POLITICAL STALEMATE DELAYING JAPAN'S ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 003401

SENSITIVE
SIPDIS

STATE FOR E
NSC FOR JIM LOI

E.O. 12958: DECL: 10/01/2018
TAGS: ECON EFIN PREL JA
SUBJECT: POLITICAL STALEMATE DELAYING JAPAN'S ECONOMIC
RECOVERY

REF: A. (A) TOKYO 3326

B. (B) TOKYO 3311

Classified By: Ambassador J. Thomas Schieffer for reasons 1.5 (b) and (
d).



1. (C) Summary. Japan's response to the global economic
slowdown has been short on immediate policy measures to
stimulate economic growth and demand, and devoid of long-term
measures to boost potential economic growth. The Japanese
Government's August 29 economic policy package (headline
figure of $108 billion, though the actual "real water" impact
was far less) was insufficient to inoculate Japan from the
ills of the global economic downturn. The proposed second
package has been delayed until January 2009 because of the
ruling LDP's political weakness. Political stalemate in
Nagata-cho is the primary culprit behind the drifting
economic policy, but there remains a longer-term strategic
economic policy void in Japan. The result is the impacts of
the global economic turmoil are not being actively addressed,
and consumers and industry, therefore, are revising downward
2009 prospects for Japan. End Summary.

GOVERNMENT (IN)ACTION
--------------


2. (C) Before the full impact of the global economic crisis
hit Japan this past fall, then PM Fukuda announced a $108
billion headline figure economic policy package in August
aimed at reassuring consumers, industry and the market
(Nikkei and Topix indices) that the Liberal Democratic Party
was "addressing the situation with all measures possible."
The package was part economic stabilization and part election
posturing, but in the end failed on both counts.
Economically, the package was too small to provide a
meaningful boost in growth. Furthermore, the stimulus
package did not have the desired political impact for the LDP
(Fukuda resigned and new PM Aso has seen his support ratings
fall since September). In summary, the package was viewed by
business and consumers as insufficient, and illuminated
Japan's economic policy void.

STIMULUS "LIKELY TO FAIL"
--------------


3. (C) In an effort to remedy the shortcomings of the Fukuda
package, PM Aso unveiled a second package in October that was
immediately greeted by economists as being insufficient to
rescue the Japanese economy. Some economists had forecast a
Japanese recession prior to the Aso announcement due to sharp
declines in exports, consumer spending and manufacturing, and
evaluated the second package poorly based on its small
schemes in a time of "harsh storms." The Aso package has
been pushed back until January 2009 at the earliest, and is
now coming under fire by members of the LDP. Minister for
Economic and Fiscal Policy, Kaoru Yosano, described the plan
in a December Financial Times interview as "likely to fail."
He forecast gloom for Japan's economy saying, "companies are
preparing to cut thousands of non-temporary workers,
consumption will shrink, production will go down, and prices
are going down," and added "creating effective demand for
instant pleasure would not be wise." Minister Yosano is a
fiscal hawk compared to Aso's more free spending ways, but
this open rift on economic policy signals Aso's second
package is in for rough waters.

COMPANIES BATTING DOWN THE HATCHES
--------------


4. (C) Japanese companies (reftels) are not waiting for GOJ
intervention and are revising their global business
strategies to endure the recession which appears to be

TOKYO 00003401 002 OF 002


strengthening. The OECD forecasts Japan's economy will
remain in a recession in 2009, albeit a mild recession
(-0.1%),but stresses the GOJ's stimulus measures are "not
powerful enough to make the economy rebound." Japan's
Cabinet Office, in the interim, has again revised downward
economic growth forecasts for FY08. December revisions have
the economy contracting at an annualized rate of -1.8% in the
July-September quarter, down from the original forecast of
-0.4%.


5. (C) Japanese companies are looking at the impact of the
global economic slowdown and are drafting measures to cut
costs. Sony announced it is cutting up to 18,000 jobs and is
closing 10% of its global manufacturing base in an effort to
cut $1 billion in annual costs. Additionally, Japanese firms
have announced they intend not to renew up to 30,000 domestic
temporary labor contracts that expire in March 2009, and 16%
of listed companies surveyed responded they intend to cut
2009 and 2010 college hires as a way to reduce costs during
the current global downturn. The LDP is working on a 2
trillion yen financial support measure to assist
non-permanent workers who have lost their jobs in the current
economic climate, and the DPJ intends to submit job creation
legislation to the Diet on December 15, however, nothing is
likely until early 2009.


6. (C) Comment. The scope of economic problems confronting
Japan are daunting and are made worse by the political
stalemate. Shijuro Ogata, a former Bank of Japan official,
told the Financial Times "Japan always thinks about the
world's impact on Japan, not on Japan's impact on the world."
Ogata's criticisms of Japan's politicians are supported by a
side-by-side comparison of global economic stimulus measures
aimed at boosting domestic economic activity (all figures are
headline figures): Japan $108 billion; China $586 billion;
U.S. $168 billion; and India $60 billion.


7. (C) Comment Continued. Aso's plan for, as the Asahi
describes it, "a trifling 12,000 yen stimulus payment"
contrasts poorly with the actions other countries are taking
and the measures Japanese firms are implementing to cut costs
globally. Japanese businesses are canceling holiday events,
laying-off workers, shuttering production plants, and
granting longer New Year's holidays in an effort to remain
competitive and profitable. Winter bonuses have not been
announced yet and will certainly signal just how severe
Japanese companies view the economic slow down.
Unfortunately, Japan's leading companies and its 4.2 million
SMEs actions are not supported by the GOJ thus far. End
Comment.
SCHIEFFER