remain cautious about introducing the
product. The spokesman of All Nippon Airways Co. said: "Since it is
necessary to thoroughly study the project from various angles, we
cannot comment on it yet." The spokesman of Japan Air Lines Co.
remarked: "We are carefully watching the situation to judge if the
profitability of operations and the comfort of the cabin will be
both secured." There are differences in interest and ardor between
the airline companies and Mitsubishi or METI.

Take-off and landing slots for jet planes have been reduced at Osaka
(Itami) Airport since last year. Focusing on this fact, some are
voicing concerns about the MJ's adaptability to domestic
circumstances.

Mitsubishi Heavy Industries is the main contractor for the MJ
project and will be responsible for production and sales. The
company initially planned to develop a smaller plane with 30-50
seats for fights to be offered between small cities and start
services in 2007, instead of a medium-size or large one, which will
cost a lot.

However, the company rewrote the specifications of the jet airliner
last year into those for a plane that can accommodate 70-90
passengers. In addition, the company also delayed the target year
for the introduction to 2012. The Japan Aircraft Development
Corporation anticipates that demand for this class of product will
grow to 4,200 units in the coming two decades.

Even so, Mitsubishi Heavy Industries has no experience in selling
passenger planes. The problem is how the company can receive orders.
In this market, there are a number of competitive rivals, such as
Bombardier Inc. of Canada and Embraer Inc. of Brazil.

By demonstrating its higher performance, such as 20% better mileage
than aircraft of other makers, Mitsubishi intends to sell the
product to foreign airlines on a basis of commission to trading
firms. But optimism may not be warranted.

Excluding orders directly from the Defense Agency, the Japanese
airline industry has lived with subcontracts from overseas
manufacturers, such as Boeing of the US and Airbus of Europe.
Keeping such a situation in mind, many in the government and the
private sector are calling for Japan's market access as the first
case since YS-11 was introduced. Reflecting such voices, the
government has injected approximately 9 billion yen in the MJ
project.

The propeller aircraft YS-11 went into service in 1965, and a
special corporation financed by both the public and private sectors

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produced 182 units, underscoring the superiority of the Japanese
airline industry domestically and internationally. However, there
were many problems in terms of profitability, with a loss of about
36 billion yen incurred until its production was suspended in 1973.

As one METI official said, "The same mistake won't be tolerated," an
essential condition is to achieve a profit. To that end, producing
at least 350 units is necessary. In order to make sufficient profit,
producing 600 units would be necessary. The company must make a
decision in FY2007 if it wants to continue the project. The company
could drop the project if it is unable to receive a necessary volume
of orders by then.

How to finance swelling development costs is also a head-ache. The
total cost was initially estimated to be 60 billion yen, but it is
now likely to double to 120 billion yen. Based on the judgment that
it is impossible for the government and the company alone to share
the risk, Mitsubishi Heavy Industries plans to establish a special
company responsible only for developing the fuselage, seeking
investment from trading houses and banks. On this plan, too, no
prospects are in sight yet.

SCHIEFFER

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