Cablegate: Japan: Economic Policy Under a Divided Diet

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R 130903Z DEC 07
FM AMEMBASSY TOKYO
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RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEHIN/AIT TAIPEI 6805
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC
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UNCLAS SECTION 01 OF 02 TOKYO 005552

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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
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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

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