After the Virus: Japan’s Painful Economic Recovery

Japan’s 2020 Olympic dreams are gone, the economy is in recession, and the COVID-19 pandemic has tragically caused nearly 1,000 deaths and counting in the country. But if this year’s anticipated boom has turned sour, better times could still lie ahead for the world’s third-largest economy as it slowly and painfully emerges from COVID-19.

First, the gloomy news, and there has been plenty of it.

After steadfastly pushing ahead with plans to launch the Tokyo Olympics on schedule in July 2020, with the coronavirus pandemic escalating worldwide the organizers were forced to face reality.

Amid growing international pressure, including threats of athlete boycotts, the International Olympic Committee (IOC) announced on March 24 that the Games would be pushed back to “not later than summer 2021” to “safeguard the health of the athletes, everybody involved in the Olympic Games and the international community.”

Postponing the summer Olympics and Paralympics is expected to cost the IOC up to $800 million, while the cost for Japan could run into the billions of dollars. While the Tokyo organizers have sought to trim expenditures, postponing the event could add another $2.7 billion to the cost of hosting the Games, which had already been estimated at up to $28 billion.

The sporting spectacular was expected to lure tourists, adding to a previous tourism boom that saw a record of nearly 32 million foreign visitors in 2019. The government hoped to bring in 40 million foreign visitors in 2020. From hotel renovations to airport investments and the launch of new airlines, the world’s biggest city spent big for the Games, now slated for July 2021.

Politically, Prime Minister Shinzo Abe was hoping for a popularity boost after investing substantial political capital in the Olympics, while Tokyo Governor Yuriko Koike faces re-election in July with management of the Games and the coronavirus now top of the agenda.

Nevertheless, not all analysts see the postponement as a financial disaster.

Capital Economics argued that most of the Olympics spending had already occurred by early 2020, with little evidence from previous events of a “feel-good” effect that might spur consumer spending.

“Spending during the Games themselves is small, perhaps just 0.2 percent of GDP, and much of this is diverted from spending in other areas of tourism and recreation,” senior Japan economist Marcel Thieliant said in a February 21 report.

Investment firm Nikko Asset Management (Nikko AM) estimated the cost of cancellation at “less than 0.5 percent of GDP.”

“Demand has evaporated due to the coronavirus, so the marginal negative impact of the postponement for this year is quite small. If the delay helps prevent further spread of the virus, it will help the global economy and also Japan,” said Naoki Kamiyama, chief strategist at Nikko AM.

Recession Bites

Adding to the gloom, in May came the news that Japan’s economy had officially entered into recession in the January to March quarter, even before the full impact of COVID-19 hit.

Yet again, a rise in consumption tax was the culprit. The October 2019 tax hike from 8 percent to 10 percent saw the economy slump by an annualized 7.1 percent in the December quarter, followed by a revised 2.2 percent drop in the March quarter for the nation’s first recession since 2015.

Economists predict even worse days ahead, with the April to June quarter expected to see a 21 percent GDP fall, according to a survey by the Japan Center for Economic Research. This followed a slump in consumer spending, which posted its biggest fall in 19 years in April amid a shutdown due to the coronavirus.

While Japan lifted its seven-week-long state of emergency at the end of May, customers have been slow to return to reopened shops and restaurants. International tourism nosedived by nearly 100 percent in April, and a survey by the Nikkei financial daily projected it would take one to two years to reach its pre-crisis level.

In May, nearly 6 million Japanese were officially employed but not working, with companies using cash reserves and employment subsidies to keep staff on the payroll. While the jobless rate is officially low, at 2.6 percent, it could top 4 percent if many of those furloughed ultimately lose their jobs, according to Mitsubishi UFJ Research & Consulting economist Shinichiro Kobayashi.

Amid criticism over its initial handling of the pandemic, the Abe administration has launched a massive fiscal boost to support the economy.

The government’s first stimulus package equated to around 20 percent of GDP, including cash handouts for households and subsidies for businesses. This, combined with a second stimulus package launched in June, has seen total government spending of some $2.2 trillion.

However, with the latest fiscal spending entirely funded by borrowings, Japan’s debt dependency ratio – the amount of government bonds issued and other borrowings as a percentage of total government expenditure – has risen above 50 percent for the first time since the global financial crisis.

Total public debt has ballooned to more than 1,100 trillion yen ($10.3 trillion), with gross government debt exceeding 238 percent of GDP, the highest ratio in the OECD.

Although tax revenue hit a record 60.35 trillion yen in fiscal 2019, it is seen falling as low as 55 trillion yen this fiscal year. With the added impost of recent extra spending, the Finance Ministry has reportedly given up on its previous goal of achieving a primary balance surplus in fiscal 2025.

“Outside Japan, there seems to be an unspoken consensus that tax hikes and spending cuts will be inevitable in a post-coronavirus era, but such a view is not widely shared in Japan,” Izuru Kato, president of Totan Research Co., told the Japan Times.

The Bank of Japan (BOJ) has also joined the recovery battle, boosting its quantitative easing measures to 110 trillion yen from 75 trillion yen while keeping official interest rates around zero.

Warning of “an extremely severe situation” for the economy due to COVID-19, BOJ Governor Haruhiko Kuroda has suggested the bank will not be tightening policy for some time.

With U.S. Federal Reserve officials suggesting its interest rates would stay near zero until the end of 2022, Kuroda told reporters, “I don’t think we will be anywhere near raising interest rates in 2021 or 2022.”

Bouncing Back

Can Japan’s economy recover?

The International Monetary Fund (IMF) expects Japan’s economy to contract by 5.2 percent this year after last year’s 0.7 percent gain. However, the Washington-based organization has projected a 3 percent GDP rise in 2021 as Japan recovers from the pandemic.

Economists surveyed by the Nikkei have projected a recovery in the September quarter 2020, eyeing a 9.9 percent increase in GDP, akin to a “V-shaped” recovery.

Nikko AM’s Kamiyama also sees the economy bouncing back, depending on the extent of the pandemic.

“We expect something that falls between V- and L-shaped recoveries, with consumption making a quick halfway rebound before continuing its recovery at a slower pace into 2021. A release of pent-up demand might fuel consumption early on, although employment, hurt by corporate bankruptcies, may never recover fully,” he said in a June 9 report.

“Apart from the pandemic, we see risks to the economic recovery coming from heightened U.S.-China tensions in the wake of the national security law that Beijing is imposing on Hong Kong, and from developments leading up to the U.S. presidential election in November.”

Capital Economics’ Japan economist Tom Learmouth also points to a “long and winding road back to normality.”

“The recent spike in COVID-19 cases in Tokyo linked to nightlife establishments in Shinjuku underlines just how slow the road back to normality could be,” he said in a June 18 report.

“But looking further ahead, Japan should bounce back more strongly from the current crisis than other developed economies. Japanese corporate balance sheets are healthier than those in the West and the labor market is also holding up better than elsewhere.

“And the significant support to workers and businesses provided by the Ministry of Finance and the Bank of Japan has reduced the chances of the virus inflicting lasting pain on the economy.

“Finally, daily new infections in Japan are generally much lower than across most economies reopening in Europe and North America, which makes a full blown ‘second wave’ much less likely.”

Reform Push

Amid the recovery effort, could the pandemic result in lasting changes to Japan’s economic structure?

Jesper Koll, senior adviser to Wisdomtree Investments, argues Japan could emerge “stronger and more competitive” from the COVID-19 crisis as the pandemic drives structural and behavioral reform.

“Positive signs are emerging already. Corporate managers famously resistant to change are all of a sudden forced to embrace smartphone and information technology as passionately as Japanese teenage girls have been for decades,” the Tokyo-based economist told the Japan Times.

“And, with an urgency not seen since the Meiji modernization drive, Japan’s captains of industry, commerce, and finance are serious about the digitalization of bottom-up decision-making.

“If I am right and the novel coronavirus kills entrenched resistance to long-overdue reform in corporate decision-making processes and workflow management, it will do more to boost future productivity than anything Prime Minister Shinzo Abe’s ‘third arrow’ of structural reform could have hoped for.”

Koll points to the potential for more domestic merger and acquisition (M&A) activity as Japan, Inc. starts spending some of its $6.5 trillion cash hoard.

The scope for consolidation is shown by data indicating the top four companies control less than 15 percent of their industries’ total revenues, compared to 38 percent in the United States, where M&A is considered a key corporate activity.

At the firm level, employees who have gained a taste for teleworking during the pandemic shutdown could push for more changes to Japan’s traditional corporate culture of long hours in the office.

Kosuke Nakamura, public relations manager for TeamViewer Japan, points to surveys showing over 60 percent of Tokyo companies had implemented teleworking solutions as of April, with many encouraging staff to work from home.

However, some cultural practices could prove harder to change, including the traditional hanko (personal seal) used to stamp business documents.

Japan’s government has also been slow to embrace information technologies, with only 7.5 percent of some 55,000 administrative procedures capable of being completed online, according to the Japan Research Institute. Compare this to countries such as Estonia, where a reported 99 percent of administrative procedures, such as setting up a new business, can be undertaken via the internet.

Progress on Abe’s “Womenomics” targets has also been disappointing, with women accounting for two-thirds of insecure, irregular jobs and Japan dropping to a lowly 121st place in the latest “Global Gender Gap” report by the World Economic Forum.

With estimates by Goldman Sachs that closing the gap could boost GDP by nearly 13 percent, measures to install more female leaders in Japanese government and business organizations could provide a timely boost.

Looking abroad, the Abe administration has sought to reduce economic dependence on China, the nation’s largest trading partner, to reduce supply chain disruptions.

Some $2.2 billion was earmarked in the fiscal 2020 supplementary budget to help Japanese companies move production back home or diversify into Southeast Asia.

The move, however, reportedly set alarm bells ringing in Beijing, particularly amid growing calls from the Trump administration for U.S. companies to also reconsider their China investments.

Chinese President Xi Jinping’s visit to Tokyo, which had been planned for April, has now been indefinitely postponed, amid suggestions relations have cooled over Hong Kong and other security issues.

Instead, Japan is seeking to improve trade ties with other nations including Britain, where a post-Brexit deal is planned to be cemented by the end of the year. London also recently expressed its intention to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an 11-nation trading bloc in which Japan is a key leader.

Yet with his approval ratings declining, Abe faces a challenge in pushing through more reforms, particularly given the effects of the coronavirus. Plans for a snap election this year have now been put on hold to 2021, when a new leader could be in charge for the first time since 2012.

“Never let a good crisis go to waste,” said Britain’s wartime leader Winston Churchill. Abe’s administration could do worse than heed that famous advice.