Identifier
Created
Classification
Origin
08TOKYO231
2008-01-29 08:33:00
CONFIDENTIAL
Embassy Tokyo
Cable title:  

FEARS OF DOWNTURN IN U.S. SPARK CONCERNS IN JAPAN

Tags:  ECON EFIN PGOV JA 
pdf how-to read a cable
VZCZCXRO3609
PP RUEHRN
DE RUEHKO #0231/01 0290833
ZNY CCCCC ZZH
P 290833Z JAN 08
FM AMEMBASSY TOKYO
TO RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 1335
INFO RUEHSS/OECD POSTS COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 1375
RUEHUL/AMEMBASSY SEOUL PRIORITY 7439
RUEHFK/AMCONSUL FUKUOKA PRIORITY 5776
RUEHHK/AMCONSUL HONG KONG PRIORITY 6429
RUEHNH/AMCONSUL NAHA PRIORITY 8172
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 9443
RUEHKSO/AMCONSUL SAPPORO PRIORITY 6384
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEHGV/USMISSION GENEVA PRIORITY 3232
RHMFISS/USFJ PRIORITY
RUEHIN/AIT TAIPEI PRIORITY 6871
RHHJJPI/PACOM IDHS HONOLULU HI PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 000231 

SIPDIS

SIPDIS

TREASURY FOR DOHNER, HAARSAGER, POGGI
STATE PASS USTR FOR AUSTR CUTLER
USTR ALSO FOR BEEMAN, MEYERS
PARIS PASS USOECD
GENEVA ALSO FOR USTR

E.O. 12958: DECL: 01/29/2018
TAGS: ECON EFIN PGOV JA
SUBJECT: FEARS OF DOWNTURN IN U.S. SPARK CONCERNS IN JAPAN

REF: TOKYO 163

TOKYO 00000231 001.2 OF 003


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

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 000231

SIPDIS

SIPDIS

TREASURY FOR DOHNER, HAARSAGER, POGGI
STATE PASS USTR FOR AUSTR CUTLER
USTR ALSO FOR BEEMAN, MEYERS
PARIS PASS USOECD
GENEVA ALSO FOR USTR

E.O. 12958: DECL: 01/29/2018
TAGS: ECON EFIN PGOV JA
SUBJECT: FEARS OF DOWNTURN IN U.S. SPARK CONCERNS IN JAPAN

REF: TOKYO 163

TOKYO 00000231 001.2 OF 003


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


1. (SBU) Summary. Weakening economic data from the United
States and global financial market volatility are sparking
fears that a recession in Japan may not be far behind. In
fact, Japanese economic growth is slowing, public and private
forecasts have been revised downward over the past several
months, and downside risks to the outlook are growing,
particularly higher oil prices and the effects of slower
economic growth in the United States on Japanese exports and
Japan's other export markets. Nevertheless, most forecasters
are projecting positive, albeit slower, real economic growth
in Japan over the remainder of the current and coming fiscal
years, largely reflecting projected firm business investment
and weaker but still supportive net exports. The prospect of
slower growth has prompted a number of Japanese economic
policymakers to express concerns. End Summary.


2. (SBU) Over the past several months, Japan's economy has
slowed due to a variety of factors. Botched implementation
of the revised Building Standards Law in July resulted in
plunging housing investment, with new housing starts down 37
percent in the July to September quarter over a year earlier
and falling at a still sharp but slightly lower rate of 27
percent in November 2007 over the prior November. Higher oil
and commodity prices are affecting profits at small to
medium-sized firms, thus limiting their ability to invest,
hire and raise wages. The December Bank of Japan (BOJ)
tankan survey reported a deterioration in business sentiment
for large manufacturers, likely related to an expected
slowdown in the U.S.. Consumer sentiment fell to its lowest
level in four years, as increases in food and gasoline prices
outstripped wage growth, pinching disposable income. When
asked recently about their living standards, 3.4% of those

surveyed reported an improvement over the previous year,
while 53.4% said conditions had worsened, the widest gap
since March 2003. In addition, the Nikkei 225 stock index
has fallen 12 percent in 2008.


3. (U) In early December, the Cabinet Office cut its estimate
of real GDP growth for the July-September quarter from 2.6 to
1.5 percent. The initial estimate had already anticipated
the drop in housing investment. The revision reflected lower
than previously estimated business investment and a larger
drawdown of inventories. As a result, the contribution of
final domestic demand to third quarter growth was flat; net
exports accounted for all the growth. Taking the third
quarter revision into account and anticipating some continued
weakness in housing investment in the October-December
quarter, the Cabinet Office lowered its projection later in
December for FY2007 real GDP growth from 2.1 to 1.3 percent.
At the same time, the Cabinet Office released its first
official forecast for real GDP growth of 2 percent in FY2008.
This forecast assumes a rebound in housing investment,
higher business investment, a similar level of personal
consumption, and a lower level of contribution to growth from
net exports when compared to FY2007.


4. (SBU) A Finance Ministry survey released on January 21
downgraded the economic performance assessment of five of
Japan's eleven regions, though the report maintained an
overall assessment that the national economy as a whole
continues to recover. This reporting reconfirmed concerns
about regional disparities among many Japanese observers.


5. (C) Following this week's BOJ Monetary Policy Board
meeting, which ended on January 22, the Bank of Japan
indicated its projection of FY2007 growth in the upper half
of the 1 percent range in its October 2007 outlook has

TOKYO 00000231 002.2 OF 003


"deviated somewhat downward." The BOJ further stated
"Japan's economy is expanding moderately as a trend, although
the pace of growth seems to be slowing mainly due to the drop
in housing investment." On January 25, BOJ Governor Fukui
confirmed BOJ projections for FY2007 were in line with those
of the government and that growth would "probably be in the
low one percent range." Perhaps optimistically, the BOJ
report after the Monetary Policy Board meeting stated "with a
virtuous circle of growth in production, income and spending
remaining basically intact, in fiscal 2008 the rate of real
GDP growth is likely to be broadly as projected, and slightly
higher than the potential growth rate." The October
projection for FY2008 real GDP growth was in the lower half
of the 2 percent range.


6. (SBU) Though a few voices in the private sector have
raised the specter of a near-term recession in Japan,
consensus private forecasts stand at 1.4 percent for FY2007
and 1.9 percent for FY2008. In these projections, the main
downside risks are the performance of the U.S. economy and
potential effects on Japanese exports and other Japanese
export markets. Another major element affecting projections
is the outlook for domestic consumption following
deteriorating consumer sentiment and the implications of
recent drops in business confidence for wage increases that
might bolster consumption.


7. (SBU) In recent days, a number of GOJ officials have
commented on the economy, as well as on the sudden market
plunge on January 21-22 (see reftel). Financial Services
Minister Watanabe focused on the downside risks to the
Japanese economy from the U.S. subprime crisis on January 16.
Economic and Fiscal Policy Minister Ota told the Diet
January 18 that Japan can no longer be called a "top tier"
economy, referring to OECD statistics showing that Japan's
nominal per capita GDP has fallen from second in the OECD in
1993 to 18th in 2006. On January 22, she noted while Japan's
economy remains in recovery, downside risks are growing due
to high oil prices and volatile market moves.


8. (SBU) On the same day, Finance Minister Nukaga told the
press that the economic recovery would continue, supported by
private domestic demand, but that he would continue to watch
market movements carefully. Prime Minister Fukuda also
responded to concerns, pledging to "closely watch risks from
the slowing U.S. economy, as well as the effects of changes
in the financial and capital markets and rising oil prices on
the Japanese economy." A few LDP politicians raised concern
over the Cabinet's "watch and see" response, with former LDP
Secretary General Hidenao Nakagawa suggesting the government

SIPDIS
should develop policy goals to reassure the international
community that Japan will continue to grow. On January 24
and 25, several opposition Democratic Party of Japan (DPJ)
politicians called for government programs to address falling
stock prices and boost sluggish personal consumption, aiming
to criticize the Fukuda Cabinet as Diet deliberations on the
FY2008 were set to get underway.


9. (C) Comment. Japan's recent gloom has a number of sources
-- weaker economic data both in Japan and the U.S., higher
oil prices and global financial market volatility. In fact,
most projections for Japan call for continued, albeit slower,
economic growth, supported by firm business investment,
improvement in housing investment as the problems caused by
the revised Building Standards Law are worked through, and a
still healthy though smaller contribution from net exports.


10. (C) While some DPJ politicians have seized on these
economic concerns as yet another opportunity to criticize the
ruling coalition, the steps that could be taken are limited
by Japan's difficult fiscal situation and current very low

TOKYO 00000231 003.2 OF 003


interest rates. A Nihon Keizai (Nikkei) Shimbun editorial on
January 24 called on the Cabinet to pull together a package
to support the financial markets, but also to "chart a clear
course for structural reforms that are crucial for laying the
foundation for renewed growth." The second part of that
recommendation from Nikkei is the message that the USG has
been and should continue delivering to the Japanese
government. End Comment.
SCHIEFFER