11 TRILLION YEN ECONOMIC PACKAGE: REAL WATER RUNS

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002389

SIPDIS

TREASURY FOR IA/WINSHIP, DOHNER

E.O. 12958: DECL: 08/29/2018
TAGS: ECON EFIN JA
SUBJECT: 11 TRILLION YEN ECONOMIC PACKAGE: REAL WATER RUNS
SHALLOW

REF: TOKYO 02134

TOKYO 00002389 001.2 OF 002


Classified By: Charge d'Affairs James Zumwalt, reasons 1.4 b and d




1. (C) Summary. Despite the fanfare that accompanied
the release of the government,s economic stimulus package,
the consolidated impact of the numerous measures and
initiatives will not be significant, suggesting that intent
of the announcement was primarily for pre-electioneering
purposes. While the stimulus package,s headline numbers
amount to 11.7 trillion yen ($106 billion),newly committed
spending amounts to only 2.8 trillion yen ($25.5 billion).
Announced prior to Prime Minister Fukuda's surprise
resignation, the package's fate is not clear, but apparently
not in danger. End summary.
Headlines and Details Not Congruent
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2. (SBU) In an effort to address public concerns regarding
soaring commodity prices and downturn in the economy, and in
one of Prime Minister Fukuda's final acts before announcing
his resignation September 1, the Fukuda Cabinet adopted a
11.7 trillion yen ($106 billion, or 2.3% of GDP) economic
policy package August 29. This overall headline figure
comprises 2.6 trillion yen ($25 billion) in fiscal spending
measures and 9.1 trillion yen ($82 billion) in increased
loans by beefing up government loan-guaranteed programs. The
additional demand created by the package, the so-called
&mamizu8 or real water fiscal stimulus, falls far short of
the headline figure. FINATT estimates the real water
component of the package at about 2.8 trillion yen ($25
billion),or 0.5% of GDP.

3. (SBU) At the same time, ruling coalition policy makers
agreed to implement individual income taxes for one year by
the end of March 2009. Specifics of the income tax cuts,
including the actual size, will be decided in the process of
deliberating FY2009 tax change proposals in December of this
year. Accordingly, the headline figure of the economic
stimulus package does not include the proposed tax cut,
although its commitment was included in the package.

4. (C) In this, the first comprehensive economic policy
package since December 2002, proposed policy measures of the
package range widely from a cut in the highway toll to
preventative measures against new types of influenza. The
centerpieces of the package are commitments to support small
and medium sized enterprises (SMEs) in order to help obtain
loans from financial institutions, and provide government
subsidies to help deal with surging commodity prices. Unlike
traditional economic stimulus programs, this package did not
include explicit pork-barrel public works spending.
Financing the Economic Package
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5. (C) New spending measures promised in the economic
package will be financed mainly by both a supplemental budget
for FY2008 and a regular budget for FY2009. The Fukuda
Cabinet plans to submit the supplemental budget to the
extraordinary Diet session to be convened September 12; the
FY2009 regular budget will be decided in late December, and
submitted to the ordinary Diet session in January 2009.
Prime the Pump or Hold the Line?
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6. (C) In formulating the economic policy package, the
Fukuda administration was faced with a fundamental dilemma.
Presently, the government is succeeding in its promotion of
fiscal consolidation through cuts in government spending to
achieve a government primary surplus by FY2011. If a large
economic stimulus package were spawned by accommodating calls
from ruling coalition politicians, the result would likely
generate concerns that the fiscal consolidation effort was
derailing. Without meaningful fiscal spending, however,
additional demand generated by the package will be limited.
The package,s text reaffirmed that the Fukuda administration
is maintaining the fiscal consolidation objective. However,
if the proposed individual income tax cuts are financed by
the issuance of additional government bonds, concerns will
emerge regarding fiscal discipline.
Package Highlights
--------------

7. (C) The package consists of three categories: 1) measures
to ease people,s uneasiness in the face of soaring commodity
prices; 2) measures to help accelerate reforms for creating
sustainable society; and 3) measures to facilitate the
adoption of new price systems and strengthening growth

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potential. Within these three categories is a panoply of
items, presumably designed to appeal to nearly sector of the
electorate: lower expressway tolls, support for a number of
industries (trucking, domestic shipping, construction),new
credit guarantees for small and medium sized businesses,
extended housing loan cuts, expanded loans to low-income
earners and single-parent families, improvements for medical
services for the elderly, prompting for the construction of
day nurseries and kindergartens, and movement to expedite the
introduction of energy-conserving facilities, to name just a
few.
It,s the Election(.
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8. (C) Analysis: While expectations rose prior to the
announcement that details of the package might reveal a new
balance in the tension between calls to prime the economic
pump and frequent pledges of fiscal consolidation, it appears
that the government,s ultimate aim is to signal awareness
that an election must be called within the next 13 months and
that the government appear sensitive to, if not actually
resolving, increasing anxieties regarding every day economic
issues. This, coupled with the lack of a bond issuance to
finance the package suggest that fiscal consolidation remains
a priority. &More so than raising GDP, what the LDP really
wants to raise is its approval rating,8 commented Barclays
Chief Economist Kyohei Morita. Societe General Chief Asia
Economist Glen Maguire stated, &I think unfortunately we,re
seeing the political cycle have prevalence over the economic
cycle at this stage.8 Richard Jerram of Macquarie added to
the emerging consensus, &(W)ith an election due in the next
year, and with the government,s support ratings so low,
(Prime Minister) Fukuda needs to be seen to be doing
something.8 When that something turned out to be his
announcement to resign, the package's viability may be called
into question, but appears safe for the time being. End
analysis.
ZUMWALT