Cablegate: Daily Summary of Japanese Press 12/22/06

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UNCLAS SECTION 01 OF 05 TOKYO 007115

SIPDIS

SIPDIS

DEPT FOR E, P, EB, EAP/J, EAP/P, EAP/PD, PA
WHITE HOUSE/NSC/NEC; JUSTICE FOR STU CHEMTOB IN ANTI-TRUST DIVISION;
TREASURY/OASIA/IMI/JAPAN; DEPT PASS USTR/PUBLIC AFFAIRS OFFICE;
SECDEF FOR JCS-J-5/JAPAN,
DASD/ISA/EAPR/JAPAN; DEPT PASS ELECTRONICALLY TO USDA
FAS/ITP FOR SCHROETER; PACOM HONOLULU FOR PUBLIC DIPLOMACY ADVISOR;
CINCPAC FLT/PA/ COMNAVFORJAPAN/PA.

E.O. 12958: N/A
TAGS: OIIP KMDR KPAO PGOV PINR ECON ELAB JA
SUBJECT: DAILY SUMMARY OF JAPANESE PRESS 12/22/06

INDEX:

(1) Trends 2006: Abe administration advocates conservatism

(2) Deregulation improves Japanese economy's productivity 7.59% from
1995 through 2002, Cabinet Office estimates: Deregulation found
effective in non-manufacturing industry

(3) Editorial -- Honma's resignation: Abe-led reform initiative
suffers a setback

ARTICLES:

(1) Trends 2006: Abe administration advocates conservatism

YOMIURI (Page 13) (Abridged)
December 21, 2006

In late September, the administration of Prime Minister Shinzo Abe
who advocates a "beautiful country" and "open conservatism" replaced
the Koizumi administration of five years and five months. The
Liberal Democratic Party has picked a young and nationally popular
Abe as its president mostly for the sake of elections. But the Abe
administration is deadlocked in its third month.

The Abe cabinet's support rating marked 70.3% in a Yomiuri Shimbun
poll shortly after its inauguration. The rate dropped to 55.9% this
month. The plunge seems to reflect the public's negative reaction to
the cabinet's responses to such issues as the reinstatement of
postal rebels and staged town meetings. In an effort to reverse the
trend, Kantei (Prime Minister's Official Residence) had come up with
the idea of using gasoline tax revenue for general purposes. But
that, too, has been shelved due to stiff resistance from the road
industry, the ruling coalition, and the Land, Infrastructure, and
Transport Ministry.

For fear of losing public support further, Abe ordered the LDP not
to accept donations from major banks. Landmark amendments to the
Basic Education Law and bills to upgrade the Defense Agency to
ministry status cleared the Diet in the just-ended extraordinary
session. But they were all carried over form the administration of
Abe's predecessor, Junichiro Koizumi. The year 2006 is drawing to a
close without witnessing a real Abe imprint on policy.

It is rare for an LDP prime minister to advocate conservatism
outright. In the Oct. 2 Lower House plenary session, Abe explained
conservatism this way:

"To me, conservatism is not an ideology but an attitude of having
confidence in this country, where I was born. It also based on
considering Japan and its people, and to review Japan's long history
from the viewpoint of the people of each period. Based on such
history, conservatism must not be closed or exclusive. I want to
achieve open conservatism by humbly turning my eyes to reality."

His view that conservatism is not an ideology is correct. His aim
for conservatism that is not closed or exclusive appears to be a
warning to himself not to fall into nationalism.

Before becoming prime minister, Abe established himself as a hawkish
and unwavering lawmaker owing to his hard-line stance toward North
Korea regarding the abduction issue. He also drew a distinction with
China, alluding to reactionary values by making comments supportive

TOKYO 00007115 002 OF 005

of Class-A war criminals. Dovish voices critical of Abe did not
spread in the LDP, and former Finance Minister Sadakazu Tanigaki
came in last in the last LDP presidential race. The LDP has given
its presidency to Abe in the hope of capitalizing on his high
national popularity in elections.

Soon after assuming office, Abe visited China and South Korea to
improve Tokyo's relations with them that had been strained due to
Koizumi's repeated visits to Yasukuni Shrine. Abe has also made it
clear that he would follow former Prime Minister Tomiichi Murayama's
postwar 50th year statement and former Chief Cabinet Secretary Yohei
Kono's "comfortable women" statement. Abe is not all hawkish.

Ichita Yamamoto, who spearheaded the campaign to realize the Abe
administration, described Abe as a "new realist." Ichita took this
view:

"It is clear from his visits to China and South Korea that Mr. Abe
is not an ideological neoconservative. Although he is guarded
against China, he is eager to forge mutually beneficial strategic
relations. True to his words to aim for open conservatism, Mr. Abe
has demonstrated extremely well balanced strategic diplomacy. He
deserves a perfect score on the diplomatic front."

What about the domestic front?

"Mr. Abe is aware that he has been pulled toward 'retrospective
conservatism' peculiar to the LDP despite his words to keep the
torch of reform burning. I think he is being torn between the two
conflicting ideas."

Retrospective conservatism specifically means conventional
influence-peddling politics. LDP administrations in the postwar
period have created a country with relatively small social disparity
that is mocked as the most successful socialist in the world.
Needless to say, the flip side of that was influence-peddling
politics exemplified by former Prime Minister Kakuei Tanaka.

Under the long Koizumi administration, Japan finally climbed out of
the long recession that followed the burst of the bubble economy.
The social disparity also widened during that period. Was it because
of the Koizumi reform drive or the long recession? Or such is
unavoidable in this age of global competition? It must be
attributable to multiple factors. Correcting the social disparity is
an important political theme, but the government must not lavishly
distribute funds to public works projects in the name of correcting
disparity.

Reform takes an iron will and a deaf ear to disturbing noises,
according to Asahi Research Center President Yoshio Suzuki, who have
been involved in the government's administrative reform since the
Second Ad Hoc Commission on Administrative Reform in the 1980s. The
LDP is now at a crossroads.

The public will not support "open conservatism" if it returns to
influence-peddling politics. The question Abe faces today is how to
keep the torch of reform burning.

(2) Deregulation improves Japanese economy's productivity 7.59% from
1995 through 2002, Cabinet Office estimates: Deregulation found
effective in non-manufacturing industry

NIHON KEIZAI (Page 5) (Full)

TOKYO 00007115 003 OF 005

December 22, 2006

The Cabinet Office calculated to what extent deregulatory efforts in
the 1995-2002 period pushed up the productivity of the Japanese
economy. The calculations found that deregulation pushed up
productivity 7.59% -- 2.98% in the manufacturing sector and 4.61% in
the non-manufacturing sector. The greatest effect was seen in the
non-manufacturing sector. In particular, the impact of deregulation
was huge in the telecommunications sector. The report once again
confirmed the importance of boosting productivity through
deregulation.

The potential growth of the Japanese economy is said to be between
1% and 2% . In order to heighten the potential, it is necessary to
increase capital stocks, such as facilities and the like, boost
labor power injection and improve total factor productivity (TFP).
However, a forced increase in capital stocks will lead to excessive
introduction of plants and facilities. The effect of the labor force
into the economy is already on the decline due to the falling
population. In order to enhance potential growth by overcoming these
factors, it is considered essential to boost productivity.

The Cabinet Office analyzed deregulation and productivity in the
structural reform appraisal report, noting that the amount of
regulation has decreased 60% since 1995. Annual productivity is
increasing following this trend. The major effect of deregulation
was felt in the non-manufacturing industry, where the number of
regulations is relatively large. Quintessential examples are the
real estate industry and the services industry.

More than 80% of regulations were scrapped in the telecommunications
industry. Its share of value added prices in the economy as a whole
increased. On the other hand, the construction industry and the
agricultural sector saw only 10% of regulations scrapped. Their
share of value added prices has fallen. It can be said that these
results confirmed that the introduction of competitive principles
trough regulatory reform has revitalized the economy.

The Cabinet Office analyzed how productivity would change if the
number of regulations were halved over the next two years. The
current rate of an increase in industry-wide productivity is 0.7% a
year. Scrapping regulations 50% over two years is expected to yield
the effect of pushing up productivity by 0.11 points a year.

In particular, the pushing up effect of deregulation is clearly
observable in the tightly regulated medical, agricultural and
financial services fields. By sector, such an effect is estimated to
be 0.24 points a year in the agricultural sector and 0.12 points in
the public services sector, such as medical services and education.
The report noted that if regulations on entries into and pullout of
the financial services sector are reduced by 10% a year, it could
produce the effect of increasing productivity by 0.64 points over
three years. The Cabinet Office has estimated that Japan's
productivity will rise from 0.69 to 0.74 against a base of 1 for the
US financial industry.

It sometimes takes time for deregulation to yield effects. There is
also a strong possibility of impact on the real economy turning out
to be greater than the estimated figure due to the spillover effect
on other industrial areas. In order to boost potential growth amid
the shrinking population, it is essential to improve productivity.
Continuing deregulatory efforts is bound to become more important.

TOKYO 00007115 004 OF 005

(3) Editorial -- Honma's resignation: Abe-led reform initiative
suffers a setback

ASAHI (Page 3) (Full)
December 22, 2006

Masaaki Honma resigned as chairman of the government's Tax
Commission after serving in the post for less than one month. The
allegation that he had lived with a woman, who is not a member of
his family, in a luxury public residence located at a prestigious
downtown area in Tokyo, provoked harsh public criticism.

Honma was appointed to the post at the strong request of Prime
Minister Abe. The Ministry of Finance (MOF) recommended a
reappointment of former Tax Commission chair Hiromitsu Ishi, but Abe
rejected this recommendation, and he instead picked Honma as a
flagship appointment for his administration, the aim of which is to
avoid bureaucratic interference in the economy. Honma's resignation
will deal a great blow to the Abe administration, even though the
resignation itself came because of his mixing public and private
affairs.

Honma is a professor at Osaka University and has a home in Osaka. He
was chosen as a private-sector member of the Council on Economic and
Fiscal Policy (CEFP) in the days of the Koizumi administration. This
job forced him to come and go between Tokyo and Osaka almost daily;
he was eventually offered a public residence in Tokyo. He had used
it since 2003 until recently.

Providing him a public apartment is understandable if the apartment
rent is less than hotel lodging. But in the case of Honma, a number
of questions about the room rent were left unanswered.

Honma lives separate from his wife even in Osaka, but he reported to
the government that he would live with his wife in a public
residence. He was able to use a 96-m2 residence accordingly at a
monthly rent of 77,000 yen, a favorable term in view of a lease
contract.

But if he had lived with a woman other than his wife in the public
residence, that's another story. Taxpayers will get angry.

The government's tax panel is a venue to debate the tax system from
a broader perspective and is expected to be fair and highly
transparent in comparison with the ruling Liberal Democratic Party's
tax committee. It also is required to be even more sensitive to the
taxpayers' livelihood and their pain.

However, the chairman of that panel drew public suspicions about his
behavior. No matter how wonderful a report such a chairman will come
up with, the public will not lend an ear to it. It is only natural
for Honma to quit since it is unlikely that he will be able to
fulfill the responsibilities expected of him as the chair of the
panel.

In general, the government's tax panel has been headed by those who
are recommended by MOF, even though it is said to be an advisory
panel to the prime minister.

Regardless of this practice, Honma was chosen as chairman of the
panel. Soon after assuming the post, Honma came up with a report
positive about cutting the corporate tax and drew a clear line
between former chairman Ishi, who had implied a consumption tax

TOKYO 00007115 005 OF 005

hike, and himself. Honma also has clearly projected his stance of
backing the prime minister's economic growth-emphasized line in the
area of the tax system.

Honma was the "brains" of the Abe administration for reform as
former Minister of Internal Affairs and Communications Heizo
Takenaka, a professor at Keio University, had been in supporting the
Koizumi administration's structural reform.

Abe, however, lost his brains that way. This loss will deal a
serious blow to his administration. The Abe cabinet, after accepting
the reinstatement of the so-called "postal rebels" in the LDP, has
faced a string of events that may bolster the image of the cabinet
are backing away from reforms. For this or some other reasons, its
approval ratings are sliding sharply in public opinion polls.

Abe was on the defensive of Honma, but veteran LDP lawmakers
questioned Honma's course of action. Abe came into power after
decisively defeating other candidates in the LDP presidential race.
Now, he has received a "yellow card" over his leadership capability
only three months after taking office as prime minister.

DONOVAN

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