Coronavirus might cost Japan over 1 million jobs, economists say

The coronavirus is strangling the nation’s labor market, which just months ago was in desperate need of manpower, and may end up leaving a gaping scar.

Although the government was set to lift the state of emergency in most of the 47 prefectures on Thursday, some economists say Japan will need to brace for massive job losses this year that could surpass those from the 2008 financial crisis.

The crisis, which caused the collapse of storied investment bank Lehman Brothers among others, created havoc in Japan’s manufacturing industry. But this time, economists say hundreds of thousands of jobs — possibly even over a million — are at stake in the service sector due to the nature of the pandemic, which is restricting personal contact.

“Compared to what happened during the Lehman Brothers-led crisis, (COVID-19) is seriously hurting nonmanufacturing industries’ revenues,” said Munehisa Tamura, researcher at Daiwa Institute of Research, referring to the disease caused by the virus.

Nonmanufacturers actually absorbed some of job losses in manufacturing back then, but there aren’t a lot of industries that can cushion the blow this time, he explained.

Japan’s unemployment rate in March climbed 0.1 point from the previous month to a one-year high of 2.5 percent, though this remains one of the lowest readings in more than 20 years.

Internal affairs minister Sanae Takaichi, whose ministry oversees the labor survey, told reporters on April 28 that COVID-19 had started affecting jobs, with part-time and temporary workers down 260,000 compared with March 2019.

Yet economists say the real impact will be more visible from this point on because economic activity has been constrained considerably since the state of emergency was initially declared in early April.

According to an estimate by the Daiwa Institute of Research, even if the virus slows through June, the country will see job losses approach 1 million overall this year, not including the self-employed. This means the unemployment rate might jump to 3.8 percent from 2.4 percent in 2019, the report said.

If the contagion continues to spread until the end of the year, the jobless figure might inflate to a staggering 3 million for a record high unemployment rate of 6.7 percent, according to the report.

The assessment suggests the pandemic could take a heavier toll than the financial crisis did in 2009, when about 950,000 jobs were lost, including self-employed people, and the unemployment rate hit 5.1 percent.

Tamura, who co-wrote the report, said that even before COVID-19 the ratio of personnel expenses to gross margin was climbing at domestic firms, which are now under even more pressure to cut labor costs now that the economy has slumped.

“It is possible that the impact on employment will be greater than the ‘Lehman shock,’” he said.

Masamichi Adachi, chief Japan economist at UBS Securities, noted that the deterioration in employment is expected to be greater in the hospitality industry than in the manufacturing sector.

“A major factor is that the yen is not that strong now, so the exchange rate is not seriously squeezing companies’ earnings” like it did when the U.S. subprime housing loan crisis claimed Lehman in September 2008, Adachi said.

The yen was trading at around 111 to the dollar in December 2007 but started soaring in 2008. After September it hit around 90 to the dollar, severely damaging profits at export-driven manufacturers.

The situation with the coronavirus, however, is different. The health crisis has not heavily swayed the yen, which was trading at around 107 to the dollar in recent weeks.

Nonetheless, UBS estimates the coronavirus recession will cost around 400,000 Japanese manufacturing jobs by September.

As for service-sector jobs, even when the emergency declaration ends next month it is highly unlikely consumer behavior will return to normal because people will still be hesitatant to eat out, travel and attend events like they used to, Adachi said.

If the restaurant, bar and hotel industries continue to struggle, around 800,000 jobs will be lost by September, UBS estimates. This includes many vulnerable small and midsize firms that don’t generally have enough cash to survive several months of plunging sales. They also have higher ratios of part-time workers.

UBS said unemployment could hit 3.8 percent by the April-June quarter and 4.4 percent by the next. While that may not be as bad as the 2008 financial crisis, Adachi cautioned that uncertainties abound.

“We’ve made assessments using past data, but no one really knows how things will turn out, since we’ve never experienced a situation like this before. But one thing is certain; quite a lot of jobs will be lost,” he said.

To mitigate the fallout, the government drafted a ¥117 trillion ($1.1 trillion) relief package last month that included stronger employment-adjustment subsidies, a tax moratorium and financial aid for struggling companies and sole proprietors.

Tamura of the Daiwa Institute said the budget for the employment subsidies is larger than the one for the financial crisis, meaning it will help companies protect jobs.

Under regular circumstances, the subsidy covers 66 percent of the salaries that small and midsize firms pay workers who are on temporary leave. Due to the pandemic, the government has raised that to 100 percent, depending on each case, though with an upper daily limit of ¥8,330.

But Prime Minister Shinzo Abe said the government is looking to substantially increase that amount, possibly to ¥15,000 per day — a move Tamura said is necessary.

“If the maximum amount is ¥8,330, companies still shoulder heavy financial burdens,” so they might cut jobs, he said.

Tamura also pointed out that the complicated application procedure also makes some companies hesitant to take advantage of the system, so the government needs to simplify the process.