Cablegate: Some Diet Economic Goals Achieved Despite

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RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #3481/01 1730832
ZNR UUUUU ZZH
R 220832Z JUN 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3577
INFO RUEHFK/AMCONSUL FUKUOKA 6876
RUEHNAG/AMCONSUL NAGOYA 6780
RUEHNH/AMCONSUL NAHA 9487
RUEHOK/AMCONSUL OSAKA KOBE 0139
RUEHKSO/AMCONSUL SAPPORO 8026
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 06 TOKYO 003481

SIPDIS

SIPDIS

PLEASE PASS TO USTR WENDY CUTLER/MICHAEL BEEMAN

E.O. 12958: N/A
TAGS: ECON ETRD JA
SUBJECT: SOME DIET ECONOMIC GOALS ACHIEVED DESPITE
POLITICAL DIFFICULTIES

REF: A. REF A: 2006 TOKYO 3290

B. REF B: 2005 TOKYO 5709

1. (SBU) Summary. Prime Minister Koizumi christened the
164th Diet session the "administrative reform" Diet, a
fitting moniker in terms of legislative achievement. He
refused to extend the Diet past June 18, leaving behind much
unfinished business such as Constitutional and educational
reform (see Septel), but his legislation to reform the
government,s administration was passed after lengthy
negotiation. For a discussion of administration reform and
tax reform see paragraphs 2-5. Bills involving health care
are discussed in paragraphs 6 and 7. The Financial
Instruments and Exchange Law can be found in paragraphs 8-10
while agricultural reforms are handled in paragraphs 11-12.
The revision to the Town Planning Laws is described in
paragraph 13 (and Reftel A) and an examination of employment
laws affecting women and youth begins in paragraph 14.
Additional bills, agreements, and treaties are examined in
paragraphs 15-23. End summary.

Administrative reform
---------------------

2. (SBU) After 128 hours of deliberations in both houses, the
Diet finally passed the administrative reform bill, which
provides a framework to realize a "simplified and efficient
government". Although intended to set in motion a program
for continued reform after Koizumi's departure, the actual
details will have to be worked out with subsequent
implementation bills to be discussed in the fall or during
next year's Diet sessions, at which time bureaucracies
affected by the downsizing may fight back. The bill also
establishes the Headquarters for Administrative Reform, made
up of Cabinet members and headed by the Prime Minister.

3. (SBU) Specific policy measures adopted by this bill are:
(a) review of independent administrative institutions and
other government-affiliated corporate entities; (b)
streamlining of special accounts by decreasing the number to
half or one-third from the existing 31 accounts within five
years. (In terms of amount, however, it only affects 12
trillion yen out of the Special Accounts' total 225 trillion
yen.) (c) trimming of the central and local government work
force by 5 percent and 4.6 percent respectively over the next
five years (FY06-10) through attrition and retirement,
outsourcing practices to private entities and reducing the
number of unnecessary practices; (d) reducing government
assets to half of that of FY2005 in terms of GDP percentage;
(e) consolidating or privatizing eight government-affiliated
financial entities, i.e., merging five institutions -- the
Japan Finance Corporation for Small and Medium Enterprise,
the National Life Finance Corp., Okinawa Development Finance
Corporation, the Agriculture, Forestry and Fisheries Finance
Corporation and the section offering international banking
services at the Japan Bank of International Cooperation
(JBIC) -- into a single entity. The Development Bank of
Japan and Shoko Chukin Bank will be fully privatized in five
to seven years. The overseas yen loan aid operations at JBIC
will be transferred to the Japan International Cooperation
Agency by April 2008. The merger of JIBC yen loan program
into JICA is part of the larger ODA (official development
assistance) reform, being undertaken by the Ministry of
Foreign Affairs. The Koizumi administration intended to
produce a major consolidation of government financial
institutions but critics claim this move may have only
shuffled agencies around with little downsizing of government
institutions.

Tax Change Legislation for 2006
-------------------------------

4. (SBU) The Diet approved this year,s tax reform
legislation on March 27. The tax bill is estimated to result
in a 2.4 trillion (0.5 percent of GDP) increase in central
and local tax revenues once the tax measures are fully in
place. Highlights include eliminating the remaining half of
the 3.3 trillion special fixed-rate individual income tax
cuts starting in January 2007. (Half of the special tax cuts
were eliminated from January 2006.) This is an incremental
increase in the tax rate but with the economy doing better we
do not expect it to have a negative impact on growth.

5. (SBU) Other tax changes include (a) scaling back tax

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incentive programs for corporate investment in IT and R&D;
(b) scaling back earlier reductions in taxes on real estate
transactions, such as the property acquisition tax, and the
registration and license tax; (c) simplifying the liquor tax
system by reclassifying ten categories of alcoholic beverages
to four, including an increase in the wine tax by 6.9 to
57.6 per 720-ml bottle, and a lowering of the sake tax by
14.8 to 86.4 per 720-ml bottle, effective May 2006; (d)
raising the tobacco tax on cigarettes by 0.85 to about 8
per cigarette, effective July 2006; (e) modifying the
qualification for non-permanent resident tax status. From
2006, anyone living in Japan for any 5 out of any 10
consecutive years will not qualify for non-permanent resident
tax status. In particular, the increase in the wine tax is
somewhat worrisome because it may represent only the first of
many tax increases on US exports of wine.

Health Care Reform
------------------

6. (SBU) Health care reform bills passed on June 14 will
increase co-payments for well-off seniors age 70 and over,
decrease co-payments for children, and give private
non-profit hospitals greater flexibility to supplement
revenues, including through issuance of hospital bonds.
Liberal Democratic Party (LDP) lawmakers reportedly are
already discussing additional new measures to reduce
government health care spending, however, in response to
criticism that these bills passed with inadequate debate and
do not go far enough to address waste in Japan's health care
system. Measures under consideration by the LDP reportedly
include significant new cuts in reimbursement prices for
pharmaceuticals and a move from biannual to annual price
cuts, changes that will exacerbate downward price pressures
on domestic and foreign pharmaceutical manufacturers. Also
reportedly under consideration are measures to expand the use
of a "fee-for-diagnosis" reimbursement model, in which
hospitals are reimbursed at a flat rate determined by the
type of illness, rather than the current "fee-for-service"
model, which gives health care providers an incentive to
maximize billable services to patients, including frequent
visits to the doctor and prolonged hospital stays. How the
LDP discussions play out will give some indication of the
extent to which the conservative Japan Medical Association is
able to regain its traditionally strong influence with LDP
politicians during the upcoming transition to a new LDP
leader.

7. (SBU) Separately, the Diet revised the Pharmaceuticals Law
June 8 to permit over the counter retail sale of less risky
non-prescription drugs, subject to licensing at the
prefectural level. These changes are expected to pave the
way for convenience stores and other retailers to sell all
but the highest risk non-prescription medicines, including
treatments for common ailments such as colds, headaches etc.
The revised law does not permit Internet or mail order sales,
however.

Financial Instruments and Exchange Law
--------------------------------------

8. (SBU) On June 7 the Diet passed the Financial Instruments
and Exchange Law. This law, which amends and renames the
former "Securities and Exchange Law," provides a wide-ranging
legal framework designed to enhance consumer protections and
establish uniform rules for transactions involving financial
products and services.

9. (SBU) The four basic goals of the law are: (a) to
establish a cross-sectoral regulatory framework of financial
products and services by providing a definition of collective
investment scheme and derivatives; (b) to enhance disclosure
requirements by introducing a statutory quarterly reporting
system for listed firms, enhancing regulations on internal
control for financial reporting with a mandatory
certification by management, and improving the transparency
of the Tender Offer Bid (TOB) process; (c) to strengthen
penalties for illegal transactions by increasing the maximum
criminal penalties against such frauds as false financial
reports and market manipulation to 10 years in prison from
the present five years; and (d) to permit stock exchanges
to create self-regulatory committees to make exchanges more
transparent and reliable. The law is expected to take effect
by summer 2007.

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10. (SBU) The new Financial Instruments and Exchange Law has
drawn much attention in the wake of the June 5 arrest of
maverick investor Yoshiaki Murakami on charges of insider
trading related to the 2005 Livedoor-Nippon Broadcasting
hostile takeover attempt. The new law closes loopholes used
by Murakami and former Livedoor CEO Takafumi Horie to acquire
major ownership positions in target firms without filing a
formal TOB. At the same time, the new law revises TOB rules
to increase the transparency of the process by requiring
target company boards to take a formal position on tender
offers and communicate their views to shareholders.
Furthermore, it permits buyers to withdraw or revise their
offers in response to target companies' deployment of
takeover defense measures such as stock splits or poison
pills. The new law also tightens the deadline for
institutional investors to report the acquisition of more
than five percent of a given company's stock, from 90 days to
two weeks, and it requires fund managers to register and
report their names and addresses. These two changes could
potentially interfere with legitimate investment strategies
and inhibiting the development of Japan's investment fund
market.

Agricultural Reform
-------------------

11. (SBU) A farm bill ostensibly designed to promote
agriculture reform passed the Diet on June 14th. When it
goes into effect in 2007, the government will focus direct
payment subsidies on large-scale farmers or farmer
organizations in an effort to promote consolidation and
increased agricultural productivity. GOJ authorities,
claiming the new supports will be more consistent with WTO
rules, hurriedly passed the bills in part to prepare Japan
for the now-stalled Doha negotiations. Some observers with
whom we have discussed the bills are not optimistic that they
will prove effective in promoting reform in Japan's
lackluster agriculture sector, however since local
governments can exploit loopholes to funnel subsidies to
smaller farmers despite the goal of focusing on larger,
competitive farms.

12. (SBU) Two bills related to BSE and submitted by the
opposition Democratic Party of Japan (DPJ) will be carried
over to the next Diet session, but it is unlikely they will
ever be passed by the LDP-controlled Diet. The bills are
designed to provide consumers with more information on the
beef they are purchasing, in particular where and when it was
imported. In addition, importers would be obliged to keep a
register of the name of the exporting country, code
identifying the cattle of origin, the party responsible for
the code and the date of import. Distributors of imported
beef would either place this information on the packages of
beef or display it in their stores. The bill also mandates
that the government evaluate BSE risk in countries or regions
that have experienced a BSE problem.

Town Planning Laws (Machizukuri Sanpo)
--------------------------------------

13. (SBU) Newly-passed amendments to Japan's Three Town
Planning Laws -- comprised of the City Planning Law, the
Large-scale Retail Store Location Law, and the Urban Center
Revitalization Law -- will make it more difficult for
retailers to open stores of over 10,000 square meters. This
will be achieved by reducing the types of land available to
retailers hoping to build large stores from six zones to only
three -- commercial districts, neighborhood commercial
districts, and quasi-industrial districts -- and prohibit
retailers from building such stores on unzoned and
agricultural land, which they are currently allowed to do.
The Japanese retail sector believes the amended laws will not
achieve their objective of attracting retailers back to
depressed urban shopping areas, but will instead result in
fewer, and smaller, shopping options in suburban areas. The
laws will not go into effect until December 2007, but
prefectures and local governments around Japan have already
used their impending enactment as an excuse to introduce
further restrictions on large retailers and reject
large-scale retail store applications. The Embassy is
engaging the GOJ to ensure that the Laws' implementing
regulations and the process leading up to them will be
implemented transparently and fairly and include

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opportunities for the USG and private sector to provide
input. (For further information please see Reftel A.)

Employment Practices
--------------------

14. (SBU) The Diet passed an MHLW-drafted bill to expand
employment opportunities for women and youth on June 15, only
a day before the Diet session effectively came to a close and
only after heated debate between the ruling and opposition
parties finally resulted in a compromise. The measure was
prompted by concerns over the declining workforce -- a
government census confirmed that Japan,s total population
decreased in 2005 for the first time since the end of WWII.
Known as the Equal Employment Opportunity Bill, the
legislation is designed to reduce gender discrimination. One
goal was to create a ministerial order to prohibit implicit
gender discriminations such as recruiting based on height and
weight, basing promotion decisions on willingness to accept
transfers to other parts of the country -- even when an
assignment does not require it -- or basing promotion on the
number of different locations where an employee has worked
(female workers tend to stay in one place during their
career, making them vulnerable to this type of
discrimination). Labor unions argued that other implicit
gender discrimination existed as well and successfully
convinced the Diet to add a supplementary resolution (futai
ketsugi), which states that any discrimination not included
in the ministerial order could be defined as illegal through
judicial rulings. The government hopes this legislation will
encourage more female workers to join the labor pool.

15. (SBU) The Diet also passed the Human Resource Development
and Employment Management Amendment Bill. It is designed to
give practical, effective vocational training to youths
through a new system combining on-the-job training with
lectures. The government hopes this new system will encourage
retiring baby boomers to transfer their technical skills and
know-how to young people.

Market Testing Law
------------------

16. (SBU) The Bill for the Reform of Public Services through
the Introduction of Competition, known as the "Market Testing
Law", establishes a legal framework and lays out the
procedure for allowing the private sector to bid
competitively with the public sector to provide public
services on national and, on a voluntary-basis, local levels.
An independent, third party organization made up of lawyers
and accountants is to be set up to ensure transparency,
neutrality and fairness in the process. The Prime Minister's
Council on the Promotion of Regulatory Reform has championed
this legislation as a way to reduce the size of government by
outsourcing government services and has visited the United
States and Europe to gather ideas on possible outsourcing
options. In addition, the impact of this bill already has
been felt. On June 1 the government outsourced the issuance
of parking tickets to private firms. Another service that is
a candidate for this initiative is the government "Hello
Work" job placement services. (For more background on this
bill see Reftel B.)

Customs Law
-----------

17. (SBU) The Customs Tariff Law (kanzei teiritsu ho)
Amendment Bill was passed on March 29 and went into
enforcement on April 1. The Ministry of Finance (MOF) had
hoped to broaden the reporting authority to allow prior
notification by a broader range of authorized reporters in
response to public comment in November 2006, but the bill
that ultimately was submitted and passed requires duties only
on aircraft and vessel captains.

Road Transportation Vehicle Law
-------------------------------

18. (SBU) The Road Transportation Vehicle Bill was passed on
May 12, released to the public on May 19, and will become
effective within 2.5 years. The revision to this law
includes the ability to register new vehicles on-line. Other
recommendations, such as removing owners, information from
the original certificates of vehicle inspection, thus

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reducing the burden on auto leasing companies and other
owners of large numbers of vehicles, were not included. The
relevant Ministerial Ordinances are to be drafted by the end
of 2006. The law still requires owners to complete the
registration process within a 15 day time period, however,
MLIT is now willing to accept en masse applications which
would enable the re-registration to be done within six
months. US stakeholders are fully involved in the outlining
and drafting of the Ministerial Ordinances, and a study group
began meeting on June 20. The US had been requesting this
step in the Regulatory Reform Initiative as a means to reduce
the burden on auto leasing companies. GE is among the
American companies that will benefit from this relaxation of
regulations.

Anti-corruption Legislation
---------------------------

19. (SBU) The Diet approved ratification of the United
Nations Anti-Corruption Convention on June 2 but did not pass
the legislation actually containing the ratification because
the opposition DPJ raised objections to the
government-drafted bill. The legislation, dubbed the
"Conspiracy Bill", was drafted to combat organized crime. It
also would have brought Japan into accordance with OECD
anti-corruption guidelines because it included a provision to
penalize Japanese nationals who commit bribery overseas.
Originally submitted in 2004, the bill continues to be "under
consideration," and will be carried over to the next Diet
session.

Eliminating Tariffs on Multi-chip Integrated Circuits
--------------------------------------------- --------

20. (SBU) Measures to implement the agreement to eliminate
tariffs on multi-chip integrated circuits between the United
States, EU, Korea, Taiwan and Japan, passed the Diet at the
end of April with apparently little or no dissension. With
the ratification of this agreement, the U.S., EU, and Korea
will abolish their duties, and Japan will bind its applied
rate at zero. Although it was hoped the treaty would spur
zero-tariff sectoral agreements in WTO negotiations, this
does not appear to have happened yet.

MRA on Telecommunications Equipment
-----------------------------------

21. (SBU) U.S. and Japanese negotiators have not yet reached
agreement on a final text for a Mutual Recognition Agreement
(MRA) on Telecommunications Equipment. It is likely the
agreement will not be ready for submission to the Diet until
2007.

Free Trade Agreements (FTAs)
---------------------------

22. (SBU) As expected, Japan's "economic partnership
agreement" (EPA) with Malaysia was ratified during this Diet
session. Because of the ongoing political uncertainty in
Thailand, however, the Thailand-Japan agreement remains
unsigned and consequently has yet to be submitted for Diet
approval even though the text of the agreement itself has
been completed. Negotiations on the Japan-Philippines EPA
continued without final resolution, thus preventing Diet
action on that agreement as well.

Japan,s EEZ with China and South Korea
--------------------------------------

23. (SBU) Three bills to crack down on Chinese and South
Korean energy exploration within Japan,s exclusive economic
zone (EEZ) will be taken up in the next Diet session. The
bills were submitted by the LDP and the DPJ, respectively.
The LDP,s bill restricts entry into an area 500 meters
around a facility set up to exploit, develop, or explore
natural resources inside the Japan-set EEZ median line. This
bill is designed to protect oil drilling and other equipment
from being damaged. The DPJ on the other hand submitted two
bills. One deems that exploration for natural resources be
carried out by the government and requires all exploration
plans be subject to Cabinet approval. The other would
prohibit foreign nationals or entities from carrying out such
research within the same coastal area without government
approval. The government will now have to continue

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contentious negotiations with China and South Korea over the
EEZ median line without domestic legislation allowing it to
crack down on violators.

Conclusion
----------

24. (SBU) Overall, this was a lackluster session, perhaps not
surprising given Koizumi,s lame duck status. Koizumi
achieved his main objective, however -- passing his
administrative reform bill. In addition, the Diet began the
difficult process of reforming the health care system and
also made some progress toward deregulation with the Market
Testing and Road Transportation Vehicle Laws. The attempt at
agricultural reform was disappointing, however, as was the
failed attempt at anti-corruption legislation. As for other
bills, such as the Financial Instruments and Exchange Law and
the Town Planning Law, we will continue to monitor and report
on the impact on US interests.
SCHIEFFER

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