With the novel coronavirus shaking up the global economy, the Japanese government is scrambling for countermeasures to cushion the economic fallout.
The pneumonia-causing virus has already rocked the financial markets, frozen tourism, cooled down consumption and disrupted companies’ production, but how much longer the economic blow will last is anybody’s guess.
Some lawmakers have said that Japan will need tens of trillions of yen worth of stimulus combined with extraordinary policies such as handing out cash and lowering the sales tax rate, which was raised just about six months ago after being delayed twice, to ease people’s concerns and sustain consumption.
Economists say that buoying consumption is indeed important, but that the first priority at this point should be to support companies unexpectedly hit by the virus and those who have lost or will likely to lose their jobs. They also say that cash distribution won’t be so fruitful when people’s mobility is restricted, while slashing the consumption tax rate is unrealistic in terms of current political hurdles as well as technical procedures.
Rather than discussing how to boost consumption, “it’s best to focus on defensive moves for now,” including helping to finance struggling firms and beefing up support to protect employment, said Kiichi Murashima, Japan chief economist at Citigroup Global Markets Japan Inc.
Companies, especially ones in the tourism industry, are suffering from the COVID-19 pandemic following many cancellations by Chinese tourists. NHK reported last week that a local bus tour company in Hokkaido, which has declared a state of emergency, laid off seven of its eight drivers.
Yoko Takeda, chief economist at Mitsubishi Research Institute, said the tourism industry has a higher rate of temporary workers, so they face a greater risk of losing their jobs. She said the first thing to do is to prevent the “sudden deaths” of companies, especially small ones.
“(If the coronavirus shock) continues for a longer period of time, more companies will struggle with their cash management. This could deteriorate employment and result in stalling consumption,” she said.
The government is apparently aware of this point. It has announced that it will relax conditions for employment adjustment subsidies and prepare ¥1.6 trillion to support companies’ cash management.
On Monday, Finance Minister Taro Aso met with top bank executives and requested that the banks communicate proactively with borrowers to inform them of their financial status and work with them.
How much deeper the economic impact of COVID-19 will be is still unclear but many economists predict that Japan’s economy will face a recession, at least in technical terms, which is defined by two consecutive quarters of economic contraction.
Murashima said three major COVID-19 factors are battering the economy: dwindling numbers of inbound tourists, weak exports and subdued consumption. The consumption factor, which had been already damaged after the October sales tax hike, has weighed on the economy significantly since Prime Minister Shinzo Abe requested people refrain from attending events.
Economic revitalization minister Yasutoshi Nishimura said in a recent TV program that the impact could be equal to or bigger than that of the 2008 global financial crisis, saying that “bold” and “unprecedented” countermeasures will be necessary.
Some lawmakers have urged the government to draft a daring stimulus package. A group from the ruling Liberal Democratic Party has reportedly proposed the government come up with a ¥30 trillion stimulus and cut the consumption tax rate to as low as zero. The Democratic Party for the People, an opposition party, has called for economic measures such as distributing ¥100,000 in cash and lowering the sales tax rate.
Some media outlets reported Wednesday that the government is considering handing out ¥12,000 or more in cash to people. In 2009, the government distributed ¥12,000 in cash to each citizen to mitigate the fallout of the global financial crisis.
But Takayuki Miyajima, senior economist at Mizuho Research Institute, doubts the effectiveness and feasibility of such policies.
“My impression is that countermeasures that the government can take are limited,” he said. “In a situation like this, people will just keep the cash in savings. They can’t even go out (until the virus is stamped out), so it’s questionable whether handing out cash will be effective.”
Unless the end of the virus outbreak becomes visible, measures aimed at bolstering consumption won’t really work, Miyajima added.
“If the government hands out cash to everyone, the budget necessary to support those who really need help might come up short. … People with stable jobs are likely to put the cash in savings, so it won’t really help boost consumption,” said Takeda of Mitsubishi Research Institute.
As for the idea of lowering the consumption tax, Miyajima said it will be difficult politically and technically.
The government raised the consumption tax from 8 percent to 10 percent, as it has to finance swelling social security costs, but the tax cut “will reverse the policy stance 180 degrees. I wonder if they can really do it.”
Also, as the October hike kept the rate for daily necessities at 8 percent, causing problems for the private sector due to the two-tier tax system that resulted, another rate change would bring about confusion again, Miyajima said.
Takeda also said she is careful about the sales tax cut because it would entail enormous political costs to raise the rate again.
The government had originally planned to increase the rate to 10 percent in October 2015 but delayed the move twice.
Miyajima said possible options to stimulate consumption include extending the current reward program for cashless payments by including larger rebates and subsidizing tourism after the virus outbreak is stamped out.
The 5 percent rebate for cashless payment, scheduled to end in June, has been implemented to cushion the tax hike’s impact on consumption.
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