Published in Newsweek Japan 30/3/2020
“Japanification” has become a common term in recent years, as economic growth and interest rates have fallen almost everywhere. Now we have another example of the world following a Japanese precedent.
In reaction to the coronavirus crisis, capital cities and indeed whole countries have become hikikomoris, with hundreds of millions of people confined to their homes.
The effect on economic activity has been devastating. Major investment banks are forecasting declines of over 20% for second quarter GDP in the United States and Europe, a meltdown of a scale not seen since the Great Depression. In these circumstances, any country that can restrict the economic shrinkage to single digits should be considered a winner.
If the drastic measures being taken succeed in limiting the virus’ spread this spring, the scars should heal in a year or so. On the other hand, if the worst case scenarios are right, such as the report by London’s Imperial College which projects a second wave in the winter, the global economic damage could take a decade to repair. Like the rest of us, governments can only hope for the best but prepare for the worst.
That means supporting the economy by all means possible, including tax cuts – a deep cut in Japan’s consumption tax would immediately boost spending power – and subsidies to help companies pay their wage bills when turnover is depressed.
In China there has been a spike in divorces caused by couples spending too much time at home together. Japan should introduce a fertility subsidy, in line with the French model, which would promote more constructive activities for couples. In future decades the money spent would be paid back many times over.
What is crystal clear is that Abenomics cannot rely solely on monetary policy. The ‘second arrow’ of the original ‘three arrows’ needs to be deployed too. That is fiscal policy, which can put extra money into people’s pocket, rather than leaving it to circulate within the financial system. Without that support, Japan risks a plunge in consumption and sharp rise in unemployment.
It would be ironic if at the time when the government has finally got around to tackling the problem of the last “employment ice-age”, which damaged the life chances of people entering the workforce between the min-90s and the mid-noughties, a new ice-age were to start.
Another vulnerability that has been exposed has been Japan’s reliance on the “inbound economy,” which in terms of spending power is equivalent to the existence of one million extra Japanese. Japan’s problem, not shared by tourism superpowers like France and Italy, is the numerical dominance of citizens of two countries, one of which is a strategic rival and the other a very prickly neighbour.
Both countries have shown willingness to use tourism as a political weapon, turning off the tap when it suits them. In a sense, the evaporation of inbound demand could be a welcome wake-up call.
The Devil’s bargain
President Trump’s use of the phrase “Chinese virus” deliberately defies the World Health Organization’s politically correct line that the disease’s source should not be mentioned in order to avoid “stigmatization.” Yet there can be little doubt that the coronavirus originated in Wuhan and that its lightning spread was due to China’s extraordinary global reach.
Prado in northern Italy has the second largest population of Chinese immigrants in Europe behind Paris. Many of them work in the garments business. That allows big fashion houses to label their high-priced offerings as “made in Italy” even if produced by Chinese workers in sweat-shop conditions.
It wasn’t just goods and people that moved down the “one belt, one road” scheme that China created. An invisible, deadly traveller came along for the ride. Now Italy is paying a terrible price for the devil’s bargain it made with hyper-globalization.
The corona crisis has highlighted, even for a super-power like the United States, the vulnerability of stretched supply chains and over-reliance on distant- countries for crucial items, including medical supplies. For countries that, unlike the United States, are not self-sufficient in food or energy, the threat of sudden stop in the world economy is far greater.
For Japan in particular, the case for bringing more nuclear reactors back on line becomes stronger, while free trade in agricultural products will look a lot less desirable. When ordinary citizens are driven to hoarding daily necessities, economists’ talk of comparative advantage cuts no ice, likewise the green dream of a wind and solar powered future.
Will this trend develop into full-scale de-globalization? It might, depending on the length and depth of the crisis. At the least, there will be greater selectivity in deciding on trading partners and production locations, with political considerations playing an important role, not just comparative costs. Expect Japanese companies to accelerate the repatriation of production from China and increase agricultural investment at home and in reliable foreign countries like Australia and New Zealand.
In a generally darkening landscape, there are some encouraging signs. While airlines and hotels have seen demand collapse and many manufacturers are operating far below break-even, the online economy is doing fine. And thanks to the internet, many businesses have managed to keep operating with employees working from home.
Some years ago the late novelist and economist Taichi Sakaiya proposed a three day week at the office, with two days spent working from home – not as an emergency measure, but as a lifestyle improvement. Perhaps after the crisis is over, such flexibility could become a permanent feature of the government’s hataraki-kaikaku (“reform of working practices”) initiative. Sakaiya-san would surely be delighted to see it. Who knows – a boom in tele-working could even lead to a much-needed revitalization of regional towns and cities.
At some point the coronavirus crisis will end and the world will emerge from its bedroom. Yet consumers, businesses and governments will live in its shadow, knowing that there could be a repeat at any time. This new sense of vulnerability will guide their thoughts and actions. Choppy waters like ahead.