VZCZCXRO0691
RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #5552/01 3470903
ZNR UUUUU ZZH
R 130903Z DEC 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 0282
INFO RUEHBJ/AMEMBASSY BEIJING 0632
RUEHUL/AMEMBASSY SEOUL 6674
RUEHBY/AMEMBASSY CANBERRA 2473
RUEHMO/AMEMBASSY MOSCOW 2013
RUEHFR/AMEMBASSY PARIS 5879
RUEHKSO/AMCONSUL SAPPORO 5597
RUEHFK/AMCONSUL FUKUOKA 4949
RUEHOK/AMCONSUL OSAKA KOBE 8615
RUEHNH/AMCONSUL NAHA 7345
RUEHHK/AMCONSUL HONG KONG 6382
RUEHGH/AMCONSUL SHANGHAI 0273
RUEHNAG/AMCONSUL NAGOYA 3678
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEHIN/AIT TAIPEI 6805
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 02 TOKYO 005552 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB AND EAP/J 
NSC FOR TONG 
USTR FOR BEEMAN, MEYERS, AND CUTLER 
USDOC FOR 4410/ITA/OJ/MELCHER 
TREASURY FOR IA/DOHNER, HAARSAGER, AND POGGI 
PLEASE PASS TO USDA 
DOE FOR HARBERT 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EFIN JA
SUBJECT: JAPAN: ECONOMIC POLICY UNDER A DIVIDED DIET 
 
REF: A. 06 TOKYO 5962 
 
     ¶B. TOKYO 5378 
 
Summary 
------- 
¶1. (SBU) The ruling Liberal Democratic Party's loss in July 
2007's Upper House election resulted in a divided Diet and 
legislative gridlock, which has undercut economic reform 
advocates and pushed economic policymaking away from the 
prime minister's office.  The result is a tougher environment 
for regulatory reform.  End Summary. 
 
Stuck in Traffic 
---------------- 
¶2. (SBU) Following the opposition Democratic Party of Japan's 
(DPJ's) unprecedented victory in July's Upper House election, 
Japan's divided Diet has been gridlocked.  For the first time 
in more than forty years, it took more than 60 days for the 
Diet to pass its first legislation, a minor law on disaster 
relief. 
 
¶3. (SBU) Media have focused on the DPJ's opposition to 
Japan's Indian Ocean refueling operation, but polls rank 
domestic pocketbook issues at the top of Japanese voters' 
concerns.  Pension reform, for example, outscored foreign 
policy ten-to-one as voters' primary issue in a recent survey. 
 
¶4. (SBU) Nonetheless, there is little prospect for 
legislative movement on substantive economic issues.  Diet 
members from both the ruling Liberal Democratic Party (LDP) 
and opposition DPJ have told the Embassy they expect no 
substantial progress on "politicized" issues -- including 
pension reform, improvements to the healthcare system, and 
tax policy -- until the current political situation changes, 
whether through a general election, party reorganization, or 
new electoral coalition. 
 
¶5. (SBU) Some Diet members have suggested limited cooperation 
is possible between the LDP and DPJ on "non-political" 
topics, such as measures to increase Tokyo's competitiveness 
as an international financial center and aviation 
deregulation, and the Diet did revise the Minimum Wage Law on 
November 28.  But other economic legislation enacted this 
session has either been non-controversial or -- in the case 
of a new law on labor contracts -- was stripped of content as 
it moved through consultative committees at the Ministry of 
Health, Labor, and Welfare. 
 
¶6. (SBU) Moreover, DPJ Diet members are lining up issues on 
which to confront the LDP, likely pushing back the timeline 
for normal Diet business well into 2008.  DPJ back-benchers 
have told Emboffs they plan to contest the confirmation of 
the next Bank of Japan Governor (the current governor's term 
ends in March), as well as tax measures linked to the budget. 
 Add the budget debate itself, which is the usual centerpiece 
of the spring Diet session, and there appears to be little 
room for routine business prior to the G8 summit in July 2008. 
 
Location, Location, Location 
---------------------------- 
¶7. (SBU) In the meantime, with the possibility of a snap 
election sometime in 2008, Diet members are positioning 
themselves on hot-button issues -- with one of the hottest 
being the question of regional disparities.  Perceptions of a 
widening economic gap between Japan's urban and rural areas 
became a major theme in July's election, when large numbers 
 
TOKYO 00005552  002 OF 002 
 
 
of voters in the LDP's traditional rural strongholds 
abandoned the party.  Many Diet members have blamed the loss 
on the structural economic reforms former PM Koizumi 
initiated.  The backlash against Koizumi reforms has 
strengthened pro-rural, pro-agricultural, and anti-reform 
currents within the LDP. 
 
¶8. (SBU) Unsurprisingly, both the DPJ and LDP are discussing 
agricultural support policies, setting off fears (not as yet 
materialized) that fiscal policies will be loosened as the 
parties move into election mode.  The anxieties about 
regional disparities run far deeper, however.  In discussing 
tax policy, for example, one Diet member carefully explained 
to the Embassy the relative political merits and demerits of 
changing the consumption, corporate, and income taxes, based 
on how each would shift burdens and benefits between urban 
and rural voters. 
 
Urban-Rural Divide:  Not empty issue 
------------------------------------ 
¶9.  (SBU) Japan's growing urban-rural divide and income gaps 
reflect profound demographic and social changes in Japanese 
society.  While some try to milk the issues for political 
advantage, responding to the challenges of a growing divide 
between city and country and widening income disparity 
engages all politicians from the left and the right.  All 
perceive that Japan, where once almost 90% of citizens 
self-identified as "middle class," has emerging upper and 
lower classes based on income.  The sense of crisis deepened 
when the OECD published a July 2006 report that found Japan's 
income inequality had risen above the OECD average (ref A). 
 
Who's Driving? 
-------------- 
¶10. (SBU) Economic policymaking has shifted as well under the 
divided Diet.  The Council on Economic and Fiscal Policy 
(CEFP) and Council for the Promotion of Regulatory Reform 
(CPRR), weakened during the Abe administration, are no longer 
the central venue for economic policymaking.  Prime Minister 
Fukuda instead relies on the bureaucracy and a group of party 
officials, including LDP Policy Research Council Chair 
Sadakazu Tanigaki, Tax Policy Chief Kaoru Yosano, and party 
heavyweight Hideano Nakagawa, to hash out policies.  As one 
private sector member of the CEFP told the media, "Abe was 
close to the party, which restricted the CEFP's freedom, but 
under the divided Diet we have no freedom at all." 
 
Comment 
------- 
¶11. (SBU) By both stalling economic legislation and shifting 
the locus of policymaking, Japan's divided Diet has made the 
environment tougher for regulatory reform.  The CEFP and 
CPRR, natural advocates for reforming Japan's economy, have 
been weakened.  The rise of regional disparities as an 
electoral issue has made reform more difficult politically, 
and the shift back toward the bureaucracy and party 
heavyweights in policymaking has made the process less 
transparent.  As bilateral reform discussions proceed, it is 
likely that more and more bureaucrats will invoke gridlock as 
an excuse, arguing that needed steps "cannot be done given 
the Diet situation." 
SCHIEFFER