CORRECTED COPY: 11 TRILLION YEN ECONOMIC PACKAGE:

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002393

SIPDIS

TREASURY FOR IA/WINSHIP, DOHNER
STATE FOR E, EEB, AND EAP/J
STATE PASS USTR FOR CUTLER AND BEEMAN

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

REF: TOKYO 02134

TOKYO 00002393 001.2 OF 002


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


1. (C) Summary. One of the last acts of the Fukuda
Government before the Prime Minister's surprise resignation
September 1 was the announcement of a stimulus package
designed to meet public concerns over the stagnating economy
and rising food, fuel, and other prices. Initial assessments
are the package would not have a significant economic impact,
but was designed to build electoral support. The stimulus
package,s headline numbers amount to 11.7 trillion yen ($106
billion),but newly committed spending amounts to only 2.8
trillion yen ($25.5 billion). Finance Minister Ibuki pledged
September 2 that the government will compile the package
despite Prime Minister Fukuda,s resignation. 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, the
Fukuda Cabinet adopted a 11.7 trillion yen ($106 billion, or
2.3% of GDP) economic policy package August 29. The Prime
Minister announced his surprise resignation the evening of
September 1 (septel),making the package one of his
government,s last initiatives.


3. (SBU) The package,s overall headline figure comprises
2.6 trillion yen ($25 billion) in fiscal spending measures
plus another 9.1 trillion yen ($82 billion) in increased
outlays via beefing up government loan-guarantee programs.
The additional demand created by the package, the so-called
"mamizu" 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.


4. (SBU) At the same time, ruling coalition policy makers
agreed to implement one year cuts in individuals, income
taxes by the end of March 2009. The specifics, including the
actual size of the cuts in individual income taxes, were to
be decided in the process of deliberating FY2009 tax change
proposals in December. The stimulus package,s headline
figure, therefore, does not include the proposed tax cut,
although the commitment to the cuts was included in the
package.


5. (C) In this, the first comprehensive economic policy
package since December 2002, proposed policy measures 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 help small and medium sized
enterprises (SMEs) obtain loans from financial institutions,
and provide them government subsidies to deal with surging
commodity prices. In a surprise to many observers, the
package did not include explicit pork-barrel public works
spending, an apparent victory for the budget hawks in this
Fukuda Cabinet.

Financing the Economic Package
--------------

6. (C) New spending measures promised in the economic
package will be financed mainly by a supplemental budget for
FY2008 and the regular budget for FY2009. The Fukuda Cabinet
planned to submit the supplemental budget to the
extraordinary Diet session that observers expected to start
in September with the FY2009 regular budget to be decided in
late December, and submitted to the ordinary Diet session in
January 2009. Plans for the stimulus package, like those for
other legislation, were thrown into confusion with Fukuda,s
resignation. The identity of Fukuda,s successor, the
composition of the Cabinet, and the timing of new elections
are all questions clouding the future of the package.
However, Finance Minister Ibuki pledged September 2 the GOJ
will compile the package despite the Prime Minister,s
resignation.

Prime the Pump or Hold the Line?
--------------

7. (C) Some of the problems Fukuda,s Cabinet faced will be
those that will confront the new prime minister as well. In
formulating the economic policy package, the Fukuda

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administration faced a dilemma. The government was
succeeding in promoting fiscal consolidation through cuts in
government spending to achieve a government primary surplus
by FY2011. A large economic stimulus package were financed
by accommodating calls from ruling coalition politicians
could derail this fiscal consolidation effort. Yet without
meaningful fiscal spending, additional demand generated by
the package will be limited. The package,s text suggested
the GOJ was intent on maintaining the fiscal consolidation
objective. However, if the proposed individual income tax
cuts are financed by additional government bonds, concerns
will emerge regarding fiscal discipline.

Package Highlights
--------------

8. (C) The package consists of three categories: 1) measures
to ease public unease in the face of soaring commodity
prices; 2) measures to help accelerate reforms for creating a
"sustainable society"; and 3) measures to facilitate adoption
of new price systems and strengthening growth potential.
Within the three categories are numerous items, presumably
designed to appeal to most sectors of the electorate: lower
expressway tolls at night to cut transport costs, 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, improved
medical services for the elderly, support for 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
package,s announcement that its details might reveal a new
bias toward priming the economic pump at the expense of
fiscal consolidation, the package showed the ruling party,s
ultimate aim was to position itself for the upcoming
elections while showing the voters that they and the GOJ are
sensitive to, if not actually resolving, increasing anxieties
regarding every day economic issues. "More so than raising
GDP, what the LDP really wants to raise is its approval
rating," 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." 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, Fukuda needs to be seen to be doing
something," although in PM Fukuda,s case it appears to have
come too late. End analysis.
ZUMWALT