Cablegate: Japanese Morning Press Highlights 12/21/06

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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: JAPANESE MORNING PRESS HIGHLIGHTS 12/21/06

Index:

1) Top headlines

2) Editorials

3) Prime Minister's daily schedule

4) Tax Council Chairman Honma to resign

5) Resignation of Honma taken as symbol of Abe Cabinet's failure at
tax reform

6) Other opposition parties all blast Minshuto (Democratic Party of
Japan) for handling of Diet strategy in last session

7) Minshuto speeding up recruitment of candidates for one-person
districts in next summer's Upper House election

8) Former LDP Secretary General Takebe launches own group of 24 in
the party

9) USFJ realignment outlays placed in separate framework in final
budget draft

10) Subsidies to local governments affected by USFJ realignment will
be allocated in four stages

11) Missile defense-related expenditures in FY07 budget to expand to
182.6 billion yen

12) Orders of PAC3 missiles will be speeded up under MD budget

13) Futenma-related Okinawa revitalization appropriation in budget
totals 10 billion yen

14) ODA budget cut eighth year in a row, now less than 40 percent of
what it was at peak

15) Outlays related to Japanese abductees increase 10-fold in FY07
budget

16) Six-party talks: Japan struggling for mention of abduction issue
in joint statement at end of this round of talks

17) Three Aegis ships outfitted for missile defense

18) Former defense chief Ishiba drafts private proposal that calls
for use of right of collective self-defense

19) Negotiations on Sakhalin-2 project expected to be concluded
today, with Gasprom receiving lion's share of investment

Articles:

1) TOP HEADLINES
Asahi:
Government Tax Commission Chairman Honma to resign over apartment
scandal; Abe administration to suffer blow

Mainichi, Yomiuri, and Tokyo Shimbun:
Country's population projected to fall below 90 million in 2055;

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Projected fertility rate also lowered to 1.26

Nihon Keizai:
Nissan, NEC to tie-up on car batteries to counter Toyota,
Matsushita

Sankei:
Japan's population projected to decline by 1 million yearly starting
in 2035

Akahata:
Finance Ministry's FY2007 draft budget kind toward large firms;
Public will suffer from tax increases and reduced daily funds

2) EDITORIALS
Asahi:
(1)Dropping population a serious problem
(2)FY2007 budget: 25 trillion yen government bond issuance laudable

Mainichi:
(1)Innovative ideas essential for future of country with shrinking
population
(2)FY2007 draft budget: Time to make decision to frontload fiscal
reconstruction program

Yomiuri:
(1)Optimism over budget looks a bit premature
(2)Projected democratic shifts underline seriousness of dropping
birthrate

Nihon Keizai:
(1)Budget needs structural reform

Sankei:
(1)FY207 budget: Reform must not slow down
(2)Tax Commission Chairman Honma must become aware of public's
severe gaze

Tokyo Shimbun:
(1)Dropping population: People want comfortable life
(2)Bad corporate nature exposed by Amagasaki accident report

Akahata:
(1)True nature of Abe's "rising tide" policy now evident

3) Prime Minister's Official Residence (Kantei)

Prime Minister's schedule, December 20

NIHON KEIZAI (Page 2) (Full)
December 21, 1996

09:03
Attended at Kantei emergency cabinet meeting. Internal Affairs
Minister Suga remained in the room. Met later with Vice Finance
Minister Fujii and Budget Bureau chief Tsuda, followed by Economic
and Fiscal Policy Minister Ota, Special Advisor Nemoto and Assistant
Deputy Chief Cabinet Secretary Saka.
10:03
Attended a meeting to strengthen functions of Kantei regarding
national security.
11:38

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Met Special Advisor Yamatani and others.
12:47
Met Expo 2005 Aichi Chairman Shoichiro Toyoda.
13:33
Held talks with LDP Secretary General Nakagawa for New Year's
project by Chugoku Newspaper at LDP headquarters.
14:59
Met at Kantei with Japan-US Economic Cooperation Council Chairman
Junichi Ujiie. Met Japan WBC manager Sadaharu Oh and other WBC
members, joined by former Prime Minister Mori. Mori remained in the
room.
16:15
Met with Acting Secretary General Ishihara and Lower House members
Yasutoshi Nishimura and Yoichi Miyazawa. Attended meeting of the
Economic and Fiscal Policy Council.
17:36
Met with Foreign Minister Aso.
18:43
Returned to his official residence.

4) Tax Commission Chairman Honma to resign over lodging scandal,
blow to Abe government

ASAHI (Top Play) (Full)
December 21, 2006

The government's Tax Commission Chairman Masaaki Honma, a professor
at Osaka University, yesterday firmed up his intention to resign his
post, according to government officials. He appears to have
determined that it would be difficult for him to devote himself to
his duty since there are increasing calls for him to voluntarily
step down from his post over the fact that he had lived without
authorization at a government-paid apartment in a prime location in
Tokyo. Prime Minister Shinzo Abe appointed him as chairman of the
commission in an attempt to demonstrate a policy of placing priority
on economic growth led by the Prime Minister's Official Residence
(Kantei). If Honma resigns after serving in his post only one and a
half months, Abe's responsibility for appointing him will be called
into question. As a result, Honma's resignation will inevitably
weaken the cohesion of the Abe administration, over which dark
clouds are already appearing due to the reinstatement of postal
rebels into the Liberal Democratic Party (LDP) and other matters.

Abe has repeatedly said he has no intention to replace him, noting,
"I want him to fulfill his duty." A government official, however,
indicated yesterday that the prime minister would eventually agree
to his resignation, saying, "There is no change in the prime
minister's position, but we cannot prevent him from stepping down."

Honma was named chairman of the Tax Commission on Nov. 7, expecting
to serve in the post for three years. Rejecting the reappointment of
Hiromitsu Ishi as chairman of the panel whom the Finance Ministry
recommended, the Kantei picked Honma, who advocates a corporate tax
cut, making clear the policy of prioritizing economic growth. The
Tax Commission on Dec. 1 submitted to the government a report on tax
reform for fiscal 2007 recommending a study of the corporate tax
rates, including a review of the depreciation system and other
aspects of corporate taxes.

However, a weekly magazine on sale on Dec. 11 carried an article
that Honma allegedly lived with a woman other than his wife in a
government-paid condominium. After that, many LDP members criticized

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him, noting that what he did was inappropriate for a person who asks
the public to agree to pay more tax.

At a press conference on Dec. 13, Honma denied the allegation that
he was living with a woman other than his wife but revealed that he
moved out of the government-sponsored apartment.

The rent for the 3LDK government-paid apartment in Shibuya Ward is
about 77,000 yen per month. Honma as chairman of an expert panel of
the Economic and Fiscal Policy Council compiled in September a
report calling for promotion of selling national assets, including
holdings for public servants. Amid growing calls for Honma's
dismissal, only Prime Minister Abe and Chief Cabinet Secretary
Shiozaki were supporting Honma.

5) Government's tax panel chair Honma's resignation to deal blow to
government, as he is "symbol of reform"

ASAHI (Page 2) (Excerpts)
December 21, 2006

The tide of opinion in the government and ruling parties about
Government Tax Commission Chairman Honma's course of action is that
his resignation will be unavoidable. If the scandal dragged on into
the ordinary Diet session to be convened early next year, "It could
put the government at risk," given that the scandal would be made an
easy target for attacks in tax system reform negotiations that
envision a possible hike in the consumption tax after the Upper
House election, a high-level government official said. Meanwhile, a
stumble in Prime Minister Abe's selection of personnel could cast a
blight on his reform line.

Late yesterday, when asked by reporters about Honma's course of
action, Abe stated, "He has deep insight into the tax system. I hope
he will devote himself to his duties and regain public confidence."
Abe thus stressed he did not waver.

But, a report of recommendations released by the Government Tax
Commission led by Honma was exposed to such criticism as "giving
favorable treatment to companies but a veiled possible hike in the
consumption tax," not getting along with the ruling Liberal
Democratic Party's (LDP) tax panel's policy. The moment the scandal
of Honma's allegedly inappropriate use of a public residence was
reported, calls for his resignation from the post erupted among
senior LDP tax panel members. Even cabinet members made cold remarks
about Honma one after another.

The government and ruling parties feared that a scandal involving
the person responsible for the tax system reform could fuel
criticism of the government in tax system reform negotiations ahead
of the Upper House election. It is also expected that the opposition
camp will strike at this scandal in the course of tax system reform
debate in the ordinary Diet session. The government and ruling camp
were highly concerned about the possibility that "once a scandal is
reported, it will be rehashed over and over again," as a high-level
government official put it.

On the other hand, Honma was an aggressive private-sector member of
the Council on Economic and Fiscal Policy (CEFP) and was seen as the
symbol of continuing the reform line. Criticisms of Honma heard in
the ruling camp in part entailed objections to Abe's attitude of
continuing the reform line. Abe, unlike former Prime Minister

TOKYO 00007075 005 OF 011

Koizumi, who remained protective of his appointed cabinet members
and LDP executives despite calls for their resignations, may give
the impression that he has given in to the ruling parties' calls.

6) SDP chief criticizes Minshuto's way of dealing with Diet session;
PNP, JCP chairman also unhappy

MAINICHI (Page 5) (Full)
December 21, 2006

Social Democratic Party (SDP) head Mizuho Fukushima during a press
conference yesterday criticized the Democratic Party of Japan's (DPJ
or Minshuto) approach to the Diet session. She rapped the party for
refusing to submit a motion censuring Prime Minister Shinzo Abe in
the final stage of the Extraordinary Diet session, noting, " It was
rotten and regrettable. We are annoyed." She played up a stance of
attaching importance to maintaining an independent posture instead
of aiming for a united front by opposition parties. She stated, "We
areQ#3N$U~y[omQ the same day stated, "I want to
demand an overall replacement of senior Minshuto Diet Policy
officials." Japanese Communist Party (JCP) Chairman Kazuo Shii also
stated during a press conference on Dec. 19: "Minshuto has come up
with a policy of confronting the opposition camp under the
leadership of party head Ichiro Ozawa. However, the details are
missing." Dissatisfaction with Minshuto is growing among opposition
parties.

7) DPJ rushing to field candidates for Upper House election next
summer in single-seat constituencies

MAINICHI (Page 5) (Excerpts)
December 21, 2006

In a bid to catch up with its late start, the Democratic Party of
Japan (DPJ or Minshuto) is rushing to field candidates in
single-seat constituencies, which are said to hold the key to the
outcome of the Upper House election next summer. Party head Ozawa
visited Nagasaki twice last week. This week he visited Okayama,
Shiga and Fukui. He has so far visited only single-seat districts.
The party has now fielded candidates in 15 single-seat districts out
of 29, picking three this month. It will likely be able to field
candidates, including those endorsed jointly with other opposition
parties, in 20 districts, approaching the LDP's 23.

Strategy to encroach upon LDP's territories

Ozawa on Dec. 20 held a press conference in Otsu City, Shiga
Prefecture, where the DPJ approved a candidate on the previous day.
Commenting on the situation of fielding candidates for single-seat
districts, he stressed, "We are smoothly picking candidates. We
could be fully ready for aiming for a majority seats of more than
15."

8) LDP's Takebe launches new group "New Breeze" with 24 young
lawmakers

YOMIURI (Page 4) (Full)
December 21, 2006

TOKYO 00007075 006 OF 011

Tsutomu Takebe, former secretary general of the ruling Liberal

SIPDIS
Democratic Party (LDP), yesterday launched a new group called "New
Breeze (Atarashii Kaze)" which he heads.

A total of 24 lawmakers, including Takebe, attended yesterday's
inaugural party held in a Tokyo hotel. The group consists of mainly
junior LDP members who are unaffiliated with any faction and are
serving their first or second term in the Diet. Takebe said in the
party:

"Former Prime Minister Koizumi's statement that there would be no
growth without reforms is not a slogan for just one government but
is Japan's new guidepost. I want to do my best to push forward with
the reform program."

House of Representatives member Yukari Iijima (proportional
representation Hokkaido) proposed that the group make efforts to
revitalize the city of Yubari in Hokkaido, which is suffering from
financial difficulties and whose population is on the decrease. The
group decided on a policy line of working on measures to revitalize
the city, after carrying out on-the-spot research.

9) JDA, MOF agree on allocation of US force realignment costs under
separate budget framework

YOMIURI (Page 2) (Full)
December 21, 2006

In the tug-of-war between the Defense Agency (JDA) and Ministry of
Finance (MOF) over how to treat expenditures to finance US force
realignment programs, a settlement was reached in effect yesterday
as the Finance Ministry earmarked 7.24 billion yen as realignment
costs under a separate budget framework from the FY2007 defense
budget in its draft budget unofficially announced the same day.
Members in the Liberal Democratic Party, which was calling for
setting up a separate framework, welcomed the MOF decision, with
former Defense Agency Director General Gen Nakatani remarking: "It
is significant that approval was given to a separate budget
framework for the initial year of the programs. This decision is
likely to affect budget compilation next fiscal year and beyond."

In the defense budget, there is no classification of "separate
framework." But outlays related to SACO (Special Action Committee on
Okinawa) aimed to reduce the burden on the local communities housing
US military bases are separated from expenditures to finance usual
defense matters, such as costs for front-line equipment and
personnel. This measure has been conventionally taken in response to
such a political request as that. "It is undesirable to hinder
Self-Defense Force's activities as a result of the defense budget
being trimmed in order to lighten the burden on local communities in
Okinawa," said an LDP member responsible for national defense
policy.

JDA and MOF agreed yesterday to allocate spending on measures to
reduce the burden on the local communities to be affected from the
relocation of the US Marine Corps' Futenma Air Station in Okinawa
and other plans under a separate slot, like the case of SACO-linked
outlays.

Next year, the mid-term defense buildup plan (FY2005 - FY2009) is
due to be reviewed. In the spar over a separate budget framework

TOKYO 00007075 007 OF 011

between JDA and MOF, the JDA's request was accepted this year. But
such a tactful game is likely to heat up again next year. One
Defense Agency official said, "The crucial stage will come three or
four years from now, when US force realignment costs is will balloon
to an annual 100 to 200 billion yen."

10) Finance Ministry proposes 5.05 billon yen in US force
realignment-related subsidies; Affected municipalities to be
classified into four levels

MAINICHI (Page 3) (Full)
December 21, 2006

The Finance Ministry's draft budget for fiscal 2007 includes 5.05
billion yen in subsidies to municipalities that would bear greater
burdens as a result of the realignment of US forces in Japan. The
system is designed to increase subsidies in four stages according to
their level of acceptance of burdens. The draft budget also includes
10 billion yen that is part of a continuing economic package for the
northern part of Okinawa. The carrot-and-stick approach to curry
favor with affected municipalities might draw protests from local
residents.

In a joint government and ruling coalition meeting on Dec. 15,
Defense Agency Director-General Fumio Kyuma expressed his eagerness
for progress in US force realignment, saying: "To meet the
expectations of municipalities that have already accepted US force
realignment, we are going to seek cooperation of municipalities that
have yet to accept it."

Realignment subsidies will become a pillar in 10-year US force
realignment promotion legislation to be submitted to the Diet in the
next regular session. Subsidies are expected to total 100 billion
yen over 10 years.

The envisioned system is similar to the special defense facilities
subsidies system covering municipalities with airports, training
ranges, and the like. The new system is unique in that the range has
expanded to cover "soft" projects, such as lecture meetings, in
addition to public works projects.

The Defense Agency plans to increase subsidies depending on
municipalities' responses based on four levels: (1) local heads'
announcement of acceptance of US facilities, (2) implementation of
environmental assessments, (3) start of construction, and (4)
relocation of troops. The program is aimed at applying mental
pressure on local governments that have yet to agree to accept US
military facilities, such as Okinawa, by discriminating them against
others depending on the degree of their cooperation.

11) MD-related budget adds up to 182.6 billion yen

ASAHI (Page 4) (Full)
December 21, 2006

The Finance Ministry's fiscal 2007 budget plan incorporated a
budgetary estimate of 182.6 billion yen for spending related to
missile defense, marking an increase of 30 percent over the current
fiscal year in response to North Korea's missile launches and
nuclear test. Japan is currently working together with the United
States to develop a missile defense system, for which the Finance
Ministry has approved a seven-fold outlay of 21.6 billion yen.

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The Finance Ministry's draft budget approves spending to co-develop
the Standard Missile 3 (SM-3), a sea-based missile defense system,
with the United States, incorporating an increase of 18.6 billion
yen from 3.0 billion yen budgeted for the current fiscal year. The
SM-3 development project, currently at the stage of design, will now
go on to the stage of making a prototype. In addition, the
supplementary budget for the current fiscal year incorporated an
additional outlay of 7.6 billion yen to move up Japan's purchase of
Patriot Advanced Capability 3 (PAC-3) ground-based missiles from a
US manufacturer.

Japan is going to step up its missile surveillance and warning
readiness, and the Finance Ministry has approved a total of 7.0
billion yen in the extra budget for the current fiscal year and in
the draft budget for next fiscal year to renovate electronic
intelligence aircraft detecting missile launch signs. Japan will
share detected intelligence with the United States.

12) Appropriation of 7.6 billion yen for purchases of PAC3 missiles
in supplementary budget ahead of schedule

MAINICHI (Page 5) (Full)
December 21, 2006

The government earmarked approximately 7.6 billion yen for early
purchases of Patriot Advanced Capability-3 (PAC-3) surface-to-air
missiles in the fiscal 2006 supplementary budget, adopted at a
cabinet meeting on Dec. 20. Though it had originally set that amount
aside in a budget appropriation request for fiscal 2007, following
the test-launches of missiles by North Korea, it has frontloaded the
appropriation together with approximately 4.5 billion yen for
expenses to repair EP-3 electronic intelligence gathering planes.
Approximately 8.4 billion yen was also earmarked as research
expenses for the transfer of Futenma Air Station to the coastal part
of Camp Schwab in Nago City, Okinawa. In the fiscal 2006
supplementary budget 71.1 billion yen, the largest amount to date,
was appropriated for defense-related expenses.

13) Futenma relocation: 10 billion yen earmarked for Okinawa's
northern economic development

ASAHI (Page 4) (Full)
December 21, 2006

In connection with the issue of relocating the US Marine Corps'
Futenma Air Station in Ginowan City, Okinawa Prefecture, to the
island prefecture's northern coastal city of Nago, the Finance
Ministry has earmarked a budgetary estimate of 10 billion yen in its
fiscal 2007 budget plan for a package of economic development
measures for Okinawa's northern districts hosting an alternative
facility for Futenma airfield.

Japan and the United States have agreed to realign US forces in
Japan. Meanwhile, the government made a cabinet decision in May to
discontinue the northern development package. However, the
government, in order to facilitate talks with base-hosting
localities, decided to continue the package at the request of
Okinawa Gov. Hirokazu Nakaima, who was elected for the first time
with his acceptance of Futenma relocation within the prefecture.

14) ODA budget now 40 percent below peak period, marking eighth

TOKYO 00007075 009 OF 011

consecutive yearly drop

NIHON KEIZAI (Page 5) (Full)
December 21, 2006

Under the Finance Ministry's draft budget for FY2007, the government
will reduce outlays for official development assistance (ODA)
projects by 4 percent below the initial budget for the current
fiscal year to 729.3 billion yen. This figure is about 40 percent
less than the 1,168.7 billion yen recorded in FY1997.

In the draft supplementary budget for FY2006, 86.2 billion yen was
earmarked as ODA funds to finance reconstruction and development
projects in Iraq. Although the ODA budget will be cut by 4 percent
in the Finance Ministry's draft budget, a ministry official said,
"The ODA budget will increase in effect if the outlays in the
supplementary budget are added. We gave consideration to increasing
ODA projects."

Former Prime Minister Junichiro Koizumi promised in 2003 to augment
10 billion dollars in ODA projects. With the record in 2004 as the
standard, about 80 percent of Koizumi's pledge is likely to be
attained by 2006. However, China's repayments of yen loans have
speeded up, so ODA projects may not increase as expected. An
official of the Foreign Ministry voiced concern, "It might become
difficult to attain the target."

Regarding the Foreign Ministry's request for increases in personnel
and diplomatic establishments abroad as part of efforts to
strengthen the nation's diplomatic capabilities, outlays were not
allocated, and the request will be discussed in restoration
negotiations.

The fixed number of Foreign Ministry personnel is expected to
increase by 32 in the end. If those farmed out from other government
agencies are included, the net increase is projected to be 51.

15) Abduction-related budget up 10-fold to 473 million yen

ASAHI (Page 4) (Abridged)
December 21, 2006

The Finance Ministry yesterday posted its draft budget in its budget
compilation for fiscal 2007. The posted budget plan incorporates an
estimate of 473 million yen for a government taskforce, headed by
Prime Minister Abe, to send and collect information about abductees.
The Finance Ministry has approved almost all abduction-related
budget requests to the full, and the approved amount of these budget
requests is nearly 10 times larger than 51 million yen budgeted for
the current fiscal year. The supplementary budget for the current
fiscal year has also earmarked 226 million yen for abduction-related
appropriations.

The draft budget endorses 134 million yen for broadcasting to North
Korea and 81 million yen for stepping up the government's
preparedness to collect information about abductees.

16) 6-party talks: Japan seeking approval for mention of "abduction"
in document

NIHON KEIZAI (Page 2) (Excerpts)
December 21, 2006

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Kei Sekiguchi, Beijing

The Japanese government intends to appeal to other member nations of
the six-party talks on the need to mention the importance of
resolving the issue of Japanese citizens abducted by North Korea in
a document that will summarize the results of the ongoing six-party
talks. The key to whether this will be realized is whether Japan can
make other members understand its position of attaching equal
importance to the abduction issue as the nuclear issue. North Korea,
which has stated (that the abduction issue) was already settled, is
certain to oppose Japan.

The top US negotiator at the six-party talks, Assistant Secretary of
State Christopher Hill has proposed documenting the results of the
six-party talks. Chief Cabinet Secretary Yasuhisa Shiozaki told a
press briefing yesterday: "Japan has reiterated the need to resolve
the abduction issue. If a document (about the six-party talks) is
created, Japan will naturally assert (the abduction issue) be
mentioned in it."

The Japanese representative to the six-party negotiations, Foreign
Ministry Asian and Oceanian Affairs Bureau Director-General
Kenichiro Sasae yesterday met separately with Hill and his South
Korean counterpart, Chun Young Woo, director of the Office of
Diplomatic Policy of South Korea's Ministry of Foreign Affairs and
Trade, and confirmed close coordination among Japan, the US, and
South Korea.

17) 3 Aegis ships readied for missile defense

SANKEI (Page 5) (Full)
December 21, 2006

The US Navy has completed the renovation work of mounting the
Standard Missile 3 (SM-3), a sea-based intercept missile system for
missile defense, on two Yokosuka-based Aegis destroyers, the USS
Stetham and the USS Curtis Wilbur, a senior official of the Defense
Agency said yesterday. The United States has told Japan that the two
ships could go operational before Christmas. The US military has now
three Aegis ships for missile defense deployed in Japan.

18) Ishiba advocates collective security

SANKEI (Page 5) (Full)
December 21, 2006

Former Defense Agency Director General Shigeru Ishiba yesterday came
up with an outline of his plan for a security law in a meeting of
the ruling Liberal Democratic Party's defense policy subcommittee he
chairs. The government has been taking the position that Japan is
constitutionally prohibited from participating in collective
self-defense. The proposed law, however, allows Japan to exercise
its right to collective self-defense only if a foreign country
closely related with Japan comes under attack from a foreign
country's armed forces. Specifically, the planned law makes it
possible for Japan to participate in collective security if and when
there is an armed attack against another country and if that can be
regarded as an attack against Japan.

19) Sakhalin-2 project to be settled possibly today; Japanese and
European firms to sell most of their stakes to Gazprom

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MAINICHI (Page 1) (Full)
December 21, 2006

Negotiations between Japanese and European firms and a Russian firm
over the management agency of the Sakhalin-2 oil and gas projects
off Sakhalin, Russia, are expected to be finalized possibly today.
Royal Dutch/Shell, Mitsui & Co., and Mistubishi Corp. will sell a
majority of their shares of Sakhalin Energy Investment Co., the
project implementing body, to the Russian state-run gas company
Gazprom. The shares will be transferred at 4-6 billion dollars (or
470-700 billion yen).

Shell made a 55 percent investment in Sakhalin Energy, followed by
Mitsui's 25 percent and Mitsubishi's 20 percent. Shell will sell
some 30 percent of its stake to Gazprom instead of exchanging other
rights, and Mitsui and Mitsubishi will follow, with the sale of some
10 PERCENT of their respective stakes. Mitsui & Co. President
Utsuda and Mitsubishi President Kojima already arrived in Russia.
After the final phase of negotiations with Gazprom starting today,
they will aim to reach agreement by Dec. 24.

The Russian government since this summer has hinted at suspending
the project or making a claim for compensation. This move was seen
as a means to let Gazprom join the project under favorable
conditions. Most Japanese electricity and gas companies have signed
a long contract to purchase LNG from Sakhalin-2 in 2008 or after.
The Russian side has confirmed that it will respect the existing
contract, but this development will likely create a source of
concern for Japan's energy policy.

DONOVAN

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