Cablegate: The Japan Economic Scope--September 27, 2007

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INFO RUEHFR/AMEMBASSY PARIS 5752
RUEHFK/AMCONSUL FUKUOKA 3402
RUEHNAG/AMCONSUL NAGOYA 2343
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RUEHOK/AMCONSUL OSAKA KOBE 7058
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UNCLAS SECTION 01 OF 07 TOKYO 004552

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PARIS PLEASE PASS TO USOECD
STATE PLEASE PASS TO USTR

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SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope--September 27, 2007

1. (U) This cable contains the Japan Economic Scope from
September 27, 2007.

2. (SBU) Table of Contents

Political
3. New PM Fukuda Keeps Economic Team Intact
4. Less Uncertainty in Japan's Trade Team
5. Fukuda's Campaign Pledges Squishy on Reform (

International Interrelations
6. Asia is the Future of Energy
7. 2007 FDI in Japan Hit Net Record
8. METI Seeks Early Implementation of Japanese Depositary
Receipt

Aviation and Industry
9. MLIT Leaks Abolishment on Double Approval Pricing System
10. Boeing Dreamliner returns "magic" to flight
11. JCAB Proposes Flight Schedule during Yokota Dual-Use Study
Group Meeting
12. Dubai Airline Offering Free Nagoya-Tokyo Bullet Train Tickets
13. Nippon Steel Acquires Daido Steel Affiliate

Economic Impact
14. Japan Post Privatization Set to Begin
15. Updated Economic Indicators
16. Age-Restricted Employment Ads to Be Curtailed

Trade
17. Pork Importer Arrested Over Tariff Evasion
18. Beef Still in Freezer?
19. Pan-East Asian Trade "Merely a Dream"

Sports
20. Sumo World Rocked by Scandal -- Again
21. Comeback for Kei Igawa?

---------
POLITICAL
---------

3. (SBU) New PM Fukuda Keeps Economic Team Intact
--------------------------------------------- -----

After winning the Liberal Democratic Party (LDP) presidency over
the weekend, Yasuo Fukuda was officially elected prime minister
September 26. His Diet selection, though never in doubt, was
delayed slightly by Democratic Party of Japan (DPJ) parliamentary
maneuvering.

Fukuda opted to keep 13 of the 17 ministers from former Prime
Minister Shinzo Abe's cabinet, and he kept the entire economic
team intact. His four changes were the following: 1) moving
Nobutaka Machimura from foreign minister to chief cabinet
secretary; 2) moving Masahiko Komura from defense minister to

SIPDIS
foreign minister; 3) selecting Shigeru Ishiba as defense
minister; and 4) appointing Kisaburo Tokai as education minister.

Fukuda's retention of Justice Minister Hatoyama and METI Minister
Amari, both of whom supported rival LDP presidential candidate
Taro Aso, was somewhat surprising. Commentators have stressed
Fukuda's need for continuity, given the ongoing Diet session and
the preparation time new ministers would have for parliamentary
appearances.

In other personnel matters, PM Fukuda selected former Finance
Minister Sadakazu Tanigaki as LDP Policy Research Council
Chairman. When Tanigaki challenged former PM Abe for the LDP
presidency in 2006, he was an outspoken advocate for raising the
consumption tax, and media have interpreted his selection as an
indication Fukuda will focus more on fiscal reconstruction than
the more growth-oriented policies pursued under PM Abe.
A photo gallery of the new cabinet is attached. For more
information on PM Fukuda's team, see classified cables Tokyo 4466
(new cabinet members) and 4468 (LDP executive). (ECON: Marc
Dillard)

4. (SBU) Less Uncertainty in Japan's Trade Team
--------------------------------------------- -----

Japan's trade policy under a new prime minister will be

TOKYO 00004552 002 OF 007

interesting to watch in coming weeks, but there is a little less
uncertainty after Trade Minister Akira Amari and Agriculture
Minister Masatoshi Wakabayashi retained their positions.

Wakabayashi was installed -- or reinstalled -- last month as MAFF's

fifth minister since May after a series of financial scandals
derailed at least three previous incumbents. New PM Fukuda
apparently saw no reason to go find another minister at this time.

As for Amari, political pundits expected him to go after he
supported Taro Aso over Fukuda in the PM race. According to a
METI official we talked to September 26, most ministry officials
saw Amari's days as numbers.

Amari thought he was on the way out too. According to our source,
the Trade Minister quipped to a large gathering of METI officials
after the new cabinet announcement how surprised he was to be
still on the job.

Amari is very popular at METI and "very familiar" with the issues,
our source indicated. This would not have been a good time to
find a new minister, he concluded. (ECON: Nicholas Hill)

5. (SBU) Fukuda's Campaign Pledges Squishy on Reform
--------------------------------------------- -----

During his short campaign for the LDP presidency, PM Fukuda
expressed qualified support for former PM Koizumi's "reform
agenda," but stressed the need to address regional disparity and
pocketbook issues, along with the "stability" he would bring to
office. See Tokyo 4417 for details. (ECON: Marc Dillard)

----------------------------
INTERNATIONAL INTERRELATIONS
----------------------------

6. (U) Asia is the Future of Energy
--------------------------------------------- -----

Non-OECD Asia will account for 75 percent of total growth in
world energy consumption between now and 2030, said DOE's Energy
Information Administration (EIA) Administrator Guy Caruso during
a September 12--13 trip to Japan.

Growth will occur across every fuel source, but will be
especially predominant in coal with a commensurate growth in
carbon dioxide emissions. The EIA estimates world oil
consumption will go from 85 million barrels today to 115 million
barrels by 2030.

China alone will increase from 7 million barrels to 20 million
barrels per day over this same timeframe, although many have
criticized this number as too conservative.

The current sky-high oil prices are a result of a perfect storm
of contributing factors. Deterioration of the investment climate
in such producer nations as Venezuela, Russia and Iraq added to
the situation.

Caruso noted that, under President Chavez, oil production in
Venezuela has declined from 4.5 million barrels per day to 2.5
million barrels per day, helping to push up prices for Middle
East oil. "Chavez is the Saudis' best friend," he joked.
Second, the low price of oil and natural gas in the late 1980s
and early 1990s acted as a disincentive to investment and
investors are now racing to catch-up.

Finally, China and India's voracious energy needs are adding fuel
to the fire, Caruso stated. (ECON: Sally Behrhorst)

7. (U) 2007 FDI in Japan Hit Net Record
--------------------------------------------- -----

Foreign Direct Investment (FDI) in Japan between January and July
this year hit a record net capital inflow of 2.32 trillion yen,
according to the Ministry of Finance. This figure already
exceeded the record annual net inflow of 1.45 trillion yen in
1999.

This increase is largely due to a significant amount of "out-in"
M&A transactions including Citigroup's acquisition of Nikko

TOKYO 00004552 003 OF 007

Cordial Group (920 billion yen), Volvo's purchase of Nissan
Diesel Motor (135 billion yen), and General Electric's purchase
of Sanyo Electric Credit (126 billion yen).

However, there is a concern that the latter half of the year is
going as well, largely due to the financial market turmoil
triggered by the sub-prime loan debacle in the U.S.

Analysis by Thomson Financial already shows this tendency as the
number of M&A transactions worldwide in August was already 22
percent lower than in July. Nikkei reported that many analysts
see the M&A market in Japan could also be affected to some degree.

Further improvements in the investment environment -- including
progress on regulatory reform -- is necessary for Japan to promote
further inward direct investment. (ECON: Satoshi Hattori)

8. (U) METI Seeks Early Implementation of Japanese Depositary
Receipt
--------------------------------------------- -----

Ministry of Economy, Trade and Industry (METI) and its Global
Industrial Finance Study Group issued a report discussing
challenges and measures to achieve the Asia Industrial Finance
Zone Initiative.

As one step, the report calls for early implementation of the
Japanese depositary receipt (JDR), the Japanese version of the
American depositary receipt (ADR), to promote listings of foreign
companies on Japanese stock exchanges.

In order to disseminate JDRs in Asia and promptly issue them, the
report makes several recommendations including: prepare brochures
and organize fora abroad; promote JDRs as financing instrument
for Indian companies in the Delhi-Mumbai Industrial Corridor
project; review the disclosure requirements that could be a
burden on foreign companies, and; encourage financial
institutions to develop new products and services.

Issuance of JDRs will be recognized under the revised Trust Law
and the amended Securities and Exchange Law (Financial
Instruments and Exchange Law). (ECON: Satoshi Hattori)

---------------------
AVIATION AND INDUSTRY
---------------------

9. (U) MLIT Leaks Abolishment on Double Approval Pricing System
--------------------------------------------- -----

The Construction and Transport Ministry will abolish the de facto
lower limit on fares for international flights from Japan to
foreign destinations beginning in fiscal 2008, according to
ministry sources.

The ministry will also scrap what it calls the double approval
system, which requires countries at both end points of a route to
approve a ticket price, according to the Yomiuri Shimbun article.
After the deregulation, airlines will need approval only from the
country of departure.

The changes will make it easier for foreign budget airlines to
operate in Japan and are expected to trigger a price war. (ECON:
Junko Nagahama)

10. (U) Boeing Dreamliner returns "magic" to flight
--------------------------------------------- -----

President of Boeing Japan Nicole Piasecki explained the market
strategy for Boeing's newest aircraft, the 787 Dreamliner, during
a lunch at the Tokyo American Club September 27.

"We want to bring the magic back to flight," she explained
showing photos of larger windows, softer lighting and smoother
curves on the aircraft. She noted that the Dreamliner is a
global project, designed and built in a variety of countries
including 35 percent of its construction in Japan.

The aircraft designer explained an increase in demand for point
to point travel. Customers want the shortest travel time
possible, according to Boeing research. More non-stop flights

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and more frequencies give customers more options, she said.

"We estimate the Dreamliner will allow airlines to create 600 new
routes, making flight more convenient for the customer," she
explained. Using China as an example, she noted that the number
of flights originating from or arriving to China has increased
nearly 20 times since 1999. (ECON: Charlie Crouch)

11. (SBU) JCAB Proposes Flight Schedule during Yokota Dual-Use
Study Group Meeting
--------------------------------------------- -----

During the 8th Study Group bilateral meeting for Civilian-
Military Dual Use of Yokota Air Base on September 26, the
Japanese Civil Aviation Bureau representative presented a plan to
inaugurate 15 weekly civilian flights out of Yokota Air Base.

The plan included specific landing and take-off times
illustrating how these flights would fit into the flight
operations of a sample week based on data from noise-pollution
monitoring of the air base.

The USG representative noted that, though presented as a part of
this feasibility study, the flight schedule seemed more like an
implementation plan. Both sides agreed to exchange their
respective versions of the final report by October 3, and agreed
that the final report should be publicly available. However,
they were not able to agree on a proposed publication date.
(ECON: Charlie Crouch)

12. (U) Dubai Airline Offering Free Nagoya-Tokyo Bullet Train
Tickets
--------------------------------------------- -----

Dubai-based Emirates Airline, which does not serve airports in
Tokyo, is handing out free round-trip Shinkansen tickets to Tokyo
passengers using Nagoya's Central Japan International Airport,
according to a September 27 article in Nikkei.

Emirates Airline currently serves the Nagoya airport and Osaka's
Kansai International Airport, with daily direct flights to Dubai.
Seat occupancy rates of these flights have been more than 80
percent.

But residents of the greater Tokyo area account for only about 20
percent of passengers using the flights into and out of Nagoya.
By passing out free Shinkansen tickets to first- and business-
class passengers, the airline hopes to boost the percentage to
around 50 percent. (ECON: Charlie Crouch)

13. (U) Nippon Steel Acquires Daido Steel Affiliate
--------------------------------------------- -----

Nippon Steel Corp. announced an agreement to acquire Daido Steel
Company's entire stake in an electric furnace steelmaking
affiliate, bringing its own interest to 42.8 percent according to
a September 26 article in the Nikkei.

Daido Steel will sell its 35.6 percent Oji Steel stake to Nippon
Steel, which already holds a 7.2 percent interest. The sale price
has yet to be hammered out, but is expected to be around 10
billion yen. Daido Steel will withdraw from Oji Steel's
management and focus on specialized steel products. (ECON:
Charlie Crouch)

---------------
ECONOMIC IMPACT
---------------

14. (SBU) Japan Post Privatization Set to Begin
--------------------------------------------- -----

Japan Post, with almost $3 trillion in banking and insurance
assets, 24,800 post offices, and 260,000 employees, will split
into six entities October 1, marking the beginning of a ten-year
privatization process.

Industry and government officials have told us the operational
transition will be highly complex. Splitting the group and
setting up core information technology systems, for example, have
required more than twice the IT upgrades than were needed to
privatize telecommunications giant NTT.

TOKYO 00004552 005 OF 007

Keep an eye on your cable queue for more details. (ECON: Marc
Dillard)

15. (U) Updated Economic Indicators
--------------------------------------------- -----

Overall economic assessments: In its monthly economic report
submitted to the cabinet on September 14, the Cabinet Office left
its overall assessment unchanged, noting that "the economy is
recovering, while some weakness has been seen recently."

The report confirmed that Japan's economy has entered its 68th
consecutive month of expansion, the longest postwar economic boom.

However, the report downgraded its view on corporate capital
spending, and expressed caution about the future course of the
U.S. economy hit by sub-prime loan problems.

The Bank of Japan report, released on September 19, also kept its
core economic assessment unchanged, indicating that the economy
is "expanding moderately."

The BOJ said that personal consumption is firm in this situation
where household income has continued to rise moderately. The BOJ
noted that exports are expected to continue rising, and business
investment has also continued to trend upward against the
background of high corporate profits. (FINATT: Shuya Sakurai)

16. (SBU) Age-Restricted Employment Ads to Be Curtailed
--------------------------------------------- -----

A revised Employment Promotion Law, which would prohibit
companies setting age limits when advertising jobs and recruiting
workers, will go into effect on October 1, according to media
reports. The revision is intended to improve the employment
situation of middle-aged and elderly people, as well as so-called
"freeters" (part-time employees).

Currently, companies are only asked to "make efforts" to not set
age limits, but with this legal revision, the prohibition will
become mandatory. Also, the number of exceptions to the
prohibition, which often limit job availability to young people,
would be reduced from ten to six.

The revised law will also require the employers of foreign
workers to report to the Ministry of Health, Labor, and Welfare
the name of the worker, as well as the status of residence and
duration of stay -- both at the time of recruitment and employment
termination. (ECON: Ai Kaneko)

-----
TRADE
-----

17. (SBU) Pork Importer Arrested Over Tariff Evasion
--------------------------------------------- -----

According to press reports, in what was described as the largest
tariff evasion criminal case in Japanese history, authorities
have arrested an importer of Canadian pork for evading some 11.8
billion yen in tariffs.

Noboru Sogabe was sentenced September 24 for taking advantage of
Japan's complicated gate pork price tariff system by over-
invoicing for import shipments between January and November 2006.

Sogabe was sentenced to 16 months in prison and fined 600 million
yen.

Japan's gate price system sets a floor on pork import prices and
charges a variable tariff that encourages importers to file false
invoices claiming they are paying higher prices for the pork than
they actually are.

Japan, the largest overseas market for U.S. pork, buys over $1
billion last year. In a recent cable (Tokyo 3304), the Embassy
reported on the potential for corruption created by the gate
price system and the impact this could have on U.S. trade.
(ECON: Nicholas Hill)

18. (SBU) Beef Still in Freezer?

TOKYO 00004552 006 OF 007

--------------------------------------------- -----

In his first press conference since retaining his position as
Agriculture Minister in PM Fukuda's newly-minted cabinet,
Masatoshi Wakabayashi restated a familiar line on the beef issue.

He told reporters September 26 that Japan would not relent to
"political pressure" from the United States to relax beef import
rules. A final decision would be based on "scientific analysis"
by professionals.

The United States position remains that Japan should respect
science-based standards, set by the World Animal Health
Organization (OIE), and allow U.S. beef to enter Japan without
age restrictions on the cattle used in production.

It is a position that Acting Secretary of Agriculture Conner
restated earlier in the week. As reported in Nikkei, Conner told
reporters that it was a "simple issue" and he hoped Japan would
observe international standards.

GOJ officials have told us that Japan cannot move to
international standards given the political climate.

Separately, some 15 representatives from the Japan Meat Trade
Association met with Embassy FAS officers on September 26 to
underscore their desire to see the United States accept a
political compromise and move away from insisting that Japan base
its import restrictions on OIE standards.

The association wants to boost available supplies of U.S. beef in
Japan and moving to a 30-month age restriction, they indicated,
could be a plausible compromise. (ECON: Nicholas Hill)

19. (U) Pan-East Asian Trade "Merely a Dream"
--------------------------------------------- -----

Despite lofty rhetoric about the future goals of ASEAN, ASEAN + 1
and other pan-East Asia organizations, there is no East Asia
community, and it is unlikely one will emerge in the foreseeable
future, said a leading Chinese scholar during a regional
economic reporting conference sponsored by Embassy Beijing.

ASEAN member countries are good at making ambitious announcements
but rarely set concrete targets. Pan-East Asian trade is "merely
a dream" as no progress has been made in establishing a common
currency, the scholar lamented.

The professor suggested three issues impeding ASEAN's further
development. First, Beijing and Tokyo are both jockeying for
regional leadership. Until an agreement can be reached between
the two governments, no progress can be made, he suggested.
Second, both Korea and Japan fear that closer integration would
result in an influx of labor.

Finally, ethnic tensions are on the rise with ASEAN members who
believe mainland Chinese investors are using local Chinese
networks to buy-up assets to gain economic leverage in the region,
the professor stated. (ECON: Sally Behrhorst)

------
SPORTS
------

20. (U) Sumo World Rocked by Scandal -- Again
--------------------------------------------- -----

The sumo world, already beleaguered by several scandals involving
Yokozuna Asashoryu, is once again hanging its head in shame.
Accusations have been leveled at famed stablemaster Tokitsukaze
and several of his wrestlers alleging that, on June 25, they
severely beat 17-year-old sumo wrestler Takashi Saito. Saito
died the following day at a local hospital. The 57-year-old
stablemaster has reportedly confessed his crime to the police.

Investigators have so far determined that Saito had attempted to
run away from the stable on the morning of June 25, but was
caught and forcibly returned by fellow stablemates.

Later that day, Tokitsukaze purportedly struck the youngster over
the head with a beer bottle while other wrestlers kicked and
punched him for approximately 20 minutes. They claimed the

TOKYO 00004552 007 OF 007

treatment was part of Saito's "instruction." Police suspect that
Saito's stablemates assaulted him on a daily basis.

At a press conference on June 28, Tokitsukaze told reporters he
did not know why the boy had died as he was not forced to endure
any unreasonable training.

Family members suspected otherwise and asked investigators to
perform and autopsy on the body. The results of the autopsy
suggest Saito may have died of shock due to physical trauma.
(ECON: Sally Behrhorst)

21. (U) Comeback for Kei Igawa?
--------------------------------------------- -----

The New York Yankees $46 million Japanese import spent most of
the summer plying in the minor leagues, but got another chance
with the big team in the middle of a pennant race.

Igawa replaced the ailing Roger Clemens, the Yankees' $28 million
(prorated) hurler, for a start against the Tampa Bay Devil Rays
on September 26. The much maligned lefty shut the Rays out for
five innings, surrendering only two hits.

In the end it did not matter. The Yankees blew a five run lead
and lost 7-6 in 10 innings to a Tampa team that is the worst in
baseball.

Meanwhile, despite the fact that their own Japanese imports,
Daisuke Matsuzaka and Hideki Okajima, have been struggling, the
Red Sox expanded their lead over New York to three games. The
magic number is two, with four games in the season remaining.
(Econ: Nicholas Hill)

22. (SBU) THIS WEEK'S CABLES
--------------------------------------------- -----

Tokyo 4468 New LDP Executive Lineup
Tokyo 4466 New Prime Minister Fukuda Leaves Cabinet Largely
Intact
Tokyo 4467 GOJ Concerned Over OEF Refueling Issue
Tokyo 4419 Fukuda Wins
Tokyo 4417 Aso and Fukuda Softpedaling Reform, Stressing
"Stability"

23. (U) This SENSITIVE BUT UNCLASSIFIED e-newsletter from U.S.
Embassy Tokyo's Economic Section, with contributions from the
consulates, is for internal USG use only. Please do not forward
in whole or in part outside of the government. The Scope is
edited this week by Charlie Crouch (CrouchCA@state.gov) and Joy
Progar (ProgarJ@state.gov)

24. (U) Please visit the Tokyo Econ Intranet webpage for back
issues of the Scope. Apologies, this option is only available to
State users. Please contact Joy Progar if you are from a
different agency and are interested in a back issue.
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