VZCZCXRO8586
OO RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHKO #1345/01 1660741
ZNR UUUUU ZZH
O 150741Z JUN 09
FM AMEMBASSY TOKYO
TO RUEATRS/TREASURY DEPT WASHDC IMMEDIATE
RHEHAAA/NSC WASHDC IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 3728
INFO RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION IMMEDIATE
RUEHBS/USEU BRUSSELS IMMEDIATE
RUEHGV/USMISSION GENEVA IMMEDIATE 3550

UNCLAS SECTION 01 OF 02 TOKYO 001345 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB AND EAP/J 
NSC FOR DANNY RUSSELL AND JIM LOI 
USTR FOR WENDY CUTLER AND MICHAEL BEEMAN 
TREASURY FOR ROBERT DOHNER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL JA
SUBJECT: NIKKEI BREAKS 10,000 SUGGESTING THE ECONOMY HAS 
HIT BOTTOM -- THE JURY REMAINS OUT 
 
¶1. (SBU) Summary: A spate of relatively positive economic 
news, both international and domestic, pushed the Nikkei 225 
to close over the psychologically important 10,000 level on 
June 12.  Some politicians and pundits argue the economy has 
"hit bottom" and will recover, albeit slowly, over the next 
few quarters.  However, while there is broad-based agreement 
Japan's economy is no longer in a steep decline, there are 
still questions on whether the economy will stage a 
sustainable recovery starting in the second half of 2009. 
Tokyo-based analysts are concerned the economy may dip again 
in 2010 as the effects of PM Aso's stimulus measures run out 
and consumers tighten their spending due to uncertain 
employment prospects and falling wages.  Many in Japan 
continue to look to exports, especially to China and the 
U.S., as the way out of the downturn rather than taking 
measures needed to restore the economy to health.  The 
country's on-going political difficulties further mitigate 
against needed structural changes.  Nevertheless, Japan's 
economy is likely to expand slightly in the April-June 
quarter if only because of the immediate impact of the GOJ's 
fiscal stimulus measures.  End Summary. 
 
Some Good Economic News Pushes Nikkei and Confidence Up 
--------------------------------------------- ---------- 
¶2. (SBU) Recent economic data show Japan's economy is 
stabilizing somewhat following dramatic contractions in 
exports, manufacturing and overall GDP since October 2008. 
The Bank of Japan upgraded its economic assessment of the 
economy last month from "economic conditions are 
deteriorating" to "the pace of the worsening of economic 
conditions is easing" in its monthly economic view.  The BOJ 
is expected to note further improvements in its June report. 
Analysts caution, however, the BOJ is still concerned about 
weak domestic demand and consumer price deflation, even if 
declines in manufacturing and exports are easing. 
 
¶3. (SBU) The composite index (CI), Japan's key gauge of the 
current state of the economy is strengthening.  The CI rose 
for the first time in 11 months in April as industrial 
production, overtime work hours, and retail sales improved 
one point over March to 85.8 (Base Year 2005 equals 100). 
The Nikkei 225 index, partially as a result of these Japanese 
data and partially in response to signs of recovery in the 
U.S. and China, closed around the psychologically important 
10,000 level June 12, a level not seen since August 2008. 
The broader TOPIX index, which provides a more comprehensive 
view of the market, has also climbed steadily since March and 
is approaching the 1,000 level.  Factory output numbers, 
which jumped 5.2 percent in April month-on-month, helped 
rebuild investor confidence.  Nevertheless, analysts again 
caution the jump may not yet be sustainable due to weak 
corporate profits and deflation. 
 
But, The Real Story is Not Confidence Inspiring 
--------------------------------------------- -- 
¶4. (SBU) The up-tick in indices of consumer confidence comes 
against the backdrop of a stabilizing world economy and the 
impact of Japan's four fiscal stimulus measures and suggest 
the private sector has begun to believe Japan's economic 
free-fall has come to an end.  However, the government sector 
is the only component of the economy that is expanding and 
bankruptcies, unemployment, and weak external demand for 
Japanese finished goods continue to cloud prospects for a 
sustainable economic recovery.  There were 1057 new 
bankruptcy filings in May, an increase of 6.3 percent from 
April, and unemployment topped 5 percent for the first time 
in half a decade.  A more disturbing statistic on the labor 
front is the 500 percent increase in companies applying for 
worker adjustment assistance since January 2009.  46,558 
companies requested GOJ financial assistance in April 2009 to 
support the furloughing of 2.3 million workers.  Japanese 
exports remain weak and the prospects for recovery, based on 
a 20.5 percent decline in industrial electricity demand 
year-on-year in May, are uncertain. 
 
¶5. (SBU) Against this backdrop, Japan's Council on Economic 
and Fiscal Policy announced June 10 its latest effort to 
reduce gross Japanese government debt, which stands at more 
than 170 percent of GDP.  The plan involves increasing the 
value added tax one percentage point a year every year 
beginning in 2010 until 2017, to 12 percent.  For the plan to 
succeed, however, the Japanese economy would have to expand 
 
TOKYO 00001345  002 OF 002 
 
 
an average of 2 percent annually, a growth rate last seen in 
the late 1980s.  The Nikkei criticized the plan in a June 10 
op-ed because it includes no structural or regulatory reforms 
the editorial board believes are essential if the Japanese 
economy is to expand that quickly.  The government in its 
recently released the 2009 Draft Policy Guidelines on 
Economic and Fiscal Policy (the annual "Honebuto" report) set 
a target for halving the government budget deficit by 2014. 
As recently as 2006, the government set  the goal of 
achieving "primary fiscal balance" -- a balance of the 
government's current account, excluding long-term capital 
expenditures -- by FY-2011.  That goal is now pushed back to 
a vague "within 10 years."  The government also said it hoped 
to "stablize the national debt as a percentage of GDP - now 
170 percent and climbing -- by "the mid-2010s" and begin to 
reduce Japan's debt-to-GDP ratio starting in FY-2020. 
 
LDP Versus DPJ on Japan's Economic Model 
---------------------------------------- 
¶6. (SBU) Prime Minister Aso is being given some credit for 
helping to stabilize the economy through the size of his 
April fiscal stimulus program.  Critics, however, still argue 
it is narrowly focused on short-term stimulus to buoy the 
electorate in the run-up to the coming Lower House elections. 
 It falls short of the reforms analysts have long said Japan 
needs to undertake. Japan's rapidly greying population plus 
the need to increase stagnant incomes and to improve the 
quality of work and life for low-income workers are seen as 
only making the task tougher.  The opposition Democratic 
Party of Japan's election manifesto recommends some changes 
to assist farmers, workers and families, but the economic 
direction of the party is still unclear; especially given its 
statements about helping Japan's farmers and also revising 
Japanese postal reform.  Furthermore, the DPJ has yet to 
articulate how it will pay for these programs. 
ZUMWALT