JAPANESE POLITICIANS QUIBBLE AS ECONOMY SHOWS

UNCLAS TOKYO 000973 SIPDIS SIPDIS TREASURY FOR IA POGGI AND DOHNER; NSC FOR TONG; STATE FOR EAP/J WEBSTER E.O. 12958: N/A TAGS: ECON EFIN EINV JA SUBJECT: JAPANESE POLITICIANS QUIBBLE AS ECONOMY SHOWS SIGNS OF STRAIN ¶1. (SBU) Summary. Although signs are Japan's main political parties may have finally agreed on a new central bank head, there is little to suggest they are looking at indications of an economic slowdown. Moreover, rather than undertake or even focus on needed economic reforms, national politicians argue endlessly over the fate of the provisional gas taxes and look likely to begin pointing fingers again over the scandal of Japan's lost pension records. The political malaise is not the cause of the slowdown, but it contributes at the margin to a lack of confidence by Japan's public in their future and by foreigners over the ability of Japanese policymakers to deal effectively with the short, medium, or long-term issues facing the economy. End Summary. ¶2. (U) Getting less play than the headlines featuring ongoing conflicts between the ruling coalition and the opposition over extending provisional gas taxes, the appointment of a new Governor for the Bank of Japan (BOJ), and the loss of millions of pension records are reports of a slowing Japanese economy. Despite good performance in fourth quarter 2007 with real GDP growth at an annualized rate of 3.5 percent, downside risks to Japan,s economy are becoming more apparent. Many analysts cite concern about the a rising yen, the slowing U.S. economy's impact on Japan's exports to the United States, as well on growth in Japan's other export markets. Closer to home, sharp increases in materials prices are damaging the prospects for the corporate sector, particularly for SMEs; earlier in the calendar year, housing investment plunged as the revised Building Standards Law dramatically slowed approvals for new construction, with a rebound not fully realized; and personal consumption remains sluggish as real incomes are hit by higher food and gasoline prices and some softening in the labor market. ¶3. (U) The BOJ's quarterly "tankan" survey of business confidence, released April 1, showed across-the-board deterioration in business sentiment among Japanese companies of all sizes. In addition to the reading for large manufacturers' views on whether business conditions were favorable or unfavorable dropping to the lowest level in four years, the survey found that new capital spending by all enterprises in FY08 is likely to decline 5.3 percent from the previous year, falling 1.6 percent for large firms. Large manufacturers project pretax profits in FY08 to remain flat from FY07 levels. However, that figure assumes an exchange rate of 109 yen to the U.S. dollar. Should the yen remain stronger than that assumption, profits could fall from year earlier levels on average. ¶4. (U) Another BOJ survey of consumer sentiment released on April 3 also finds deteriorating conditions, with more consumers saying economic conditions have worsened than say they have improved. The index is at its lowest level in five years. Press reports speculate that the depressed consumer outlook has been affected by recent price hikes, lower stock prices, a stronger yen, slowing economies overseas and recent political confusion in Japan. ¶5. (SBU) Comment. In terms of real effects on the economy, the political confusion does not have a direct impact in the short-term. However, the uncertainty created by the failure to extend the provisional gas taxes, to be followed by potential reinstatement in a month, and the general perception that the government and politicians are incapable of moving forward in a constructive manner have an indirect impact on sentiment among both businesses and consumers. The longer the political impasse continues, the more likely that local and foreign investors will become convinced Japan's policymakers are not only incapable of dealing effectively with the immediate issues at hand, such as financing this year's budget, but lack the vision and foresight to adequately address the need for medium-term fiscal consolidation and put in place policies to deal with Japan,s aging population and changing social security commitments, let alone other long-needed reforms. SCHIEFFER