JAPAN ECONOMIC AGENDA: FUKUDA STARTS WITH DOMESTIC

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 004556

SIPDIS

SIPDIS

NSC FOR TONG
USTR FOR BEEMAN AND MEYERS
DOC FOR 4410/ITA/MAC/OJ/NMELCHER
TREASURY FOR IA/DOHNER, HAARSAGER, AND POGGI

E.O. 12958: DECL: 09/27/2017
TAGS: ECON EFIN PGOV JA
SUBJECT: JAPAN ECONOMIC AGENDA: FUKUDA STARTS WITH DOMESTIC
POLICIES


Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 b/d

Summary
--------------

1. (C) Japan's new Prime Minister Yasuo Fukuda has kept the
Abe administration's economic team largely intact, but there
are indications that policy focus has shifted toward domestic
pocketbook issues. Former finance minister Sadakazu
Tanigaki's appointment suggests a commitment to fiscal
restraint. The prospects for reform are unclear, although we
may get a better sense from Fukuda's policy speech to the
Diet October 1. End Summary.

Same Team, Shifted Priorities
--------------

2. (SBU) Having run within the Liberal Democratic Party (LDP)
on a platform stressing "stability," newly elected Prime
Minister Yasuo Fukuda made almost no changes to former PM
Abe's economic team. The key exception was the appointment
of former Finance Minister Sadakazu Tanigaki as LDP Policy
Research Council Chairman.


3. (C) Despite the familiar faces, Fukuda's press remarks and
initial instructions to cabinet ministers suggest greater
attention on domestic economic issues. While efforts to
extend Japan's support of refueling operations in the Indian
Ocean will be Fukuda's first and most pressing task, Fukuda
has made clear his intent to tackle the pocketbook issues
Japanese voters have ranked among their top concerns,
including addressing regional economic disparities.


4. (C) Fukuda is well-known for playing his cards close to
the vest, and his economic agenda remains vague. His
initial statements as prime minister, however, have centered
on a number of fixes to current systems, including freezing
already slated increases in medical premiums for older
patients, repairing the much-criticized pension records
system, revitalizing regional economies, studying tax rate
changes, and tightening political fundraising regulations.
Notably absent from his initial remarks has been discussion
of Japan's economic partnership agreements (their version of
free trade agreements),regional economic architecture, the
Doha Development Round, and encouraging foreign direct
investment into Japan.

Refilling the Trough?
--------------

5. (C) Fukuda's repeated mention of regional disparities,
along with the LDP's loss of rural voters in July's Upper
House elections, has led some to speculate the LDP will
return to pork barrel spending. But Fukuda's appointment of
Tanigaki, a known budget hawk, suggests the contrary -- a
commitment to fiscal conservatism and the goal of reaching
primary budget balance by 2011. Tanigaki was also a strong
advocate of a consumption tax increae during the 2006 LDP
presidential campaign.


6. (C) What about reform? Given the continuing popularity of
former PM Koizumi's "reform agenda" in polls (at least as a
slogan),Fukuda will continue to express his support.
Moreover, many on the team -- including Fukuda -- have reform
credentials. But there has been no indication so far of a
"big idea" animating the reform agenda, and Council on
Economic and Fiscal Policy (CEFP) Minister Ota told the press
her first discussion with PM Fukuda included notice that
reforms proposed in the CEFP's most recent policy blueprint
-- which many found relatively tepid -- would be subject to
revision.

Comment
--------------

TOKYO 00004556 002 OF 002



7. (C) PM Fukuda has described his cabinet as having its
"back to the wall," with no margin for error. While there
may be support for reform among cabinet members as
individuals, Fukuda's focus on fixing domestic programs -- an
agenda thrust on the LDP by the opposition -- suggests a
defensive emphasis on competence rather than a desire to
pursue bold new initiatives.
Schieffer