Identifier | Created | Classification | Origin |
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09TOKYO307 | 2009-02-09 08:32:00 | CONFIDENTIAL | Embassy Tokyo |
VZCZCXRO6051 PP RUEHFK RUEHGH RUEHKSO RUEHNH DE RUEHKO #0307/01 0400832 ZNY CCCCC ZZH P 090832Z FEB 09 FM AMEMBASSY TOKYO TO RUEHC/SECSTATE WASHDC PRIORITY 0662 INFO RUEHBJ/AMEMBASSY BEIJING 7652 RUEHUL/AMEMBASSY SEOUL 3671 RUEHJA/AMEMBASSY JAKARTA 4408 RUEHFR/AMEMBASSY PARIS 6419 RUEHKSO/AMCONSUL SAPPORO 2899 RUEHOK/AMCONSUL OSAKA KOBE 6132 RUEHFK/AMCONSUL FUKUOKA 2345 RUEHNH/AMCONSUL NAHA 4690 RUEHGH/AMCONSUL SHANGHAI 0534 RUEHHK/AMCONSUL HONG KONG 6698 RHEHAAA/NSC WASHDC RUEHBS/USEU BRUSSELS RUEATRS/TREASURY DEPT WASHDC RUCPDOC/DEPT OF COMMERCE WASHINGTON DC |
C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 000307 |
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 -------------------------- 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 -------------------------- 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 TOKYO 00000307 002 OF 002 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 -------------------------- 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 |