Identifier
Created
Classification
Origin
08TOKYO892
2008-04-01 22:50:00
CONFIDENTIAL
Embassy Tokyo
Cable title:  

GAS TAX, SMA EXPIRE; "APRIL PANIC" OVERBLOWN

Tags:  PGOV PREL EFIN ECON MOPS JA 
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C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 000892 

SIPDIS

SIPDIS

DEPARTMENT FOR EAP/J, EEB
DEPARTMENT PASS USTR FOR CUTLER AND BEEMAN

E.O. 12958: DECL: 03/31/2018
TAGS: PGOV PREL EFIN ECON MOPS JA
SUBJECT: GAS TAX, SMA EXPIRE; "APRIL PANIC" OVERBLOWN

REF: A. TOKYO 0860

B. TOKYO 0761

C. TOKYO 0646

Classified By: Ambassador J. Thomas Schieffer, reasons 1.4(b),(d).

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 000892

SIPDIS

SIPDIS

DEPARTMENT FOR EAP/J, EEB
DEPARTMENT PASS USTR FOR CUTLER AND BEEMAN

E.O. 12958: DECL: 03/31/2018
TAGS: PGOV PREL EFIN ECON MOPS JA
SUBJECT: GAS TAX, SMA EXPIRE; "APRIL PANIC" OVERBLOWN

REF: A. TOKYO 0860

B. TOKYO 0761

C. TOKYO 0646

Classified By: Ambassador J. Thomas Schieffer, reasons 1.4(b),(d).


1. (C) Summary: March 31 marked the sunset of Japan's
decades-old "provisional" gas tax rate, as the opposition
parties rejected an eleventh-hour proposal by Prime Minister
Fukuda that would have kept the taxes in place but would have
made related revenues available for general use starting in
FY 2009, rather than keeping them in accounts earmarked for
road construction. The ruling coalition has announced its
intention to use its two-thirds override power in the Lower
House to break the gridlock on or shortly after April 29.
Real economic impact is expected to be minimal, assuming the
break in tax collections is relatively brief, but the
prospect of yo-yoing taxes on a basic commodity could add to
impressions that Japan's government is incapable of prudently
managing the its economic affairs. The two sides did manage
to agree on a stopgap measure to extend other revenue items
for 60 days, assuring little disruption in the FY2008 budget,
passed on February 29. The fight over the gas tax has
damaged the public standing of both the ruling LDP and the
opposition DPJ, but Fukuda appears to be getting the better
of DPJ leader Ozawa in some circles for his willingness to
seek genuine reform. Ironically, Fukuda's failure to clear
his proposal with construction interests within his own party
and coalition partner Komeito could leave him more
vulnerable, as he tries to sell the public on restoring the
gasoline tax in the weeks ahead. Separately, the SMA
governing support for U.S. forces in Japan also expired on
March 31. End summary.

Gas Tax Sunsets; Other Taxes Extended 60 Days
--------------


2. (SBU),Japan's "provisional" gasoline and road-related
taxes, dating from 1974, expired on March 31 after the

divided Diet failed to reach agreement on legislation to
extend the revenue measures. (Legislation to extend the
umbrella Special Tax Measures Law that expired March 31 had
been passed in the Lower House on February 29, but never
taken up by the Upper House.) The new law would have
extended collection of the JPY 25.1/liter tax for another ten
years and continued allocating these monies to the central
government to hand out for road construction and maintenance
projects. If the opposition-controlled Upper House fails to
take action by April 29 (just two days after a key national
by-election in Yamaguchi Prefecture),the ruling coalition
can pass the extension into law by a two-thirds majority
re-vote in the Lower House.


3. (SBU) The Upper House has yet to begin formal
deliberations more than one month after receiving the
approved bill from the Lower House. The opposition has
refused to deviate from its insistence on eliminating the
provisional tax rate on a permanent basis, even after Prime
Minister Yasuo Fukuda offered a last-minute compromise that
would have agreed to DPJ demands to treat revenue from the
provisional gasoline tax as general revenue starting in 2009
(Ref A).


4. (SBU) The proposed Special Tax Measures Law revision also
includes provisions on over 100 unrelated revenue measures,
in addition to the road-related taxes. Recognizing the need
to avoid disrupting these less controversial revenue inflows
-- Japan's annual budget deficit is about 4.0 percent of GDP
-- the ruling and opposition parties cooperated on March 31
to pass a stopgap measure extending the non-road-related tax
measures for sixty days, until May 31. Passing the law to
extend the Special Tax Measures Law on or after April 29 will
serve to extend the non-road-related taxes beyond May 31. If
that legislation is modified or fails to pass, however, the
non-road-related tax measures will need to be extended again

TOKYO 00000892 002 OF 004


via some alternative legislation.


5. (SBU) An opposition Democratic Party of Japan (DPJ)
counterproposal to the ruling Liberal Democratic Party
(LDP)-Komeito coalition's Special Measures Tax Law revision
already excludes road-related taxes from the omnibus bill,
but has yet to be deliberated, amidst DPJ concerns that
passage of its counterproposal could be construed as a
rejection of the ruling coalition's bill and thereby allow
the Lower House to take an earlier re-vote. The DPJ
reportedly conditioned its cooperation on the March 31
stopgap measure on an agreement with the leaders in both
Houses that a vote on the non-road-related taxes would not be
similarly misconstrued.

Economic Impact Minimal, Dependent on Final Outcome
-------------- --------------


6. (SBU) Japan's consumers awoke April 1 to find generally
lower fuel prices availablEP>~H.Q^icant short-term
economic impact, the government is considering measures to
offer loan guarantees and interest subsidies to retailers
unable to meet operating costs. The DPJ has also floated its
own proposal to offer credits to retailers for their
potential losses.


8. (SBU) There may also be some short-term decrease in
government spending. Several prefectural governments have
indicated they will place an immediate freeze on some portion
of current road construction projects to account for
projected revenue shortfalls. The central government has
generally preached restraint, and Embassy contacts anticipate
that no new bond issues will be necessary to deal with what
they expect to be a brief interruption in gas tax revenues.
A Nikkei analysis notes little short-term economic impact,
although it cites potentially serious economic consequences
if the provisional tax were to be eliminated over the longer
term and road construction projects had to be cut.


9. (C) In fact, should the short-term drop in the provisional
tax become a longer-term scenario, the macroeconomic impact
will expand. The fiscal impact is potentially large, as the
road-related taxes amount to JPY 2.6 trillion (USD 26
billion) annually. If planned road-improvement projects are
implemented by issuing additional bonds, the combined central
and local government deficit would rise 0.5 percent of GDP,
posing a serious risk to the government's medium-term fiscal
consolidation goals. If instead, road construction projects
were eliminated, that would withdraw government investment
from the economy, lowering the economic growth rate. A
sustained drop in gas prices would lower the CPI,
potentially by 0.4 percentage points according to market
analysts. Lower prices could raise consumption to the extent
that consumers spend their windfall on other goods and
services. Though the impact would not be very large, if
sustained for the whole fiscal year, personal consumption
could rise around 0.5%, if the entire windfall is spent.


TOKYO 00000892 003 OF 004



10. (C) More problematic, however, is the growing sense that
the political situation is keeping the government from
prudently managing the economy. Following so closely on the
government's failure to appoint a Bank of Japan (BOJ)
Governor (Ref B),many observers see the expiration of the
"provisional" taxes as another sign that nobody is at the
economic helm during a time of heightened concern about
global markets. Prime Minister Fukuda, for his part, offered
a public apology March 31 for the uncertainty and confusion
caused by the failure to extend relevant legislation.

Political Fallout More Difficult to Predict
--------------


11. (C) Media coverage over the past several weeks has been
largely critical of Prime Minister Yasuo Fukuda for his
failure to display greater leadership in managing the BOJ
Governor and budget-related tax issues. Over the past
several days, however, the tide has shifted rather suddenly
in favor of the government and against the opposition.
Recent editorials credit Fukuda for bucking vested
construction interests within his own LDP to offer a proposal
for incorporating road-related taxes into general revenue
from next year, a key demand of the DPJ and a goal that has
long evaded reform-minded elements within the LDP. All of a
sudden, Fukuda is being compared favorably in some circles to
former Prime Minister Junichiro Koizumi, and DPJ leader
Ichiro Ozawa is drawing sharp criticism for choosing
short-term political gain over a real opportunity for reform.



12. (C) Embassy contacts attribute this shift, in part, to
Fukuda's more aggressive use of the media to take his message
to the people. They note that the DPJ may have also
overplayed the obstructionist card. Polls indicate that
voters hold both parties responsible for the Diet gridlock
over the tax legislation, but only a quarter of respondents
are calling for Fukuda to step down in the near term.
Fukuda, for his part, continues to insist that he will not
shuffle his Cabinet or dissolve the Lower House before the
G-8 Summit in July.


13. (C) A bigger problem for Fukuda, Embassy contacts say,
will be the fight with the LDP's "road tribe" over the future
direction of road-related tax policy. Many LDP members are
concerned that he failed to lay the proper groundwork for his
proposal before revealing his hand to the DPJ and the public.
A related factor is LDP politicians, nationally and at the
local and regional level see these funds and the roads they
build/maintain as a tool to garner support and votes. He may
have support from coalition partner Komeito, which is hinting
that it will link support for a two-thirds re-vote on the
Special Measures Tax Law to acceptance of Fukuda's
ground-breaking proposal to eliminate road construction
earmarks. Selling a gas tax rise in the coming weeks to the
public will be another difficult chore, with polls showing
60-70 percent of respondents opposed. Fukuda and other
ruling party leaders have already noted publicly their
intention to restore the tax. He has tried to justify his
position on economic and environmental grounds, noting, for
example, that encouraging more people to drive by lowering
the price of gas is wrongheaded for a country that is
attempting to become a leading environmental power.

SMA Also Lapses; Impact Limited
--------------


14. (C) Also expiring on March 31, although unrelated to the
tax legislation, was the Special Measures Agreement (SMA),
governing USD 1.4 billion in host nation support for U.S.
Forces in Japan (Ref C). The resulting lapse means that the
United States will have to cover funds for labor and utility
costs until the bill is passed in early May. Japan is
committed to reimbursing those costs. Training relocation
exercises will also be suspended during this period.

TOKYO 00000892 004 OF 004




15. (C) The ruling and opposition parties agreed on March 28
to bring the SMA to a vote in the Lower House plenary on
April 4. The bill is certain to clear the Lower House the
same day. As an international treaty, the SMA agreement will
become law 30 days after passage in the Lower House,
regardless of subsequent Upper House action or inaction. The
DPJ has yet to decide whether to vote for or against the
bill, according to Embassy MOFA contacts, but withdrew its
hold on committee action in exchange for an accounting of
past use of funds for utilities.


16. (C) The opposition fought hard for weeks to delay
deliberations on the SMA -- citing the need to discuss the
Aegis ship collision and Defense Ministry reform -- before
finally taking up formal hearings on March 27. DPJ leaders
have criticized elements of the SMA in conversations with
Embassy officers and statements to the press, but have never
expressed any intention to oppose passage of the measure
outright. Embassy contacts expect the Upper House to take a
vote on the SMA in mid-April.
SCHIEFFER