Published in Japan Forward 11/3/2020
The global coronavirus crisis has the potential to change politics everywhere. Governments that botch their responses are likely to lose favour rapidly. Underestimating the threat is a much greater risk than overestimating it, so it is right to cancel major events, shut down schools and encourage teleworking where possible. Human connectivity is how the virus spreads, so we must reduce it.
The problem is that nobody can be sure how long such measures will be necessary. They are highly deflationary and the longer they remain in place the worse the damage to economic activity. Airlines and hotels are already in a parlous condition. Small companies existing on wafer-thin margins could easily be tipped over the edge. It is not hard to imagine the medical crisis becoming an economic crisis and then morphing into a financial crisis.
The situation is particularly urgent in Japan since the economy was already weakening in the last quarter due to the effect of typhoons and the hike in the consumption tax. Japan is also vulnerable to the collapse of the “inbound” boom as travel restrictions and health concerns reduce tourist numbers to a trickle. Meanwhile, the strong yen and dramatic fall in the oil price will exert downward pressure on consumer prices and strengthen the deflationary mindset that Abenomics aimed to change.
There is a strong case for policy-makers to move pre-emptively and bolster economic conditions before a downward spiral develops. The optimum course would be if the G7 and other major countries operated in a co-ordinated way to boost final demand, but this is not the 1980s and differing national agendas will likely make that impossible. Japan needs to move alone.
Over the past seven years, Prime Minister Abe’s economic programme has relied heavily on monetary policy, together with some reforms such as increasing the number of immigrant workers and changing working practices (hataraki kaikaku). But in Japan and Europe and increasingly elsewhere, monetary policy has reached the point of exhaustion. Central banks have bought vast amount of bonds, but the main effect has been the evaporation of interest rates. At this stage, doing more of the same will solve nothing.
To put it another way, the rock bottom, in some cases negative level of bond yields mean that bond markets are imploring governments to issue more bonds – in other words, to borrow more money.
That may sound counter-intuitive given the Japanese government’s mountain of debt. But that debt is just one side of the balance sheet. The other is the Japanese private sector’s even bigger mountain of assets, comprising household savings and the growing hoard of corporate savings. Japan remains the world’s largest creditor nation and the largest holder of US government bonds.
So far the second arrow of Abe’s original ‘three arrows’ – fiscal policy – has barely been used. On the contrary, the two hikes in the consumption tax together doubled the rate to 10%. Before the last-tax hike in October, the Prime Minister and Minister of Finance declared that they would go ahead with it “unless there was a major crisis such as the Lehman shock” of 2008. Well, there was no way to know at the time, but just such a crisis was about to erupt in Wuhan, China.
So what should be done? A strong signal would be to cut the consumption tax by 5% until a satisfactory level of growth – for example, over 1.5% for two years in a row – has been achieved. Would the money be spent? Some of it, for sure. These days, a large proportion of shopping is done on the internet, so there is no need to for nervous people to visit shopping centres or department stores. More adventurous people might like to do their hanami in top-class ryokan or onsen which will surely be offering discounts.
Another possibility would be generous fertility incentives, such are in use in France. What could be a better use of money than investing in the Japanese of the future? It would be particularly apt as couples will be spending more time together at home than usual.
Bold measures of this nature would improve confidence and also be a powerful assertion of leadership, showing that the government is thinking strategically, not being swept along by daily events.
In a matter of months the virus has appeared in all continents, and entire cities have been locked down, from Taegu in South Korea to most of Italy. The virus may disappear in the warmth of spring, or we may face a long battle as it mutates into more resistant forms. The best approach in such circumstances is hope for the best and prepare for the worst.
But this “precautionary principle” applies to economic policy as well as virus control.
The time to act is now.