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

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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

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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