PRIME MINISTER ASO ANNOUNCES $256 BILLION ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 003408 SIPDIS TREASURY FOR IA FOSTER E.O. 12958: DECL: 12/15/2018 TAGS: ECON EFIN JA SUBJECT: PRIME MINISTER ASO ANNOUNCES $256 BILLION ECONOMIC POLICY PACKAGE REF: A. TOKYO 3079 ¶B. TOKYO 03401 TOKYO 00003408 001.2 OF 002 Classified By: Ambassador J. Thomas Schieffer; reasons 1.4 (b/d) ¶1. (C) Summary: Prime Minister Aso announced at a December 12 press conference the outline of a new 23 trillion ($256 billion, or 4.5% of GDP) economic policy package, the third of its kind in about 100 days (reftel) . Excluding some 6 trillion ($67 billion) of overlapping measures, the overall headline figure of the new package is about 17 trillion ($189 billion, or 3.3% of GDP). The centerpieces of the new economic policy package are commitments to implement an additional 1 trillion ($11 billion) in employment promotion measures amid worsening labor market conditions, and an expansion of the available limit for a possible injection of public funds into banks by 10 trillion ($110 billion) to 12 trillion ($133 billion). The additional demand created by the package, the so-called "real water" fiscal stimulus, falls far short of the headline figure. FINATT estimates the package,s real water component at about 2.1 trillion, or 0.4% of GDP. End Summary. Financing for the Economic Package -------------- - ¶2. (C) A second supplemental budget for FY2008 and the regular budget for FY2009 will finance the additional fiscal spending in the December 12 package. The Aso Cabinet will decide on a second FY2008 supplemental budget on December 20, and the FY2009 regular budget on December 24, prior to their submission to the Diet in January 2009. Individual Policy Measures -------------- ¶3. (C) The 23 trillion ($256 billion) economic policy package is comprised of 10 trillion ($111 billion) in fiscal spending measures, inclusive of overlapping measures already announced in the October 30 stimulus package, and 13 trillion ($145 billion) in financial measures to boost the available limit for the injection of public funds into banks and to support companies suffering funding difficulties. The following are brief descriptions of the individual policy measures, with a few background notes. Fiscal Measures -------------- ¶4. (C) The government will spend an additional 1 trillion ($11 billion) in employment measures, such as maintaining the employment of non-regular workers, helping those who have lost jobs find new ones, and lowering the premiums of the employment insurance program, which are borne evenly by employers and employees; the government will increase revenue sharing with local governments by 1 trillion ($11 billion). Unlike central government subsidies, local governments will be able to spend funds from revenue sharing at their discretion; a new 1 trillion ($11 billion) reserve fund will be created in the general account budget to prepare for a sudden economic deterioration that requires an immediate government response; a total of approximately 1 trillion ($11 billion) in tax cuts will be implemented, including an expanded housing tax credit, energy efficiency investment tax reductions, and a tax cut on purchases of environmentally friendly cars; the government will carry out the "measures for people's lives" previously announced in the October 30 package (reftel),amounting to about 6 trillion ($67 billion). Financial Measures -------------- ¶5. (C) The available limit for possible injection of public funds into banks has been increased from the present 2 trillion ($22 billion) to 12 trillion ($133 billion) under the revised bank recapitalization law. (Note: on December 12 the Diet approved final passage of the revised Law on Special Measures for Strengthening Financial Institutions. End Note.); the government will allow the Development Bank of Japan to purchase a total of about 2 trillion ($22 billion) in commercial paper issued by corporations to help restore confidence in the market. Large corporations are having increasing difficulty issuing commercial paper: at the end of November, outstanding commercial paper totaled 13.7 trillion ($152 billion),a 9.9% decline from the year before and the second consecutive year-on-year drop. The average yield on one-month commercial paper edged up further to 1.27% in TOKYO 00003408 002.2 OF 002 November, the highest level since May 1995; government affiliated financial institutions will increase their lending to SMEs by about 1 trillion ($11 billion). This includes the government-affiliated Japan Housing Finance Agency's loans to small and medium-sized real estate and housing companies. SCHIEFFER