JAPANESE DEPUTY PM KAN DISCUSSES ECONOMIC STRATEGY,

UNCLAS SECTION 01 OF 02 TOKYO 002709 SENSITIVE SIPDIS STATE FOR E, EEB, EAP/EP, AND EAP/J NSC FOR MICHAEL FROMAN, DAVID LIPTON AND JAMES LOI USTR FOR AUSTR WENDY CUTLER AND DAUSTR MICHAEL BEEMAN E.O.12958: N/A TAGS: ECON ETRD PREL EINV JA SUBJECT: JAPANESE DEPUTY PM KAN DISCUSSES ECONOMIC STRATEGY, BILATERAL ECONOMIC ENGAGEMENT WITH NEC DIRECTOR SUMMERS REF: TOKYO 02456 SUMMARY -------------- ¶1. (SBU) Deputy Prime Minister Naoto Kan and Vice Minister Motohisa Furukawa discussed the Democratic Party of Japan (DPJ) government's thinking on economic strategy and called for political-level bilateral dialogue on economic issues during a meeting with National Economic Council (NEC) Director Lawrence Summers on November 14. Kan explained how Japan needs to look in a new direction to achieve growth going forward, and he described measures the DPJ is considering to boost domestic demand. Ultimately, however, the DPJ regards the growth of Japan's economy as dependant on increased global growth, which will require international collaboration, beginning with bilateral U.S.-Japan engagement, Kan and Furukawa said. Kan emphasized that the DPJ seeks a dialogue with the United States led by politicians, not bureaucrats as in the past. Summers indicated that the United States would welcome such a bilateral political-level dialogue to deal with structural issues, as well as close bilateral cooperation at the political level on issues of global importance in multilateral fora. MACROECONOMIC PICTURE AND PROSPECTS -------------- ¶2. (SBU) On the sidelines of President Obama's November 13-14 visit to Tokyo, NEC Director Summers met Deputy Prime Minister Kan and Vice Minister Furukawa on November 14 to discuss the DPJ-led government's macroeconomic strategy. Commenting on the economic challenges the Government of Japan faces, Kan emphasized that a major reason for Japan's sluggish economic performance in recent years is the past two decades of misguided fiscal policy under a Liberal Democratic Party (LDP) beholden to vested interests. Successive LDP governments poured public funds into wasteful pet projects that provided no lasting economic benefit, he said. As a result, Japan neglected to invest in projects having strategic or other enduring economic value. As an example, Kan pointed to spending on 90 airports in Japan without development of a hub airport. Under Minister of Land, Infrastructure, Transport and Tourism Seiji Maehara, the GOJ is reviewing projects underway to slash wasteful public works spending. 
 ¶3. (SBU) Kan underscored how Japan needs to look in a new direction to achieve robust economic growth, and the DPJ hopes to present a strategy pointing the way forward. In addition to reviewing existing fiscal programs, the DPJ needs to tackle the problem of burdensome rules by carrying out deregulation, he added, because the way Japan does many things must be changed in order to open the path to future growth. ¶4. (SBU) Looking ahead, Kan said that DPJ leaders wish to stimulate the economy while at the same time contain any increase in the interest rate on Japan's debt of over 800 trillion yen. In the short term, the DPJ is considering measures to increase employment in areas where demand outstrips supply, such as long-term nursing care and forestry, to boost gross domestic product (GDP) and to offset the effects of cutting public works spending. The DPJ is also considering raising subsidies for eco-friendly cars and appliances, new houses, and retrofitting of houses to conserve energy to increase domestic demand. DPJ leaders would also like to encourage Japanese over age 60 (who hold the largest share of private savings) to spend more as a means of boosting internal demand. Kan said that he expects Japan will make the transition from negative to positive growth in the coming year, achieving 2 or 3 percent growth within five years' time. INTERNATIONAL COLLABORATION NEEDED -------------- ¶5. (SBU) Furukawa explained that Japan will not be able to achieve the transition to robust growth alone; it will require the collaboration of all countries to boost global growth. Many countries are in recession and looking inward at present. Acting independently, they can drag each other down further, he noted. Additionally, future growth will depend upon expansion of industrial frontiers. Japan is concentrating on new sectors, such as those relating to green technology, and aims to expand its economic ties with the rest of Asia, as suggested by the Hatoyama initiative, TOKYO 00002709 002 OF 002 Furukawa explained (see reftel). BILATERAL ENGAGEMENT -------------- ¶6. (SBU) Furukawa emphasized that international political-level dialogue, beginning with bilateral U.S.-Japan engagement, will be necessary to make this transformation to positive growth a reality and thereby get the world economy back on track. Furukawa highlighted the need for political-level involvement to move policy forward, contrasting what the DPJ had in mind with the bureaucracy-led bilateral dialogue conducted during the time of the Clinton administration. Kan explained that visits of Treasury Secretary Geithner and other senior U.S. officials had provided a valuable opportunity for DPJ leaders to build relationships with their American counterparts, which would facilitate decision-making on key issues going forward. ¶7. (SBU) Describing the DPJ's effort to bring politician-driven administration to Japan, Kan added that the DPJ aims to make policy decisions expeditiously. Such decision-making would represent a significant change from the past twenty years of uneasy compromise, procrastination, and delay on vital national issues under the LDP. Summers said that the United States would welcome a political-level dialogue. Such engagement would provide a useful opportunity to continue past discussion of structural issues, and international cooperation can help in overcoming domestic opposition, he added. (Note: On November 15, Japan's major daily newspapers reported that that Deputy PM Kan met with NEC Director Summers and that the two shared the view that politicians, not bureaucrats, should take the initiative in addressing bilateral economic and trade issues. End note.) Summers also noted that the U.S. also welcomed bilateral cooperation at the political level on issues of global importance at the G-20 and elsewhere, and Furukawa confirmed that the GOJ looks forward to working in lockstep with the United States when dealing with global issues in multilateral fora so as to achieve meaningful results. ¶8. (U) NEC Director Summers has cleared this message. ZUMWALT