CAN THE KOIZUMI GOVERNMENT MANAGE HIS ECONOMIC

UNCLAS SECTION 01 OF 02 TOKYO 000675 SIPDIS SENSITIVE SIPDIS PLEASE PASS TO USTR JOHN NEUFFER/MICHAEL BEEMAN. E.O. 12958: N/A TAGS: ECON EFIN PGOV JA SUBJECT: CAN THE KOIZUMI GOVERNMENT MANAGE HIS ECONOMIC AGENDA IN THE DIET? REF: A. REF A: TOKYO 399 ¶B. REF B: TOKYO 597 ¶C. REF C: TOKYO 325 ¶D. REF D: TOKYO 408 ¶E. REF E: TOKYO 441 ¶F. REF F: TOKYO 533 ¶1. (SBU) Summary. The economic debate in this Diet session is shaping up to be more contentious than we anticipated, due to the convergence of five issues the opposition party has exploited to criticize government handling of the economy. Some observers believe the Prime Minister has emerged with a weakened mandate for economic reform but the Embassy expects Koizumi to remain determined to press on with his reform agenda. With firm control over two-thirds of the Diet Lower House and a history of emerging stronger after adversity, we should not discount his prospects too much despite his rocky beginning. Septel reports on the individual economic bills before this Diet session and the prospects for each. End Summary ¶2. (SBU) This year,s Ordinary Diet session began badly for Prime Minister Koizumi due to the unfortunate convergence of five issues -- the earthquake building code scandal, the Livedoor mess (see Ref A),allegations of bid-rigging at the Defense Facilities Administration Agency (DFAA) (see Ref B), the suspension of U.S. beef imports (see Refs C, D, E, and F),and an unexpected surge in opposition within the ruling Liberal Democratic Party (LDP) to the amendment of the Imperial House Law over succession. ¶3. (SBU) The earthquake building code scandal broke in late 2005 when a Japanese architect admitted falsifying quake resistance data in designs for at least 71 buildings in Japan. The Livedoor debacle began with a raid on the Internet company in January followed by the arrest of its colorful CEO, Takafumi Horie, and several other top managers. They are accused of falsifying accounts and misleading investors. In addition, three current and former high-ranking officials of the DFAA have been arrested on suspicion of colluding with manufacturers over projects worth billions of yen. ¶4. (SBU) The government's ability to manage the docket of economic legislation in this Diet session became even more complicated on the Diet's opening day on January 20 when Japan suspended processing of U.S. beef imports because a U.S. company mistakenly shipped a cut of beef banned in Japan under our bilateral agreement. The opposition party has blamed the government for too hastily allowing importation to resume. Agricultural Minister Shoichi Nakagawa further inflamed the controversy by first accepting responsibility for not sending Japanese inspectors to U.S. plants prior to lifting the ban and then reversing himself. ¶4. (SBU) Finally, after several months of study and relatively smooth sailing, the government's succession amendment to the Imperial House Law has encountered unexpected LDP opposition, including among some new members who owe their election to endorsement of the Prime Minister's reform agenda. This likely will become a distraction for the ruling party but with very little impact on its economic agenda. ¶5. (SBU) The opposition DPJ had already begun calling this session the &Safety8 Diet. With plans to pursue the Livedoor scandal, the earthquake building code scandal, and the bid-rigging accusations at DFAA already in place, the suspension of U.S. beef imports further emboldened the opposition party. After successfully delaying the passage of the supplementary budget with acrimonious questions over beef, the DPJ seemed to be finding its voice again and likely will be reluctant to allow the LDP to pass all of the government economic bills without careful scrutiny and debate. However, the arrests of lower house member Yoshitake Kimata -- the third DPJ arrest since late last year -- will likely hobble the DPJ in future Diet confrontations with the LDP. TOKYO 00000675 002 OF 002 ¶6. (SBU) The Prime Minister has labeled this Diet session the &administrative reform8 Diet to emphasize his continuing commitment toward the structural reform of Japan's economy. Important economic bills include an administrative reform bill, to be submitted by the Cabinet Office after the passage of the budget (see septel for a discussion of this and other economic bills.). It provides a general framework for reform that should prevent the restructuring achieved thus far from stalling or moving backwards after Prime Minister Koizumi leaves office, as expected, in September. In addition, Koizumi has identified the consolidation of the eight government-affiliated financial institutions, included in the administrative reform bill, as his next goal after postal privatization. ¶7. (SBU) Comment. Despite the fact that some observers believe the Prime Minister has emerged with a reduced mandate to devote his remaining time in office to sustaining economic reform, we should not discount his prospects too much. The ruling coalition still boasts a two-thirds majority in the Lower House and the Prime Minister has a history of emerging from adversity with renewed determination to pursue his reform agenda. SCHIEFFER