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