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Japan Is Testing the Limits of Pandemic Economics

Can the world’s most indebted country afford a $1 trillion stimulus?

Japan's Prime Minister Shinzo Abe wearing a face mask attends a press conference at the prime minister's official residence on April 7 in Tokyo.
Japan's Prime Minister Shinzo Abe wearing a face mask attends a press conference at the prime minister's official residence on April 7 in Tokyo. Tomohiro Ohsumi/Getty Images

Japanese Prime Minister Shinzo Abe is putting the era of pandemic economics to an early test. After getting criticized in some quarters for a lackluster response to the coronavirus pandemic, Abe has now swung in the other direction. In addition to imposing a state of emergency on nearly half of the country’s population, he has also unveiled a multipronged economic stimulus package he claims is worth nearly $1 trillion in total. That has raised the question of whether the world’s most indebted country can afford that kind of spending.

Abe announced the measures in a nationally televised news conference in which he said the Japanese economy is “in the worst crisis since the end of World War II.” He said that the total value of the support measures would total 108 trillion yen—approximately $1 trillion—equal to 20 percent of annual GDP. Economists quickly reckoned actual new spending would be much lower, with most of the headline figure representing programs already in place. Nevertheless, they said that the speed with which money will get into the economy will help to stave off an economic disaster.

“Unlike other stimulus packages before, this program will reach households and companies quite quickly. It will also be highly necessary,” said Martin Schulz, chief economist at the technology firm Fujitsu. “We know from other economies that consumer demand initially drops by as much as 30 percent during a lockdown.”

The monthlong state of emergency covers the Tokyo region, as well as Osaka and the southern city of Fukuoka. The prefectures involved account for 48 percent of the nation’s GDP and 44 percent of the population. The action comes as the number of cases is growing at an increasingly fast rate, although at 1,339 cases in Tokyo, the numbers are still far below the levels seen in New York and other big cities globally. Abe had been reluctant to declare an emergency fearing the economic impact, a balancing act facing virtually every country.

The impact on the Japanese economy has already been severe, with a sharp slowdown in China, followed by the United States, hitting the country’s two largest trading partners. Even before the outbreak, Japan was on a path toward a recession, with the GDP down 6.3 percent at an annualized rate in the fourth quarter—a surprisingly steep dip—due to a sales tax increase that led to a downturn in consumption. The various turns in the coronavirus drama have kept economists busy steadily downgrading their forecasts. In the latest shocking numbers, Goldman Sachs is predicting a 25 percent contraction in GDP in the second quarter. It is small comfort to Japan that this is smaller than the estimated 34 percent decline for the United States and 38.4 percent drop for the eurozone economies.

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The stimulus measures have drawn on some of the lessons learned from similar exercises after the global financial crisis in 2008-2009 and the massive earthquake and tsunami in northern Japan in March 2011. Instead of blanket cash payouts to everyone, hard-hit households can apply for one-time payments of 300,000 yen ($2,750). Meanwhile, small businesses can get up to 2 million yen ($18,350). There was also an acknowledgement of the red tape that can delay such payouts. To cope with that, some of the help comes in the form of delays for required tax and social insurance payments, helping firms to preserve cash immediately. Private financial institutions have also agreed to make five-year interest-free loans available to small businesses.

How to pay for all this? Japan’s sovereign debt is already the highest in the world in relation to its GDP at a gross level of 237 percent. That figure is more than double the U.S. level of 107 percent and manages to outpace economic disaster Venezuela, which comes in at No. 2. To solve that problem, the government will go to its old friend the Bank of Japan (BOJ) for yet more money. The government has already announced it will be floating an additional 16.8 trillion yen ($154 billion) in bonds this fiscal year. This will break the government’s six-year run of reducing total bond issuance as Abenomics has helped to boost economic growth and therefore tax receipts to help make at least a small impact on the debt mountain.

The debt figures are also not as dire as they may first appear—at least for Japan in the short term. Unlike other heavily indebted countries, Japan has two key advantages. First, the BOJ is now the buyer of first resort, taking almost all the new issuance each year onto its own books as it tries to end the equally destructive deflationary cycle that has plagued Japan since the collapse of the high-flying Bubble Economy in 1990. To achieve this, it has pushed bond yields to zero percent, meaning that the government can refinance all its debt at virtually no cost.

Second, since the country in effect owes the money to itself, there is very little risk of a debt crisis in which holders start to sell, pushing down prices and forcing others to bail out in a downward spiral. BOJ Governor Haruhiko Kuroda said Thursday that economic uncertainty is “extremely high,” adding that the central bank is ready to do even more to help combat the downturn. The BOJ is already stretched by some measurements, with its balance sheet worth 105 percent of annual GDP. That compares with around 20 percent for the Federal Reserve as of the end of last year, although the Fed has now engaged in its own aggressive easing program.

Indeed, by some calculations, the government has a fair amount of headroom in its program. According to Tomohiro Ota, a senior economist at Goldman Sachs in Japan, the fiscal deficit is now around 2.9 percent of annual GDP, far lower than the 8.2 percent level at the height of the global financial crisis in 2009. “From a market perspective, I’m not concerned about the new borrowing. The BOJ has shown just recently that it can stabilize the bond market when rates start to rise,” he said. One unknown, he acknowledged, is how much government revenues will now decline due to the quickly cooling economy. Early evidence of that is now emerging with the release of a popular index on people’s personal economic outlook, known as the “Economy Watchers Survey.” The index, which gauges the views of those on the front lines of the economy, such as taxi drivers and service personnel, fell to a reading of 14.2, on a scale of 0 to 100 in which 50 would be neutral. It is the lowest level since it was first measured in 2000.

It was this economic impact that Abe said he had considered in determining whether to announce a state of emergency, and he took pains to say that the situation was not the same as a mandatory shutdown. “We will not enforce the lockdowns of cities as seen abroad. It is the view of the experts that that would not be necessary,” Abe said in announcing the emergency. Part of this is a legal issue. Even with newly enacted legislation, the government is not able to forcibly close businesses and cannot stop people from going about their daily lives. Instead, the new measures are a ratcheting up of government pleas for people to stay at home.

Another key factor, Abe said, was to help stop an overloading of the health care system. Up to now, anyone diagnosed with the coronavirus has been admitted to a hospital. With the number of cases in Tokyo doubling in just six days, those with mild or no symptoms will now be sent off to specially outfitted hotels in the capital, utilizing the no-frills budget hotels in the city that are largely empty in any event.

The question remains whether all this will be enough to ward off a health care crisis. On the one hand, the need for more stringent measures means that the previous steps have failed. Anecdotally, subway trains are still crowded in rush hour as workers either are mandated to go to the office or feel that it is their duty to keep showing up. One survey just two weeks ago found that only 13 percent of workers had started telecommuting. Abe hopes to cut social interactions by 70-80 percent. Japan will soon discover whether its workaholic company employees will now see that their moral duty is to stay home rather than following the traditional notion of showing up at all costs. In the end, it seems the government’s constant calls for common sense have fallen on deaf ears. In one notable case this week, 40 interns at the prestigious Keio University Hospital in central Tokyo went ahead with a group dinner. Eighteen of them now have the coronavirus.

“This is an intolerable act,” said the hospital’s Director-General Yuko Kitagawa. The entire country will now be footing the bill for that kind of negligence.

William Sposato is a Tokyo-based writer who has been following Japan’s economy and financial markets for more than 15 years.

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