NIKKEI BREAKS 10,000 SUGGESTING THE ECONOMY HAS

UNCLAS SECTION 01 OF 02 TOKYO 001345

SENSITIVE
SIPDIS

STATE FOR EEB AND EAP/J
NSC FOR DANNY RUSSELL AND JIM LOI
USTR FOR WENDY CUTLER AND MICHAEL BEEMAN
TREASURY FOR ROBERT DOHNER

E.O. 12958: N/A
TAGS: ECON EFIN PREL JA
SUBJECT: NIKKEI BREAKS 10,000 SUGGESTING THE ECONOMY HAS
HIT BOTTOM -- THE JURY REMAINS OUT


1. (SBU) Summary: A spate of relatively positive economic
news, both international and domestic, pushed the Nikkei 225
to close over the psychologically important 10,000 level on
June 12. Some politicians and pundits argue the economy has
"hit bottom" and will recover, albeit slowly, over the next
few quarters. However, while there is broad-based agreement
Japan's economy is no longer in a steep decline, there are
still questions on whether the economy will stage a
sustainable recovery starting in the second half of 2009.
Tokyo-based analysts are concerned the economy may dip again
in 2010 as the effects of PM Aso's stimulus measures run out
and consumers tighten their spending due to uncertain
employment prospects and falling wages. Many in Japan
continue to look to exports, especially to China and the
U.S., as the way out of the downturn rather than taking
measures needed to restore the economy to health. The
country's on-going political difficulties further mitigate
against needed structural changes. Nevertheless, Japan's
economy is likely to expand slightly in the April-June
quarter if only because of the immediate impact of the GOJ's
fiscal stimulus measures. End Summary.

Some Good Economic News Pushes Nikkei and Confidence Up
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2. (SBU) Recent economic data show Japan's economy is
stabilizing somewhat following dramatic contractions in
exports, manufacturing and overall GDP since October 2008.
The Bank of Japan upgraded its economic assessment of the
economy last month from "economic conditions are
deteriorating" to "the pace of the worsening of economic
conditions is easing" in its monthly economic view. The BOJ
is expected to note further improvements in its June report.
Analysts caution, however, the BOJ is still concerned about
weak domestic demand and consumer price deflation, even if
declines in manufacturing and exports are easing.


3. (SBU) The composite index (CI),Japan's key gauge of the
current state of the economy is strengthening. The CI rose
for the first time in 11 months in April as industrial
production, overtime work hours, and retail sales improved
one point over March to 85.8 (Base Year 2005 equals 100).
The Nikkei 225 index, partially as a result of these Japanese
data and partially in response to signs of recovery in the
U.S. and China, closed around the psychologically important
10,000 level June 12, a level not seen since August 2008.
The broader TOPIX index, which provides a more comprehensive
view of the market, has also climbed steadily since March and
is approaching the 1,000 level. Factory output numbers,
which jumped 5.2 percent in April month-on-month, helped
rebuild investor confidence. Nevertheless, analysts again
caution the jump may not yet be sustainable due to weak
corporate profits and deflation.

But, The Real Story is Not Confidence Inspiring
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4. (SBU) The up-tick in indices of consumer confidence comes
against the backdrop of a stabilizing world economy and the
impact of Japan's four fiscal stimulus measures and suggest
the private sector has begun to believe Japan's economic
free-fall has come to an end. However, the government sector
is the only component of the economy that is expanding and
bankruptcies, unemployment, and weak external demand for
Japanese finished goods continue to cloud prospects for a
sustainable economic recovery. There were 1057 new
bankruptcy filings in May, an increase of 6.3 percent from
April, and unemployment topped 5 percent for the first time
in half a decade. A more disturbing statistic on the labor
front is the 500 percent increase in companies applying for
worker adjustment assistance since January 2009. 46,558
companies requested GOJ financial assistance in April 2009 to
support the furloughing of 2.3 million workers. Japanese
exports remain weak and the prospects for recovery, based on
a 20.5 percent decline in industrial electricity demand
year-on-year in May, are uncertain.


5. (SBU) Against this backdrop, Japan's Council on Economic
and Fiscal Policy announced June 10 its latest effort to
reduce gross Japanese government debt, which stands at more
than 170 percent of GDP. The plan involves increasing the
value added tax one percentage point a year every year
beginning in 2010 until 2017, to 12 percent. For the plan to
succeed, however, the Japanese economy would have to expand

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an average of 2 percent annually, a growth rate last seen in
the late 1980s. The Nikkei criticized the plan in a June 10
op-ed because it includes no structural or regulatory reforms
the editorial board believes are essential if the Japanese
economy is to expand that quickly. The government in its
recently released the 2009 Draft Policy Guidelines on
Economic and Fiscal Policy (the annual "Honebuto" report) set
a target for halving the government budget deficit by 2014.
As recently as 2006, the government set the goal of
achieving "primary fiscal balance" -- a balance of the
government's current account, excluding long-term capital
expenditures -- by FY-2011. That goal is now pushed back to
a vague "within 10 years." The government also said it hoped
to "stablize the national debt as a percentage of GDP - now
170 percent and climbing -- by "the mid-2010s" and begin to
reduce Japan's debt-to-GDP ratio starting in FY-2020.

LDP Versus DPJ on Japan's Economic Model
--------------

6. (SBU) Prime Minister Aso is being given some credit for
helping to stabilize the economy through the size of his
April fiscal stimulus program. Critics, however, still argue
it is narrowly focused on short-term stimulus to buoy the
electorate in the run-up to the coming Lower House elections.
It falls short of the reforms analysts have long said Japan
needs to undertake. Japan's rapidly greying population plus
the need to increase stagnant incomes and to improve the
quality of work and life for low-income workers are seen as
only making the task tougher. The opposition Democratic
Party of Japan's election manifesto recommends some changes
to assist farmers, workers and families, but the economic
direction of the party is still unclear; especially given its
statements about helping Japan's farmers and also revising
Japanese postal reform. Furthermore, the DPJ has yet to
articulate how it will pay for these programs.
ZUMWALT