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Looking beyond May: Potential economic outcomes of the coronavirus crisis in Japan

By Mark Loy Goodhew

While Covid-19 has been a global emergency since the beginning of this year, causing untold healthcare and economic crises in nation after nation, some recent domestic developments now allow us to better understand the economic outcomes that may be on the horizon in Japan.

April was a busy month. First, on April 7, the government declared a state of emergency for seven prefectures including Tokyo. This was expanded to cover the whole country on April 16. On April 27, the Bank of Japan announced that it was going to escalate its stimulus package by buying an unlimited amount of government bonds as needed, and would more than double its purchase of corporate debt. And on April 30, a 25.69 trillion yen spending plan to tackle the virus was passed in parliament, including a cash payment of 100,000 yen for each household.

Now that the current state of emergency has been extended until May 31, what are the economic consequences?

Those who are following international news may be alarmed by the much-reported softness of Japan’s state of emergency, especially in comparison to some of the strict lockdowns currently enforced around the globe. There is, however, a rational reason for this: since the virus first landed on its shores, Japan has used a “cluster-based approach” to tackle it. And even if the actual number of active cases is several times higher than official statistics, due to the difficulties of testing such a large population, the numbers are still significantly lower than in many international hotspots and nations.

So far, the “cluster-based approach,” together with the decline of social contact and large gatherings brought about by the current state of emergency, seems to be working. On May 1, Yasutoshi Nishimura, the economic minister and head of the government’s coronavirus response, reported that the number of new coronavirus patients is at present decreasing. This has allowed much of everyday public life to continue.

The government is trying to walk a fine line: the sooner the state of emergency can end, the sooner we can return to some sort of economic normalcy. The longer it extends the state of emergency, the greater the negative economic consequences will be. However, if it ends or relaxes the state of emergency too soon and there is a sudden spike in cases, another, perhaps stricter, lockdown would have to be enacted.

One of the benefits of Japan’s current state of emergency is that it can be extended as needed. This is in contrast to the harsher lockdown methods used abroad that can only be maintained for so long. If by the end of May or beginning of June it is deemed that another month is needed, then it is officially decreed so and households and firms will continue on as before.

The major economic consequences of the coronavirus will not be solely due to the virus itself, but rather to how weak the Japanese economy was before, with the virus making a bad situation worse. Since the 2011 earthquake and Fukushima disaster, the third largest economy of the world grew at an average annual real rate of only 1.2% between 2012 and 2018. It then shrank by an annualized real rate of 7.1% in the fourth quarter (Q4) of 2019, primarily due to increasing consumption tax from 8% to 10% in October. This expected decline was the first GDP contraction in five quarters, clearly marking an end to Japan’s post-2011 “growth.”

The current predictions are dire. According to the most recent Nikkei survey, private sector economists expect the upcoming Q1 numbers to show a contraction of 5.2% and forecast a Q2 contraction of 21.7%, its biggest since the end of World War II (all numbers are annualized). This will be caused primarily by an anticipated 6.9% drop in consumer spending, with nonessential consumption shrinking as much as 50-90%, according to one of the forecasters.

There may, however, be light at the end of the tunnel: these same Nikkei survey forecasters predict a 9.9% annualized expansion for Japan in Q3, following the IMF’s expectation of a recovery in the second half of 2020. Of course, this depends on how quickly the world can recover from the effects of the coronavirus and whether there are future “waves” of new infections.

Essentially, Japan is both lucky and unlucky at this moment. Lucky in that the number of active coronavirus cases remains low, allowing for the “Japan Model” to work and for much of daily life and activity to continue unchanged. And unlucky that the virus hit just when Japan’s mild growth since 2011 was coming to an end and the government decided to shock the economy with its consumption tax increase.

This is the opposite of a country like the U.S., which is unlucky in that it has a high number of active coronavirus cases, forcing much of the nation to lockdown, but lucky that its economy was strong going into this crisis. Currently, the U.S. Congressional Budget Office predicts a 40% annualized contraction in Q2 and a 14% unemployment rate, yet “only” a 5.6% annual GDP contraction for 2020, with annual growth resuming in 2021.

Two uncertainties now determine Japan’s economic outlook for the rest of 2020. The first is how long the state of emergency must be maintained, which naturally limits domestic consumption and economic activity. The second is how quickly and robustly the world economy recovers in the second half of this year, bringing Japan up with it and perhaps reviving Japan’s exports – which comprised 18.5% of GDP in 2018 – and even attracting some international tourism. Neither can really be predicted with any accuracy at this early stage. We may be in for a long and tough year.

Mark Goodhew is an English instructor at a university in Yokohama, but in a past life received a graduate degree in economics and worked as an economic consultant in New York City.

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