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C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 000548 
 
SIPDIS 
 
SIPDIS 
 
USTR FOR BEEMAN 
TREASURY FOR DOHNER, CARNES, POGGI 
USDOC FOR NMELCHER 
NSC FOR TONG 
 
E.O. 12958: DECL: 02/27/2018 
TAGS: PGOV EFIN MARR JA
SUBJECT: DECISION TIME IN DIVIDED DIET OVER BUDGET, BANK OF 
JAPAN APPOINTMENT 
 
REF: A. TOKYO 0235 
     ¶B. TOKYO 0142 
 
Classified By: Ambassador J. Thomas Schieffer, reasons 1.4(b),(d). 
 
¶1. (C) Summary.  The final outcome of intense Diet debate 
over the budget, budget-related bills, and the appointment of 
a new Bank of Japan (BOJ) Governor remains murky as key 
deadlines approach.  Six weeks into the Diet session, the 
opposition DPJ has managed to block progress on 
deliberations, using several highly-publicized scandals and 
other unfortunate incidents to keep the government on the 
defensive.   The government intends to bring the budget to a 
vote in the Lower House on February 29, aiming to enact it by 
the time the new fiscal year opens on April 1.  The Lower 
House will also vote February 29 on the controversial Special 
Tax Measures Law revision.  This and other budget-related 
bills, while separate from the budget, also expire at the end 
of the fiscal year.  One budget-related bill that may 
directly impact the U.S. government if delayed past April 1 
is the Special Measures Agreement governing USD 1.2 billion 
in Host Nation Support for U.S. forces in Japan. The 
opposition is threatening to respond to coalition party 
budget action by blocking the appointment of a new BOJ 
Governor to take over when the incumbent's term expires on 
March 19.  End summary. 
 
Sagging Support for Fukuda's Low-Key Approach 
--------------------------------------------- 
 
¶2. (C) Six weeks into the Diet session, the ruling Liberal 
Democratic Party (LDP)-Komeito coalition is still struggling 
to resolve the three key issues that were expected to 
dominate the first ten weeks of the session -- the budget, 
budget-related tax legislation, and key appointments to the 
Bank of Japan (BOJ).  Press reports and Embassy contacts 
alike place some of the blame for this lack of progress on 
the cautious, consensus-oriented management style of Prime 
Minister Yasuo Fukuda.  Polls show Fukuda's lack of 
leadership skills is a key factor in his dropping support 
rate.  The Prime Minister's public support has dropped from 
highs in the upper 40s and low 50s at the beginning of his 
term in late September 2007 to the upper 20s and low 30s 
today, with non-support approaching or exceeding 50 percent 
in nearly every major poll. 
 
High-Profile Scandals Help Conceal DPJ Disunity 
--------------------------------------------- -- 
 
¶3. (C) Fukuda has been buffeted by a number of troubling 
incidents in recent weeks, including the discovery of tainted 
food products from China, an alleged rape and other 
misconduct by U.S. military personnel in Okinawa, and a fatal 
collision involving an Aegis-equipped Japanese Maritime 
Self-Defense Forces vessel and a fishing boat.  These 
incidents, along with questions over their handling by the 
government, have given the main opposition Democratic Party 
of Japan (DPJ) ammunition to delay deliberations in the 
divided Diet and to frustrate progress on Fukuda's 
legislative initiatives, much as the DPJ used defense-related 
scandals to block movement on the Indian Ocean refueling bill 
in the 2007 Diet session. 
 
¶4. (C) While Fukuda has faced down DPJ threats of a censure 
motion, pressure is mounting to take action with respect to a 
purported cover-up at the Ministry of Defense over the 
Aegis/fishing boat accident.  Fukuda insists that he will not 
seek Defense Minister Ishiba's resignation, but DPJ leaders 
say the opposition is ready to link Ishiba's fate to action 
on the budget-related bills and the appointment of the new 
 
TOKYO 00000548  002 OF 004 
 
 
Bank of Japan governor. 
 
¶5. (C) The DPJ has not presented a united front.  A number of 
senior DPJ lawmakers have gone public recently over policy 
disagreements with DPJ leader Ichiro Ozawa, and the party has 
yet to come through with either a counterproposal to the 
ruling coalition's budget-related bills or a clear slate of 
nominees for the BOJ, despite repeated requests from the 
ruling parties and the press.  Embassy contacts within the 
DPJ note a continued lack of cohesion among different 
elements of the party, and simmering discontent over Ozawa's 
one-man management style. 
 
Budget Passage Could Come With a Price 
-------------------------------------- 
 
¶6. (C) Passage of the FY2008 budget is the most 
time-sensitive issue on the agenda at the moment, but also 
the easiest to solve.  In accordance with the Constitution, 
the budget is considered approved 30 days after passage in 
the Lower House, regardless of subsequent action by the Upper 
House.  The government thus plans to put the budget to a vote 
in the Lower House late in the day February 29, to ensure the 
budget's passage by the time the new fiscal year opens April 
¶1.  Legally, the opposition is powerless to block the budget, 
even if it boycotts deliberations or passes a censure motion. 
 Practically speaking, however, control of the Upper House 
has proven a powerful lever for the opposition since 
elections last July.  In the case of the budget, the DPJ is 
threatening to take measures to delay budget-related bills 
and the BOJ appointment, if not given more time for 
deliberation.  This contrasts with the supplemental budget 
for FY2007, which passed the Lower House with mostly 
bipartisan support on January 29, and became law February 6. 
 
Budget-Related Bills More Problematic 
------------------------------------- 
 
¶7. (C) Budget-related bills, too, need to move quickly 
through the Diet, if the government is to avoid the sunset of 
key tax measures on March 31.  The government has proposed a 
bill encompassing all proposed national tax changes, 
including provisions to extend a number of Special Tax 
Measure Laws that will expire at the end of the fiscal year, 
such as controversial gasoline-related taxes and surcharges. 
Many of these laws contain multiple provisions affecting a 
variety of interests and constituencies.  The Special Tax 
Measures Law alone accounts for 110 separate revenue items. 
Provisions related to tariffs on beef and corn could prove 
particularly significant for U.S. agriculture, if the 
legislation is not revised and extended by the deadline.  LDP 
contacts have stressed that the government does not want to 
be seen as imposing new taxes after April 1, if the existing 
taxes are allowed to lapse.  The government plans to debate 
and vote on the Special Tax Measures Law revisions February 
29 and early March 1. 
 
¶8. (C) Unlike the budget itself, budget-related bills can be 
held in the Upper House for up to 60 days, after which they 
can be passed into law by a two-thirds re-vote in the Lower 
House.  The government has already passed the deadline 
required to prevent the taxes from lapsing on April 1, 
relying on a January agreement brokered by Lower House 
Speaker Kono and Upper House President Eda to reach "a 
certain conclusion" on the measures before the end of the 
fiscal year.  The problem is that from the beginning, neither 
party appears to have had a clear understanding of what they 
agreed to, or a concrete plan for realizing the agreement. 
Former Special Advisor to Prime Minister Abe Hiroshige Seko 
told the Embassy that the LDP had given up passage of a 
 
TOKYO 00000548  003 OF 004 
 
 
stopgap "bridging" bill in exchange for DPJ promises to vote 
the budget-related bills up or down before the end of March, 
allowing the ruling coalition to exercise its override, if 
necessary.  LDP Lower House member Kenji Kosaka noted the 
need to exercise care in over-using the two-thirds re-vote, 
however, to avoid the appearance of a "dictatorship" of the 
ruling parties. 
 
Road-Related Tax Reform 
----------------------- 
 
¶9. (C) DPJ leaders want to integrate all road-related taxes 
into general revenue.  The ruling parties have indicated they 
are amenable to considering a revised bill in the Upper 
House, based on a DPJ counterproposal, but the opposition is 
not ready with its own legislation, according to DPJ 
staffers.  A senior media contact told the Embassy he 
believes a compromise can be reached if the LDP and DPJ can 
agree to shorten the extension period, increase the 
percentage of road-related taxes to be used as general 
revenue, and convert a portion of the proceeds to use for the 
environment. 
 
SMA Delays Could Impact U.S. Training 
------------------------------------- 
 
¶10. (C) There is one budget-related bill that may impact 
directly on the U.S. government if delayed past April 1 -- 
the Special Measures Agreement (SMA) governing USD 1.2 
billion in Host Nation Support (HNS) for U.S. forces in 
Japan.  MOFA and Ministry of Defense (MOD) officials tell the 
Embassy that the bill is unlikely to clear the Lower House 
until mid-March.  The Upper House is likely to drag out 
debate for the full 30 days, leaving a gap of more than two 
weeks.  The delay will not affect salaries for local base 
employees or reimbursements for on-base utilities, categories 
that account for all but USD 18 million of the total SMA. 
However, MOD has warned that the delay could slow 
Japanese-funded training relocation scheduled for April 
(Septel). 
 
New Bank of Japan Governor Hostage to Budget Debates 
--------------------------------------------- ------- 
 
¶11. (C) The government is expected to nominate Deputy 
Governor Muto of the Bank of Japan to succeed Governor Fukui 
when he steps down on March 19.  Muto enjoys solid support 
among many DPJ lawmakers, who acknowledge his strong 
credentials to lead the BOJ during a period of world-wide 
economic uncertainty, according to DPJ contacts.  Unlike 
either the budget or the budget-related bills, however, 
high-level appointments require consent by both Houses, with 
no recourse to an override by the Lower House.  This gives 
the DPJ and its smaller opposition partners real bargaining 
power.  As recently as two weeks ago, it appeared that the 
Muto nomination could potentially sail through with 
bipartisan support.  Now the DPJ is threatening to hold the 
vote hostage to demands for consideration on the budget and 
the budget-related bills, forcing the government to announce 
publicly that it is postponing its formal nomination of Muto 
pending more pressing legislative debates.  If Fukuda cannot 
win over the DPJ, he will have no choice but to find a new 
nominee, or leave the position temporarily unfilled. 
 
¶12. (C) The Bank of Japan issue is not pure partisan 
politics.  The DPJ party rules call for agreement on 
high-level appointments by the party's 12-member Executive 
Board, and several ranking members have already spoken out 
publicly against Muto, questioning whether a former Ministry 
of Finance bureaucrat should have control over monetary 
 
TOKYO 00000548  004 OF 004 
 
 
policy, given concerns regarding central bank independence. 
DPJ contacts tell the Embassy that Ozawa will make the final 
call, and expect the rank-and-file to follow his lead. 
Nonetheless, the DPJ's failure to either enunciate criteria 
for choosing a new nominee or suggest an alternative 
candidate has left it open to criticism of using the 
appointment for political gain, at a time when global market 
conditions require strong leadership at the helm of the Bank 
of Japan. 
 
New Transparency in Selection Process 
------------------------------------- 
 
¶13. (C) The DPJ has already succeeded in forcing the ruling 
parties to allow more transparency in the Diet confirmation 
process.  Under the new rules, Muto and the candidates for 
the two BOJ deputy slots will appear before the Rules 
Committees of both Houses in open hearings, which will be 
followed by closed sessions.  Both Houses will then vote the 
nomination up or down in separate plenaries.  In the past, 
when the LDP controlled both Houses, it was not uncommon for 
nominees to be selected by a handful of party leaders.  Diet 
hearings, if they were held at all, were closed to the 
public.  This time, the LDP has promised to release the 
transcripts of the question and answer sessions to the public 
soon after the vote, a sign of the changed circumstances in 
the divided Diet. 
SCHIEFFER