VZCZCXRO2817
PP RUEHRN
DE RUEHKO #2389/01 2460521
ZNY CCCCC ZZH
P 020521Z SEP 08
FM AMEMBASSY TOKYO
TO RUEHFK/AMCONSUL FUKUOKA PRIORITY 9633
RUEHNH/AMCONSUL NAHA PRIORITY 1996
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 3374
RUEHKSO/AMCONSUL SAPPORO PRIORITY 0214
RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 6934
INFO RUEHSS/OECD POSTS COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 002389 
 
SIPDIS 
 
TREASURY FOR IA/WINSHIP, DOHNER 
 
E.O. 12958: DECL: 08/29/2018 
TAGS: ECON EFIN JA
SUBJECT: 11 TRILLION YEN ECONOMIC PACKAGE: REAL WATER RUNS 
SHALLOW 
 
REF: TOKYO 02134 
 
TOKYO 00002389  001.2 OF 002 
 
 
Classified By: Charge d'Affairs James Zumwalt, reasons 1.4 b and d 
 
 
 
¶1.    (C)  Summary.   Despite the fanfare that accompanied 
the release of the government,s economic stimulus package, 
the consolidated impact of the numerous measures and 
initiatives will not be significant, suggesting that intent 
of the announcement was primarily for pre-electioneering 
purposes.  While the stimulus package,s headline numbers 
amount to 11.7 trillion yen ($106 billion), newly committed 
spending amounts to only 2.8 trillion yen ($25.5 billion). 
Announced prior to Prime Minister Fukuda's surprise 
resignation, the package's fate is not clear, but apparently 
not in danger. 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, and in 
one of Prime Minister Fukuda's final acts before announcing 
his resignation September 1, the Fukuda Cabinet adopted a 
11.7 trillion yen ($106 billion, or 2.3% of GDP) economic 
policy package August 29.  This overall headline  figure 
comprises 2.6 trillion yen ($25 billion) in fiscal spending 
measures and 9.1 trillion yen ($82 billion) in increased 
loans by beefing up government loan-guaranteed programs.  The 
additional demand created by the package, the so-called 
&mamizu8 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. 
¶3.  (SBU) At the same time, ruling coalition policy makers 
agreed to implement individual income taxes for one year by 
the end of March 2009.  Specifics of the income tax cuts, 
including the actual size, will be decided in the process of 
deliberating FY2009 tax change proposals in December of this 
year. Accordingly, the headline figure of the economic 
stimulus package does not include the proposed tax cut, 
although its commitment was included in the package. 
¶4. (C) In this, the first comprehensive economic policy 
package since December 2002, proposed policy measures of the 
package 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 support small 
and medium sized enterprises (SMEs) in order to help obtain 
loans from financial institutions, and provide government 
subsidies to help deal with surging commodity prices.  Unlike 
traditional economic stimulus programs, this package did not 
include explicit pork-barrel public works spending. 
Financing the Economic Package 
-------------------------------------------- 
¶5. (C)  New spending measures promised in the economic 
package will be financed mainly by both a supplemental budget 
for FY2008 and a regular budget for FY2009.  The Fukuda 
Cabinet plans to submit the supplemental budget to the 
extraordinary Diet session to be convened September 12; the 
FY2009 regular budget will be decided in late December, and 
submitted to the ordinary Diet session in January 2009. 
Prime the Pump or Hold the Line? 
-------------------------------------------- 
¶6. (C)  In formulating the economic policy package, the 
Fukuda administration was faced with a fundamental dilemma. 
Presently, the government is succeeding in its promotion of 
fiscal consolidation through cuts in government spending to 
achieve a government primary surplus by FY2011.  If a large 
economic stimulus package were spawned by accommodating calls 
from ruling coalition politicians, the result would likely 
generate concerns that the fiscal consolidation effort was 
derailing. Without meaningful fiscal spending, however, 
additional demand generated by the package will be limited. 
The package,s text reaffirmed that the Fukuda administration 
is maintaining the fiscal consolidation objective.  However, 
if the proposed individual income tax cuts are financed by 
the issuance of additional government bonds, concerns will 
emerge regarding fiscal discipline. 
Package Highlights 
------------------------- 
¶7. (C)  The package consists of three categories: 1) measures 
to ease people,s uneasiness in the face of soaring commodity 
prices; 2) measures to help accelerate reforms for creating 
sustainable society; and 3) measures to facilitate the 
adoption of new price systems and strengthening growth 
 
TOKYO 00002389  002.2 OF 002 
 
 
potential.  Within these three categories is a panoply of 
items, presumably designed to appeal to nearly sector of the 
electorate: lower expressway tolls, 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, improvements for medical 
services for the elderly, prompting for the 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 
announcement that details of the package might reveal a new 
balance in the tension between calls to prime the economic 
pump and frequent pledges of fiscal consolidation, it appears 
that the government,s ultimate aim is to signal awareness 
that an election must be called within the next 13 months and 
that the government appear sensitive to, if not actually 
resolving,  increasing anxieties regarding every day economic 
issues.  This, coupled with the lack of a bond issuance to 
finance the package suggest that fiscal consolidation remains 
a priority.  &More so than raising GDP, what the LDP really 
wants to raise is its approval rating,8 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.8  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, 
(Prime Minister) Fukuda needs to be seen to be doing 
something.8   When that something turned out to be his 
announcement to resign, the package's viability may be called 
into question, but appears safe for the time being.  End 
analysis. 
ZUMWALT