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Cablegate: Scenesetter for G-8 Labor Ministers' Meeting May

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R 070732Z MAY 08
FM AMEMBASSY TOKYO
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RUEHHK/AMCONSUL HONG KONG 6500
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC
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RUEHBS/USEU BRUSSELS
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UNCLAS SECTION 01 OF 03 TOKYO 001230

SENSITIVE
SIPDIS

DOL FOR DEPUTY SECRETARY RADZELY, DEPUTY U/S PONTICELLI
DOL FOR ILAB
NSC FOR BROWN AND TONG
STATE FOR E, G, DRL, EEB, AND EAP/J
PARIS FOR USOECD

E.O. 12958: N/A
TAGS: ELAB PGOV OVIP JA
SUBJECT: SCENESETTER FOR G-8 LABOR MINISTERS' MEETING MAY
11-13

Summary
-------
1. (SBU) Japan's economy is in its longest postwar expansion,
but for many it does not feel that way. Japanese consumers
are pinched by rising commodity prices and stagnant wages,
and the country is facing long-term fiscal and demographic
challenges. Reform, particularly in the labor market, would
raise productivity and prosperity and make it easier for
Japan to support a range of bilateral initiatives. Our
bilateral challenge in Niigata is to explain how flexible and
responsive labor markets would help more Japanese benefit
from today's global market. End summary.

Economic Expansion Not Felt By Many
-----------------------------------
2. (SBU) Japan's economy is in its longest continuous
expansion of the postwar period, but for many it does not
feel that way. Despite moderate GDP growth and strong
corporate profits, Japan's nominal GDP in 2006 was marginally
smaller than it was a decade before. Wages have been
relatively stagnant over the past six years. Moreover, the
labor market has split between career employees with benefits
and "non-regular" workers, who now account for more than
one-third of the workforce. Japanese today talk of "winners"
and "losers" in the economy, a politically potent shift in a
society that has prided itself on economic equality.

Fiscal and Demographic Challenges
---------------------------------
3. (SBU) Long-term structural pressures have added to a sense
of malaise. Japan unsuccessfully tried to spend its way back
to growth after its economic bubble burst in the early 1990s,
and it is still coping with the aftermath. Government debt
was around 180 percent of GDP in 2007 -- the highest among
OECD countries -- and although Japan cut its deficit to
around 4 percent, it will need to tighten its belt further if
it is to meet the government's goal of balancing the budget
(excluding interest payments) by 2011.

4. (SBU) Exacerbating its fiscal challenges, Japan's
population began shrinking in 2005. The government recently
predicted the labor force could be one-third smaller by 2050
and that more than 30 percent of Japanese will be older than
65 by 2035. The resulting squeeze means Japan's pension and
medical benefits system is unsustainable in the long-run,
absent significant changes. Extending the retirement age,
raising premiums, cutting benefits, and bringing more women
into the workforce could mitigate the severity of oncoming
problems, but (in lieu of an unprecedented shift in
immigration policy) Japan will need to increase its
productivity to maintain its economic standing.

Labor and Productivity
----------------------
5. (SBU) The "good news" is there is plenty of room for
improvement, particularly in Japan's labor markets. The OECD
recently reported labor productivity in Japan is 30% below
the U.S. level. Foreign-invested firms have shown how much
can be done in the current environment, as they are more
productive than average domestic companies in both the
manufacturing and service sectors. Regulatory reform,
greater openness to trade and investment, and greater labor
mobility would all raise average productivity and bring
greater prosperity.

6. (SBU) Parts of the Japanese government and bureaucracy
understand what needs to be done. Former Prime Minister

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Junichiro Koizumi initiated a number of broad financial and
economic reforms after 2001, and members of the cabinet-level
organization he used to drive his reforms forward, the
Council on Economic and Fiscal Policy (CEFP), had grand
ambitions about labor market reforms to start in 2007. Last
summer's Upper House election, however, interfered with those
plans.

Reform Fatigue and the Divided Diet
-----------------------------------
7. (SBU) Economic reform lost steam under former Prime
Minister Shinzo Abe, who focused more on his diplomatic and
security agenda than on pocketbook issues and was criticized
for never fully enunciating an economic agenda. When it was
exposed in 2007 that the pension system had lost or garbled
50 million records, endangering people's retirement savings,
the government's handling of the situation -- layered over
cabinet gaffes and an intensifying national conversation
about growing income and regional disparities -- led to a
defeat for the ruling Liberal Democratic Party (LDP) in
July's election. The opposition took extended control of the
Upper House for the first time since 1955. Abe resigned in
September 2007.

8. (SBU) Prime Minister Fukuda, also of the LDP, inherited a
divided Diet. The LDP maintains a two-thirds supermajority
in the Lower House with which it can pass legislation over
the objections of the opposition Democratic Party of Japan
(DPJ), but Japanese fondness for consensus decision-making
weighs against its frequent use. The current session of the
Diet has thus been consumed by debate over 30-year-old
"provisional" taxes that fund road construction and a fight
over appointing a new Governor of the Bank of Japan -- a
fight that culminated in the post falling vacant for the
first time in the postwar era (a compromise candidate was
found after several weeks). The DPJ continues to prolong
fights on contentious issues, hoping to force a Lower House
election and topple the LDP-led coalition government. Debate
on necessary economic and structural reform has languished,
and the CEFP's relevancy as a driver of reform is
increasingly in question. Prime Minister Fukuda's cabinet
support rates have plummeted.

9. (SBU) Significantly, two different interpretations of the
LDP's electoral loss -- and preferred policy future -- have
emerged among Japanese politicians. One is the LDP lost
because Japanese people tired of former PM Koizumi's economic
reform agenda. The other is the reforms did not go far
enough, and people voted against what they saw as the
resurgence of the "old LDP" of entrenched interests. Through
the Labor Ministerial, we have an opportunity to support the
reform interpretation and explain how reform, rather than a
return to a nostalgic past, is the way for Japan to reach
greater prosperity in a globalized economy.

Your Message
------------
10. (SBU) Minister of Health, Labor, and Welfare (MHLW)
Yoichi Masuzoe's portfolio includes recent hotbutton issues
such as the pension and medical systems. Nonetheless, his
popular support in the polls remains strong. In your
conversations with Minister Masuzoe, other Japanese
government and political officials, and the media, we suggest
the following points:

-- To address successfully its fiscal and demographic
challenges, Japan needs to raise productivity over the long

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term. Labor market reform would contribute significantly to
those efforts.

-- Expanding the workforce, increasing labor mobility, and
enhancing competition would all lead to higher growth and
greater prosperity. Supporting women's ability to work and
simultaneously raise a family would boost productivity by
bringing skilled but underutilized workers into the economy.

-- So would greater openness to foreign investment.
Foreign-invested firms, both in the manufacturing and service
sectors, have higher average productivity than their purely
Japanese counterparts, and they bring needed jobs and
know-how to Japan.

-- America's experience shows a flexible and responsive labor
market can provide continuous opportunities for workers to
build their skills and grow throughout their careers. The
key is a policy structure that facilitates transitions to the
most productive areas of the economy and encourages skill
formation.

-- An example is defined contribution pension plans, which
have proven very popular with American workers. Making
saving via Japan's defined contribution pension system more
attractive would benefit firms, workers, and the economy as a
whole.

-- Japan has benefited greatly from globalization over the
past 30 years, but some Japanese economic structures have not
kept pace with today's global marketplace. Reforming those
structures would broaden the reach of globlization's benefits.


DONOVAN

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