SETTING NEW FISCAL CONSOLIDATION TARGETS

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 001400

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E.O. 12958: DECL: 06/18/2019
TAGS: ECON EFIN PGOV JA
SUBJECT: SETTING NEW FISCAL CONSOLIDATION TARGETS

TOKYO 00001400 001.2 OF 002


Classified By: CDA JAMES ZUMWALT FOR REASONS 1.4(B) AND (D)


1. (SBU) The Council on Economic and Fiscal Policy (CEFP) has
released its draft basic policy framework for 2009. Known as
the honebuto ("big-boned" or "robust"),the policy framework
is meant to place this year's policy priorities in a
medium-term context. The 2009 honebuto makes clear that the
top priority is overcoming the current recession, but also
sets new fiscal consolidation targets: stabilizing the gross
debt-to-GDP ratio by the "mid-2010s" and reducing it by the
"early 2020s." Other key priorities
include strengthening Japan's social safety net and the
identification of (and potential government support for) key
industries expected to drive future growth. The Cabinet is
scheduled to approve formally the honebuto June 23.


2. (U) (Note: The CEFP is a consultative body within the
Cabinet Office. It is headed by the Prime Minister, and
includes the Chief Cabinet Secretary, Minister for Economic
and Fiscal Policy, Minister of Finance, Minister for Internal
Affairs and Communications, Minister of the Economy, Trade,
and Industry, and the Bank of Japan Governor. End note.)

New Fiscal Consolidation Targets
--------------


3. (SBU) New Fiscal Consolidation Targets -- Since July 2006
under then-Prime Minister Koizumi, Japan has maintained two
targets for fiscal consolidation: 1) achieving a primary
surplus (i.e., a surplus net of interest payments on
government debt) by FY11; and 2) the reduction of the gross
debt-to-GDP ratio starting in the "mid-2010s." The primary
surplus target has been criticized as technocratic and
difficult for the public to understand. Further, the current
economic downturn, with its associated decline in tax
revenues and additional fiscal stimulus, has rendered both
targets unachievable.


4. (U) The 2009 honebuto establishes two new targets for
fiscal consolidation, each with its own interim benchmark:

1) Stabilize the Debt-to-GDP ratio by the mid-2010s. The
interim benchmark is halving the primary deficit by FY13.
(The primary deficit was about 5.7% in FY09 before the April
2009 stimulus package.)

2) Reduce the Debt-to-GDP ratio starting in the early 2020s.
The interim benchmark is the achievement of a primary surplus
by FY19.


5. (SBU) (Note: The Cabinet Office's definition of gross
government debt includes only debt with an original maturity
greater than one year, a definition most likely designed to
avoid any noise associated with short-term debt issuance.
For this reason, the Cabinet Office figure (163% at end-March
2009) is lower than the more inclusive OECD figure (173% at
end-2008). Instrument-wise, the Cabinet Office definition
includes Japanese government bonds (JGBs),local government
bonds, and the borrowing of a
special account to finance local governments. End note.)


6. (U) The honebuto does not detail any specific proposals
for revenue increases or expenditure cuts. However, as
reference material, Cabinet Office staff prepared extensive
scenario analysis for fiscal consolidation for FY09-23.
There are nine different scenarios combining three
assumptions: 1) GDP growth; 2) increases in the consumption
tax from the current 5%; and 3) whether the GOJ carries out
JPY11.4 trillion or JPY14.3 trillion in aggregate scheduled
spending cuts, as well as whether the government holds
discretionary non-social security government expenditures at
FY11 levels, or increases them with inflation (Note: The 2006
honebuto estimated that an adjustment of about JPY16.5
trillion would be needed to achieve a combined central and
local government primary surplus by FY11. The plan
specifically calls for JPY11.4 - JPY14.3 trillion in
aggregate spending cuts in the FY07-11 period.
Ttax increases and economic growth-driven rises in tax
revenues would fund the remaining JPY 2.2 - JPY 5.1 trillion.)


7. (SBU) The Cabinet Office found only one of the nine
combinations of assumptions could achieve the twin fiscal

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consolidation targets -- raising the consumption tax by one
percentage point annually from FY11 to reach 12% in FY17,
combined with 1.5% average annual real GDP growth and large
government spending cuts. (The Cabinet Office separately
estimated potential growth at only 1.0%, but Japan does have
a large output gap which would in theory allow a burst of
non-inflationary higher growth.) If the consumption tax is
raised only by a total of 5 percentage points to 10% in FY15,
the Cabinet Office projects a
combined primary surplus in FY21, two years later than the
target. The Cabinet Office also projects that the
debt-to-GDP ratio largely would stabilize by the early 2020s,
but not significantly decline. As a rule of thumb, a one
percentage point increase in Japan,s consumption tax is
estimated to generate
about JPY2.5 trillion (0.5% of GDP) in additional revenue
annually.


8. (U) Briefing reporters on the honebuto, Finance Minister
Yosano stressed the projections were no more
than mechanical estimates and that the Aso Cabinet had not
made any decision on a consumption tax increase.

Strengthening Japan,s Social Safety Net
--------------


9. (U) The honebuto calls for building a "secure society" in
three phases. In the first (FY09-11),the GOJ would improve
access to social insurance programs for non-regular workers
and introduce an earned income tax credit. In the second
(FY11 to the mid-2010s),the government would review personal
income and asset taxes to narrow income disparities, and
improve childcare. In the final phase (mid-2010s to early
2020s),the GOJ would improve support services further for
the elderly and boost the public nursing care program.

Looking at Key Industries -- Industrial Policy Flashbacks?
-------------- --------------


10. (C) Finally, the honebuto asserts (not argues or
demonstrates) that the following three fields will drive
Japan,s economic growth: (1) environmental and energy-saving
technology; (2) medical, healthcare, and nursing care
services; and (3) animation and game software, information
technology, and tourism (also meant to strengthen Japan's
"soft power"). According to the plan, Japan will be able to
create new competitive advantages and produce high-quality
employment in these fields. (COMMENT: While the honebuto
does not lay out concrete proposals, the identification of
these industries may help lay the groundwork for future
government assistance. END COMMENT.)
ZUMWALT