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 -------------- -------------- ¶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 -------------- ¶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? -------------- ¶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 TOKYO 00002389 002.2 OF 002 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(. -------------- ¶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