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Viewing cable 07TOKYO2352, The Japan Economic Scope - May 25, 2007

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Reference ID Created Released Classification Origin
07TOKYO2352 2007-05-25 06:01 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tokyo
VZCZCXRO6305
RR RUEHFK RUEHNAG RUEHNH
DE RUEHKO #2352/01 1450601
ZNR UUUUU ZZH
R 250601Z MAY 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3937
RUEAIIA/CIA WASHDC
INFO RUEHFR/AMEMBASSY PARIS 5499
RUEHFK/AMCONSUL FUKUOKA 1255
RUEHNAG/AMCONSUL NAGOYA 0471
RUEHNH/AMCONSUL NAHA 3688
RUEHOK/AMCONSUL OSAKA KOBE 4819
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 07 TOKYO 002352 
 
SIPDIS 
 
PARIS PLEASE PASS TO USOECD 
STATE PLEASE PASS TO USTR 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON JA ZO EAGR
SUBJECT: The Japan Economic Scope - May 25, 2007 
 
Sensitive but unclassified.  Please protect accordingly. 
 
1. (U) This cable contains the Japan Economic Scope from May 25, 
2007. 
 
2.(SBU) Table of Contents 
 
3.  Ministry of Agriculture Concerned About U.S. - Japan FTA 4. 
4.  Australian Ambassador Promotes EPA during Hokkaido Visit 
5.  Does METI Want to Launch FTA Talks with the United States? 
6.  Asia Scholars Ponder East Asian Economic Integration and 
Japan and U.S. Role 
7.  CEFP Begins Work on Basic Policies 2007 for Abe Government 
8.  Regulatory Reform Talks Wrap Up, but Work Remains 
9.  OIE Pronounces U.S. Beef Safe -- Ball in GOJ's Court 
10.  PM Abe's Asia Gateway Partially Opens 
11.  Regulatory Reform Council Clashes with Transport Ministry 
Over Aviation Liberalization 
12.  Japanese Shipbuilding Still Going Strong 
13.  Japan: First Quarter Real GDP Grew 2.4%, though Deflation 
Lingers 
14.  Japanese Traditional Industries Fighting for New Markets 
Overseas 
15.  Osaka Businesses Shifting to Tokyo Again? (U) 
16.  Greater Seattle Leadership Delegation Visits Fukuoka & 
Kitakyushu 
17.  Asbestos Inspection: U.S. EPA Method Is Far More Accurate, 
Speedy and Economical Than GOJ Regulation 
18.  CO2 Emission Trading Scheme in Osaka 
19.  Daisuke Matsuzaka Wins Player of the Week Honors in American 
League for the Red Sox 
20.  Pickering Fellow Virsa Hurt 
 
3.  (SBU) Ministry of Agriculture Concerned About U.S. - Japan 
FTA 
--- 
 
The subject of negotiating a free trade agreement with the United 
States comes up about three times a week, an Agriculture Ministry 
(MAFF) official told an Economic Section FSN on May 18. 
 
Reflecting the Abe administration's announcement in January to 
triple free trade agreements to twelve in the next two years, the 
MAFF official noted that the number of FTA officials within the 
ministry had increased recently to 60. 
 
The MAFF official asserted that, notwithstanding the goal to 
boost the number of free trade deals by three-fold, MAFF would 
insist that barriers to trade on sensitive items remain in place. 
Meanwhile, the official conceded that Japanese farmers needed to 
boost productivity -- this would occur as farmers follow MAFF 
policies that are encouraging efficiencies, including by 
consolidating farmland. 
 
 Since a proposal by a CEFP subcommittee on EPA and Agriculture 
reform was released earlier this month, MAFF and Japan 
Agricultural Cooperatives (JA) have been busy trying to show they 
are pursuing a reform agenda. 
 
A MAFF advisory committee on farmland reform issued a report May 
15 calling for a relaxation of measures to enable more corporate 
leasing of farmland.  JA is expected to announce a set of 
proposals of its own on the subject in early June. 
For background on Japan's FTAs and how they affect agriculture, 
please see: USDA Foreign Agricultural Service GAIN Report Number: 
JA7018. (ECON: Ryoko Nakano) 
 
4.  (SBU) Australian Ambassador Promotes EPA during Hokkaido 
Visit 
----- 
 
On May 14-16, Australian Ambassador Murray McLean visited 
Hokkaido on a trip aimed at countering local opposition to the 
proposed Economic Partnership Agreement (EPA) between Japan and 
Australia. 
 
Ambassador McLean spoke on the benefits of an EPA to Japan during 
a public meeting with Governor Harumi Takahashi, a dinner with 
top officials from Hokkaido agricultural entities, and a well- 
attended Australian consulate business awards reception in 
Sapporo.  He also criticized Hokkaido government estimates that 
 
TOKYO 00002352  002 OF 007 
 
 
an EPA will negatively affect the Hokkaido economy by $11.6 
billion as "quite exaggerated." 
 
During the awards reception, Australia's Consul in Sapporo told 
us that Governor Takahashi acknowledged the Australian position 
but remained steadfast that the EPA would hurt Hokkaido farmers. 
The consul also described the dinner with agricultural officials 
as "very tough" since attendees clearly showed no support for an 
EPA.  (Sapporo:  Ian Hillman/Yumi Baba) 
 
5.  (SBU) Does METI Want to Launch FTA Talks with the United 
States? 
------- 
 
Japan's Trade Ministry (METI) is pushing the envelope and wants 
to launch FTA negotiations with the United States by 2009, 
according to a May 22 Kyodo wire service story. 
 
According to the story, which appeared on Kyodo's English 
language website first, METI wants to launch private sector 
"studies" on the merits of a U.S. - Japan FTA as early as this 
fall, and elevate the studies to the inter-governmental level by 
the fall of 2008, with government-to-government negotiations 
possibly starting by the summer of 2009. 
 
The Japanese language version of the story, which appeared after 
the English version, had less definitive language.  A METI source 
we talked to on May 23 emphasized that there has been no change 
in the ministry's position on negotiating a free trade deal with 
the United States.  (ECON:  Nicholas Hill) 
 
6.  (U) Asia Scholars Ponder East Asian Economic Integration and 
Japan and U.S. Role 
------------------- 
 
Japanese scholars uniformly emphasized the need for a U.S.-Japan 
FTA while China experts were split on the speed of future growth 
in China at a conference jointly sponsored by the Japan Institute 
for Social & Economic Affairs (Keizai Koho) and the Brookings 
Institution in Tokyo on May 21. 
 
Takashi Shiraishi, Vice President of the National Graduate 
Institute for Policy Studies focused on the need for the United 
States and Japan to maintain their alliance and further integrate 
their economies to counterbalance the growth of China.  Shiraishi 
pointed out that the idea of an East Asian Economic Community was 
still vague and that a U.S.-Japan FTA would anchor the U.S. in 
the region. 
 
Shujiro Urata, an Economics Professor at Waseda and chair of the 
CEFP subcommittee on FTAs and agriculture, emphasized that Japan 
needs an FTA with the United States to give Japan the impetus, 
(via good, old-fashioned foreign pressure) to improve its 
efficiency and stay competitive. 
 
A more skeptical Akihiko Tanaka, a University of Tokyo Professor 
of International Politics, questioned whether the United States 
even has a regional policy or just has too many policies for East 
Asia. 
 
Some Chinese experts forecast difficulty for continued fast 
growth in China if it does not make some major reforms. 
Brookings scholar Wing Thye Woo saw potential troubles for the 
Chinese economy, a view supported by Keio Professor Ryosei 
Kokubun who predicted that the Chinese economy would lose some 
steam after the Olympics. 
 
Meanwhile, Chinese scholars working in China such as Shulong Chu 
of Tsinghua University and Xinghau Ding of the Shanghai Institute 
of American studies predicted nonstop rapid growth in China. 
Ding underscored that there would be no anti-American alliance in 
East Asia.  (ECON: Marilyn Ereshefsky) 
 
7.  (SBU) CEFP Begins Work on Basic Policies 2007 for Abe 
Government 
---------- 
 
The Prime Minister's Council on Economic and Fiscal Policy will 
convene on May 25 to begin work on its Basic Policies 2007 
document, which is due to be released sometime in June.  Coming 
so soon before July elections, the document will be closely 
 
TOKYO 00002352  003 OF 007 
 
 
scrutinized. 
 
On trade policy, we talked to two members of the CEFP 
subcommittee which has contributed to a very forward-leaning 
report recommending that the GOJ push hard to reform its 
agriculture sector and more aggressively seek Economic 
Partnership Agreements (see previous two issues of the Scope). 
Neither of our interlocutors would predict how trade issues would 
be reflected in the final Basic Policies document.  These are 
very difficult issues and are in the hands of the politicians at 
this stage, one member told us on May 22. 
 
During a May 18 meeting with Deputy Assistant U.S. Trade 
Representative Michael Beeman, the Chairman of the subcommittee, 
Shujiro Urata, told us that obviously there was opposition at the 
political level, particularly at the Agriculture Ministry.  He 
said he expected the subcommittee's work to continue after 
elections.  (ECON:  Nicholas Hill) 
 
8.  (U) Regulatory Reform Talks Wrap Up, but Work Remains 
------------------------------ 
 
Inter-agency U.S. and Japanese delegations met in Tokyo May 14-18 
to prepare the draft text of the Report to Leaders, the document 
that the two governments plan to release to the public at around 
the time of the next meeting of Prime Minister Abe and President 
Bush, probably on the margins of the G-8 Summit in Germany June 
6-8. 
 
Regulatory Reform is a main pillar in the two countries' 
bilateral economic relations and includes several working groups 
covering a wide range of regulatory issues, including: IT and 
telecommunications; medical devices and pharmaceuticals; 
financial services and other cross-sectoral issues. 
 
Please contact us if you have any questions about the regulatory 
reform process.  When the Report to Leaders is released, we will 
put it on the Embassy website.  (ECON:  Nicholas Hill) 
 
9.  (SBU) OIE Pronounces U.S. Beef Safe -- Ball in GOJ's Court --- 
--------------------------- 
 
Long anticipated, the World Organization for Animal Health (OIE) 
pronounced U.S. beef safe -- or in a "controlled risk" category -- 
in a decision announced on May 23 at its headquarters in Paris. 
The decision means that the OIE agrees that there should be no 
age restrictions on exports of U.S. beef. 
 
"This will not immediately lead Japan to alter its conditions for 
beef imports," Chief Cabinet Secretary Shiozaki told reporters in 
Tokyo afterward.  He indicated that Japan would look for a 
determination from its own independent Food Safety Commission 
(FSC). 
 
Japan's Health and Agriculture Ministries asked us this week for 
the data that went into the OIE decision, a first step in 
possibly easing regulations that first banned and subsequently 
severely limited U.S. beef sales in the Japanese market after a 
cow was discovered in the United States with BSE in 2003. 
 
Agriculture Minister on May 23 indicated publicly that Japan was 
"willing" to hold talks with the United States on the subject. 
The two governments could form a working group as early as June, 
with the objective on the U.S. side to see Japan adopt OIE, 
science-based standards that would lead to a full market opening. 
The GOJ has provided little reason, however, to believe that the 
process will lead to a full resumption of trade anytime soon. 
Once the GOJ has studied the data and assessed the BSE risks, a 
recommendation will be forwarded to the FSC for a decision. 
(ECON:  Nicholas Hill) 
 
10.  (SBU) PM Abe's Asia Gateway Partially Opens 
------------------------------ 
 
Accenting aviation policy, late on May 16 the Asia Gateway panel 
reported out its proposals to implement the PM's Asia Gateway 
Vision. 
 
PM Abe commented that, "We see strong national interest in the 
issues related to airline routes and airports, such as the Asia 
Open Sky and 24-hour operation of international airports....-- 
 
TOKYO 00002352  004 OF 007 
 
 
MLIT Minister Fuyushiba, however, felt compelled to remind Abe 
that "aviation policy responsibilities lie with us." 
 
For Haneda airport, the report called for longer hours for 
international charters including those to the U.S. and Europe, 
maximum use of the airport for international flights, and a more 
flexible perimeter than MLIT was contemplating for when Haneda 
expansion is completed in 2010. 
 
The report also proposed "Asian Open Skies," for Nagoya and Osaka 
airports. 
 
The report made some small progress in aviation reforms although 
U.S. airlines may not benefit directly or in the near term as 
MLIT was able to blunt any stronger proposals (see Tokyo 2180). 
MLIT also has tried to exclude any mention of this PM panel's 
work in the Report to Leaders in the Regulatory Reform talks. 
(ECON: Josh Handler) 
 
11.  (U) Regulatory Reform Council Clashes with Transport 
Ministry Over Aviation Liberalization 
------------------------------ 
 
The Government's Council for the Promotion of Regulatory Reform 
(CPRR) and officials from the Ministry of Land, Infrastructure 
and Transport (MLIT) disagreed on every item regarding aviation 
liberalization at a May 21 CPRR meeting, according to press 
accounts. 
 
Articles state that MLIT officials strongly opposed the 
panelists' call for liberalizing international airfares and 
relaxing regulations on foreign ownership of shares in Japanese 
airlines. 
 
At the meeting, MLIT Director-General for Civil Aviation Bureau, 
Hisayasu Suzuki, disclosed the possibility of increasing 
international slots to 40,000 a year at Haneda Airport; an 
increase of 10,000 slots from the previously allocated 30,000 by 
the ministry for year 2010 after the airport expansion project is 
completed. 
 
MLIT Vice-Minister Masafumi Yasutomi, however, subsequently 
disavowed this increase on May 22, saying at a press briefing 
that Haneda would have 30,000 slots as planned.  Moreover, he 
believed the aviation issues being considered by the CPRR are 
already covered by PM Abe's Asia Gateway Strategy Panel, which 
released its final report on May 16.  He said that the respective 
parties should now concentrate on how to increase international 
flights to Asia.  (ECON:  Junko Nagahama) 
 
12.  (SBU) Japanese Shipbuilding Still Going Strong 
------------------------------ 
 
Although a high-wage country, Japan's shipbuilders are still 
going strong, capturing 17.7 percent of new ship orders by 
tonnage world-wide in 2005, according to a new report by the 
Japan Ship Exporters' Association. 
 
Japanese shipping companies are expanding their fleets to meet 
worldwide shipping demand, and the largest container ship built 
in Japan, a 9,040 TEU (twenty-foot equivalent units) container 
vessel was recently delivered. 
 
There are some headwinds, however.  Japanese shipbuilders face 
competition from China and Korea and are concerned about their 
aging workforce.  Small and medium shipbuilders are doing less 
well than the larger yards, but the GOJ is seeking to give them 
some support and at the same time is seeking to reduce over 
capacity in the industry.  A cable on this topic is to follow 
shortly.  (ECON: Josh Handler) 
 
13.  (U) Japan: First Quarter Real GDP Grew 2.4%, though 
Deflation Lingers 
----------------- 
 
Japan's real GDP grew at a 2.4 percent annualized rate in the 
January to March quarter of 2007, according to the preliminary 
data announced by the Cabinet Office on May 17. 
 
GDP growth in the first quarter was weaker than private analysts' 
consensus forecast of a 2.7 percent increase and considerably 
 
TOKYO 00002352  005 OF 007 
 
 
below the revised 5.0 percent rise in the fourth quarter of 2006. 
Overall real GDP growth for the first quarter reflected a 1.6 
percentage-point contribution from net exports and another 1.2 
percentage point contribution from final domestic demand, 
supported by firm personal consumption. 
 
On the other hand, the contribution to overall growth from 
inventories was -0.4 percentage point and business investment 
fell in the quarter. 
 
First quarter GDP growth was well above Japan's estimated 
potential growth rate of about 1.5-2.0 percent. 
 
The overall GDP deflator, while still negative, improved from a 
0.5 percent year over year decline in the fourth quarter of 2006 
to a 0.2 percent year over year drop in the first quarter, the 
smallest drop since the second quarter of 1998.  (FINATT:  Shuya 
Sakurai) 
 
14.  (U) Japanese Traditional Industries Fighting for New Markets 
Overseas 
-------- 
 
Small western Japanese manufacturers in traditional industries, 
such as shoe and towel makers, are trying to recover from a 
decade-long decline in their domestic shares by developing new 
overseas markets by supplying high value-added products rather 
than competing with low price Chinese imports. 
 
According to media reports, several SMEs are doing brisk business 
overseas, and are seeking to do more.  A traditional dyeing 
business (Yuzen-zome) in Kyoto has opened stores in London and 
New York, and towel makers from southern Osaka and Ehime have 
boosted exports of high quality towels to Hong Kong and Taiwan. 
Shoemakers in Kobe are selling in Europe.  In 2006, the towel 
union sent a mission to the United States for market research, 
and has embarked upon a strategy of blanketing foreign trade 
shows with their products. 
 
 The export volume of these products has not returned to the 
peaks of the late 90s, but since 2004 has begun to recover. 
Nonetheless, the trade data shows that exporters still some way 
to go.  Mr. Manabu Kashii, Managing Director of the Osaka Towel 
Industry Union, is happy with the growth of exports but pointed 
out that the export share of total towel sales in the region is 
still less than 10 percent.  Moreover, there is stiff foreign 
competition as Chinese imports continue to grow, from 50 percent 
of the domestic market a couple of years ago to 80 percent. 
(Osaka-Kobe:  Phil Cummings/Naomi Shibui) 
 
15.  (U) Osaka Businesses Shifting to Tokyo Again? 
------------------------------ 
 
According to the recent study by Osaka Prefecture, the number of 
major companies headquartered in Osaka with more than 10 billion 
yen ($8.4 million) was 92 in 1994, but dropped to 75 companies a 
decade later.  In addition, pharmaceutical, financial, insurance, 
and retail companies (i.e., more highly regulated sectors) are 
moving to the capital at a higher rate than firms in the service 
industry and manufacturing. 
 
In other cases, Osaka headquarters have been downgraded to branch 
offices -- a path taken by Osaka trading giant Marubeni in April. 
Daimaru Holdings, the new holding company for retailers Daimaru 
and Matsuzakaya, which are merging in September, will put its 
headquarters in Tokyo, as well. 
 
In addition to the long shadow of Tokyo government agencies, an 
analyst pointed out that other attractions of Osaka are the 
concentration of information and better business infrastructure. 
Therefore, Osaka needs to look closely at its weaknesses and fix 
them in order to stanch the flow of firms to the east, he said. 
(Osaka-Kobe:  Phil Cummings/Naomi Shibui) 
 
16.  (U) Greater Seattle Leadership Delegation Visits Fukuoka & 
Kitakyushu 
---------- 
 
On May 12-18, a 70-person strong Greater Seattle International 
Study Mission visited Fukuoka and Kitakyushu for the second time 
in three years.  Senior executives of Boeing, Microsoft, leading 
 
TOKYO 00002352  006 OF 007 
 
 
U.S. banks, and Seattle law firms were among the delegation's 
members, as were state and city legislators and academic 
representatives. 
 
Bill Stafford, President of the Trade Development Alliance of 
Greater Seattle (TDAGS), noted that the mission's goal was to 
help local business, civic, and government leaders learn the best 
practices of other globally competitive cities. 
The mission focused on what Fukuoka and Kitakyushu are doing with 
regard to high-technology strategies, environmental policies, and 
the challenges of an aging society.  Consulate Fukuoka Principal 
Officer Joyce Wong gave the delegation a presentation on "What 
(Seattle) can learn from Fukuoka." 
 
To promote investment, trade and business exchanges between 
Fukuoka and Seattle, leaders from the two cities and the Fukuoka 
Chamber of Commerce and Industry and TDAGS signed a Memorandum of 
Agreement on May 14.  (Fukuoka:  James Crow) 
 
17.  (SBU) Asbestos Inspection: U.S. EPA Method Is Far More 
Accurate, Speedy and Economical Than GOJ Regulation 
------------------------------ 
 
At a seminar on asbestos inspection of building materials on May 
23, experts stressed that the U.S. EPA method is far more 
accurate, speedy and economical than the GOJ-instructed Japanese 
Industrial Standards (JIS) procedure. 
 
To see if a building contains asbestos, the EPA Method 600/R- 
93/116 requires checking five traits and takes only one to two 
hours to obtain the result, whereas Japan's JIS method relies on 
one optical trait only and yet can take as long as one week. 
The Ministry of Health, Labor and Welfare (MHLW), however, has 
published a directive to use the JIS method.  Industry observers 
say that JIS even plans to revise the method in October 2007 to 
eliminate any possibility to use another method, so the 
organization can protect current vested interests. 
 
Dr. Hironori Kamemoto, Director for Earth Appraisal Co. Ltd., 
which held the seminar, recounted that JIS committee members 
created its method without expertise on the EPA technique which 
is now the international standard adopted by Europe and Taiwan. 
Local governments responsible for asbestos inspection are 
troubled by the bizarre situation -- an official from Chiyoda-ku 
in Tokyo stated at the seminar that it is very difficult to 
conduct inspections under the current Japanese system. (EST: 
Keiko Kandachi/ Joyce Rabens) 
 
18.  (U) CO2 Emission Trading Scheme in Osaka 
------------------------------ 
 
The Kansai Economic Federation (Kankeiren)'s study group on 
Asia's first CO2 emission trade market has begun recruiting SMEs 
to join the scheme in Osaka.  Due to their smaller scale, these 
firms would operate in clusters.  The clusters would pool 
emission savings and serve as traders in the market. 
One remaining problem: while financial institutions, sensing 
opportunities for profit generation, are eager to participate, 
manufacturers have been reluctant to invest in the scheme. 
(Osaka-Kobe: Phil Cummings / Naomi Shibui) 
 
19.  (U) Daisuke Matsuzaka Wins Player of the Week Honors in 
American 
League for the Red Sox 
---------------------- 
 
We just thought our readers would like to know that.  (ECON: 
Nicholas Hill) 
 
20.  (U) Pickering Fellow Virsa Hurt 
------------------------------ 
 
The Tokyo Economics Section would like to welcome Pickering 
Fellow Virsa Hurt.  A graduate student in International Economic 
Policy at Columbia University, Ms. Hurt will be with us for the 
next ten weeks.  Her projects include looking at how income 
disparities (kakusa) are likely to affect the July Upper House 
elections and taking over the editing of this fine newsletter. 
Hurt speaks Japanese, having done her junior year abroad at 
Waseda University, and has State Department experience, having 
worked in the Office of Transportation Policy and in Embassy 
 
TOKYO 00002352  007 OF 007 
 
 
Accra.  If you wish to send Ms. Hurt any words of wisdom or 
kernels of advice, she can be reached at hurtvy@state.gov. 
(ECON: Sally Behrhorst) 
SCHIEFFER