JAPAN: CABINET SHUFFLE NOT ABOUT ECONOMICS, SAYS

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002238 SIPDIS USTR FOR DAUSTR BEEMAN, HOLLOWAY PLEASE PASS TO USDA DOC FOR 4410/ANESA/MAC/OJ E.O. 12958: DECL: 08/10/2018 TAGS: ECON EFIN PGOV JA SUBJECT: JAPAN: CABINET SHUFFLE NOT ABOUT ECONOMICS, SAYS BUSINESS REF: TOKYO 2122 Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 b/d. Summary -------------- ¶1. (C) Prime Minster Fukuda's cabinet shuffle was about politics, not economics, foreign and domestic business interlocutors told Emboffs in a series of meetings. In shoring up the ruling Liberal Democratic Party (LDP) for the next Lower House election, PM Fukuda concentrated on balancing party interests and appointing ministers to address domestic concerns such as consumer protection and patching up the pension system. New structural economic reforms are not expected, nor is the cabinet likely to lay out a new vision of Japan's economy for voters. Instead, the "economic" focus will be, as some senior LDP politicians have said, on "easing the public's concerns" and thereby building support for the party in the next general election. End summary. Addressing Public Unease, Economic Worries -------------- ¶2. (C) While Prime Minister Fukuda's policy focus is firmly on domestic economic issues, e.g., consumer protection and the pension system, his cabinet shuffle was intended to shore up the ruling Liberal Democratic Party (LDP) in the run-up to the next Lower House election. Foreign and domestic business leaders repeatedly voiced this reaction to the new cabinet with Emboffs in the aftermath of the August 1 cabinet changes, downplaying the appointment of several experienced economic policymakers (reftel). As some senior LDP politicians put it, PM Fukuda's emphasis will be on "easing the public's concerns" to build support for the LDP in the run-up to the next Lower House election, which must be called by September 2009. Reformers??? -------------- ¶3. (C) The consensus of many interlocutors is the structural reform line pioneered by former PM Koizumi has been stopped, at least for the time being, as the LDP enters an electoral preparatory mode. Observers describe Fukuda's appointment of Consumer Administration Minister Seiko Noda and LDP Policy Research Council Chief Kosuke Hori -- two "postal rebels" Koizumi had kicked out of the LDP in 2005 for opposing his signature reform -- as a sign new reforms are not in the cards. ¶4. (C) Minister Noda's appointment to the new Consumer 
Administration portfolio particularly caught the attention of some foreign business leaders, who fear the PM's promised new Consumer Agency will take an anti-business stance under her direction. Moreover, the appointment of Finance Minister Bunmei Ibuki, a former Ministry of Finance official, and Economic and Fiscal Policy (CEFP) Minister Kaoru Yosano, who has a reputation for favoring bureaucrats, reinforced the impression the lead on economic policy is shifting away from the prime minister's office and back to the ministries, particularly Finance. ¶5. (C) The disappearance from the cabinet of former Financial Services Agency Minister Watanabe, who had pushed strongly for civil service reform, adds to the impression of the bureaucrats regaining control. Watanabe's reform targets had included not only the civil service's career track system, but also a number of practices near-and-dear to top career officials, such as placing senior bureaucrats into cushy and lucrative jobs post-retirement. Several domestic interlocutors, however, remain sanguine structural reforms already underway will continue. Fiscal Focus TOKYO 00002238 002 OF 002 -------------- ¶6. (C) Initial media reaction keyed on the appointments of Finance Minister Ibuki, CEFP Minister Yosano, and Land, Infrastructure, and Transport (MLIT) Minister Sadakazu Tanigaki. All three have spoken out before in favor of a consumption tax increase. Some observers tout these appointments as the victory of those in the LDP focused on eliminating budget deficits over the group led by former LDP Secretary General Hidenao Nakagawa, which sees growth stimulated by reform as the way to improve economic well-being and the LDP's political future. Other analysts, however, have floated the idea Nakagawa's group will exert influence through a reenergized LDP National Vision Strategy Headquarters -- which PM Fukuda may be building up as a counterweight to the LDP's Policy Research Council in formulating party policy and its election manifesto. ¶7. (SBU) Fukuda's public comments that consideration of any consumption tax should take place over two-to-three years have tamped down media buzz (and the three ministers' public remarks) about an immediate tax hike. Nonetheless, Fukuda's directive that CEFP Minister Yosano compile an economic stimulus package to help small and medium size enterprises, a package that would be considered in the Fall Diet session, has kept attention on fiscal policy. So too has incoming LDP Secretary General Taro Aso's trial balloon to push back the government's 2011 target for reaching a balanced budget (excluding debt service). Aso suggested the delay to allow more near-term expenditures in light of the current Japanese and global economic situation. ¶8. (C) Business leaders expressed considerable skepticism the cabinet will propose a consumption tax increase before the next general election. However, they too are puzzled about the appointments of Ibuki, Yosano, and Tanigaki. One major domestic financial institution's policy researchers argue PM Fukuda selected fiscal hawks for the cabinet because he knew pork-barrel spending would need to rise before the Lower House election. Only by putting hawks in the cabinet, goes the argument, could Fukuda keep the rise in spending under control. MLIT Minster Tanigaki plays a key role in that scenario: not only does he lead the ministry in charge of infrastructure construction, a traditional LDP channel for pork, but he will manage the transition of earmarked gasoline tax and surcharge revenues from a special construction account to the general account, where they can be used to "ease the public's concerns." Comment -------------- ¶9. (C) Fukuda's -- and the LDP's -- emphasis on pocketbook issues and on calming voters' immediate unease over Japan's slowing economy, rising food and gas prices, and economic disparities translate into loss of interest in further structural reforms, no matter how needed. As one foreign observer with an international financial house put it, "you can take 'reform' out of your lexicon for at least six months." That, however, would assume the Lower House elections take place in six months. SCHIEFFER