PM ASO'S ECONOMIC AGENDA: STALLED AND LOSING

1. (C) Prime Minister Aso's policies have not had the impact
on Japan's economy he wanted. When the global economic
crisis hit, Aso promised "bold countermeasures" to confront
rising unemployment and bankruptcies, record drops in
business confidence and manufacturing output, and slumping
public support. He has promised more than his proposals can
deliver, however, and the public is increasingly
disappointed. Politically weak and with analysts downgrading
further Japan's 2009 economic prospects -- some now expect
negative growth to continue into 2010 -- Aso's economic
policy options look increasingly constrained. End summary.

Falling Off a Cliff


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2. (C) When Prime Minister Taro Aso took power in September
2008, he immediately faced economic challenges. After a
69-month period of tepid growth ended in October 2007,
Japan's economy contracted at an annualized rate of 1.1
percent during the first three quarters of 2008. Two
supplementary budgets with economic stimulus measures were in
the works, but remained unimplemented, as politicians failed
to grasp the severity of the global downturn and its impact
on export-oriented Japan.



3. (SBU) With global consumption collapsing in the last
quarter of 2008, Japan's economy began to deteriorate
rapidly. Analysts' consensus estimate is Japan's gross
domestic product (GDP) shrank at an annualized rate of around
10 percent in the fourth quarter (seasonally adjusted) and
unemployment ticked up 0.5 percent between November and
December -- the fastest month-to-month rise in joblessness
since 1967. Manufacturing output also declined 9.6 percent
in December, the largest monthly drop recorded since
statistics were first compiled in 1953.



4. (SBU) The speed of the deterioration caught PM Aso and the
Japanese public off-guard. A key change in Japan's economy
over the past fifteen years has been a shift away from
lifetime employment practices and an increase in the number
of part-time, temporary, and contract workers, who now
constitute slightly more than one-third of the labor force.
More easily hired than traditional career workers, they are
also more easily fired, and Japanese companies shuttered
factories and laid off staff faster than in previous
downturns. Many are falling through holes in Japan's social
safety net, which the country has not adjusted to address for
the shift away from the lifetime employment model.

Policy Promises


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5. (SBU) Faced with rising unemployment and bankruptcies,
record drops in business confidence, and slumping public
support rates (now in the teens in some polls), PM Aso
abandoned his predecessors' multi-year commitment to fiscal
restraint, and vowed publicly to take "bold countermeasures"
that would make Japan "the first country to emerge from
recession." The centerpiece of his effort is a set of
stimulus measures embedded in two supplementary budgets for
fiscal year 2008 and the proposed budget for fiscal year
2009, which begins in April. Aso also vowed action to create
1.6 million jobs over the next three years and to extend
unemployment benefits to groups missed by the social safety
net.



6. (C) The Prime Minister has promised more economic relief
to the public, however, than reasonably can be expected from
his policy proposals. Given the role exports continue to
play in Japan's economy, the country is unlikely to emerge
from recession before growth recovers in the U.S. and China,
two top markets for Japanese goods. (The U.S. takes about
one-fifth of Japan's exports; China takes just over fifteen

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percent.) The 75 trillion yen ($833 billion) in headline
stimulus measures PM Aso touted becomes 8.7 trillion ($97
billion, or 1.7 percent of GDP) when examined for actual new
spending. Moreover, the recently passed legislation to
expand unemployment benefits is expected to affect only about
1.5 million of the 10 million workers without unemployment
coverage. As a former Deputy Governor of the Bank of Japan
characterized the plans: "if people place too much hope in
the (stimulus) measures, I'm afraid they'll be disappointed."

Looking Ahead


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7. (SBU) Economic forecasts for Japan continue to be revised
downward. The IMF, for example, reduced in January its
prediction for Japan's 2009 GDP growth from negative 0.5
percent to negative 2.6 percent. A respected Japanese think
tank suggested February 4 that GDP might drop this year by
3.8 percent and that its projections might see further
downward revisions. A return to deflation is considered a
possibility.



8. (C) Prime Minister Aso and his team are in a tough
political position. Weak public support for the Aso Cabinet,
an Upper House controlled by the opposition, and ruling party
concerns about a general election that has to take place
sometime this year make it difficult to advance policy. Much
of the current Diet session is likely to be consumed by
wrangling over the fiscal year 2009 budget and required
implementing legislation.



9. (C) They also have limited economic policy options.
Expansionary fiscal measures are partly hindered by Japan's
significant burden of public debt -- the legacy of how
successive cabinets handled the 1990s banking and real estate
crisis -- which at around 180 percent of GDP is the highest
in the OECD. Monetary policy, too, is constrained. The Bank
of Japan has demonstrated a willingness to address economic
conditions, but the benchmark overnight interest rate is
already near zero, leaving little room to maneuver.



10. (C) Without the "bold countermeasures" Aso promised,
whether in the form of stimulus measures or overdue
structural economic reform, Japan will be forced to wait for
the United States and China to recover so it can export its
way out of the current recession. Given the severity of the
economic downturn in these key markets and globally, it could
be a long wait.


ZUMWALT