VZCZCXRO2942
PP RUEHRN
DE RUEHKO #2393/01 2460850
ZNY CCCCC ZZH
P 020850Z SEP 08
FM AMEMBASSY TOKYO
TO RUEHFK/AMCONSUL FUKUOKA PRIORITY 9650
RUEHNH/AMCONSUL NAHA PRIORITY 2013
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 3391
RUEHKSO/AMCONSUL SAPPORO PRIORITY 0231
RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 6952
INFO RUEHSS/OECD POSTS COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002393 
 
SIPDIS 
 
TREASURY FOR IA/WINSHIP, DOHNER 
STATE FOR E, EEB, AND EAP/J 
STATE PASS USTR FOR CUTLER AND BEEMAN 
 
E.O. 12958: DECL: 08/29/2018 
TAGS: ECON EFIN JA PGOV
SUBJECT: CORRECTED COPY: 11 TRILLION YEN ECONOMIC PACKAGE: 
REAL WATER RUNS SHALLOW 
 
REF: TOKYO 02134 
 
TOKYO 00002393  001.2 OF 002 
 
 
Classified By: Charge d'Affaires James Zumwalt, reasons 1.4 b and d 
 
¶1.   (C)  Summary.  One of the last acts of the Fukuda 
Government before the Prime Minister's surprise resignation 
September 1 was the announcement of a stimulus package 
designed to meet public concerns over the stagnating economy 
and rising food, fuel, and other prices.  Initial assessments 
are the package would not have a significant economic impact, 
but was designed to build electoral support.  The stimulus 
package,s headline numbers amount to 11.7 trillion yen ($106 
billion), but newly committed spending amounts to only 2.8 
trillion yen ($25.5 billion).  Finance Minister Ibuki pledged 
September 2 that the government will compile the package 
despite Prime Minister Fukuda,s resignation. End summary. 
 
Headlines and Details Not Congruent 
----------------------------------- 
¶2. (SBU)  In an effort to address public concerns regarding 
soaring commodity prices and downturn in the economy, the 
Fukuda Cabinet adopted a 11.7 trillion yen ($106 billion, or 
2.3% of GDP) economic policy package August 29.  The Prime 
Minister announced his surprise resignation the evening of 
September 1 (septel), making the package one of his 
government,s last initiatives. 
 
¶3.  (SBU)  The  package,s overall headline figure comprises 
2.6 trillion yen ($25 billion) in fiscal spending measures 
plus another 9.1 trillion yen ($82 billion) in increased 
outlays via beefing up government loan-guarantee programs. 
The additional demand created by the package, the so-called 
"mamizu" or real water fiscal stimulus, falls far short of 
the headline figure.  FINATT estimates the real water 
component of the package at about 2.8 trillion yen ($25 
billion), or 0.5% of GDP. 
 
¶4.  (SBU) At the same time, ruling coalition policy makers 
agreed to implement one year cuts in individuals, income 
taxes by the end of March 2009.  The specifics, including the 
actual size of the cuts in individual income taxes, were to 
be decided in the process of deliberating FY2009 tax change 
proposals in December.  The stimulus package,s headline 
figure, therefore, does not include the proposed tax cut, 
although the commitment to the cuts was included in the 
package. 
 
¶5. (C) In this, the first comprehensive economic policy 
package since December 2002, proposed policy measures range 
widely from a cut in the highway toll to preventative 
measures against new types of influenza.  The centerpieces of 
the package are commitments to help small and medium sized 
enterprises (SMEs) obtain loans from financial institutions, 
and provide them government subsidies to deal with surging 
commodity prices.  In a surprise to many observers, the 
package did not include explicit pork-barrel public works 
spending, an apparent victory for the budget hawks in this 
Fukuda Cabinet. 
 
Financing the Economic Package 
------------------------------ 
¶6. (C)  New spending measures promised in the economic 
package will be financed mainly by a supplemental budget for 
FY2008 and the regular budget for FY2009.  The Fukuda Cabinet 
planned to submit the supplemental budget to the 
extraordinary Diet session that observers expected to start 
in September with the FY2009 regular budget to be decided in 
late December, and submitted to the ordinary Diet session in 
January 2009.  Plans for the stimulus package, like those for 
other legislation, were thrown into confusion with Fukuda,s 
resignation.  The identity of Fukuda,s successor, the 
composition of the Cabinet, and the timing of new elections 
are all questions clouding the future of the package. 
However, Finance Minister Ibuki pledged September 2 the GOJ 
will compile the package despite the Prime Minister,s 
resignation. 
 
Prime the Pump or Hold the Line? 
-------------------------------- 
¶7. (C)  Some of the problems Fukuda,s Cabinet faced will be 
those that will confront the new prime minister as well.  In 
formulating the economic policy package, the Fukuda 
 
TOKYO 00002393  002.2 OF 002 
 
 
administration faced a  dilemma.  The government was 
succeeding in promoting fiscal consolidation through cuts in 
government spending to achieve a government primary surplus 
by FY2011.  A large economic stimulus package were financed 
by accommodating calls from ruling coalition politicians 
could derail this fiscal consolidation effort.  Yet without 
meaningful fiscal spending, additional demand generated by 
the package will be limited.  The package,s text suggested 
the GOJ was intent on  maintaining the fiscal consolidation 
objective.  However, if the proposed individual income tax 
cuts are financed by additional government bonds, concerns 
will emerge regarding fiscal discipline. 
 
Package Highlights 
------------------------- 
¶8. (C)  The package consists of three categories: 1) measures 
to ease public unease in the face of soaring commodity 
prices; 2) measures to help accelerate reforms for creating a 
"sustainable society"; and 3) measures to facilitate adoption 
of new price systems and strengthening growth potential. 
Within the three categories are numerous items, presumably 
designed to appeal to most sectors of the electorate: lower 
expressway tolls at night to cut transport costs, support for 
a number of industries (trucking, domestic  shipping, 
construction), new credit guarantees for small and medium 
sized businesses, extended housing loan cuts, expanded loans 
to low-income earners and single-parent families, improved 
medical services for the elderly, support for construction of 
day nurseries and kindergartens, and movement to expedite the 
introduction of energy-conserving facilities, to name just a 
few. 
 
It,s the Election... 
--------------------- 
¶8. (C)  Analysis: While expectations rose prior to the 
package,s announcement that its details might reveal a new 
bias toward priming the economic pump at the expense of 
fiscal consolidation, the package showed the ruling party,s 
ultimate aim was to position itself for the upcoming 
elections while showing the voters that they and the GOJ are 
sensitive to, if not actually resolving, increasing anxieties 
regarding every day economic issues.  "More so than raising 
GDP, what the LDP really wants to raise is its approval 
rating," commented Barclays Chief Economist Kyohei Morita. 
Societe General Chief Asia Economist Glen Maguire stated, "I 
think unfortunately we,re seeing the political cycle have 
prevalence over the economic cycle at this stage."  Richard 
Jerram of Macquarie added to the emerging consensus, "(W)ith 
an election due in the next year, and with the government,s 
support ratings so low, Fukuda needs to be seen to be doing 
something," although in PM Fukuda,s case it appears to have 
come too late. End analysis. 
ZUMWALT