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The recent surge in new COVID-19 cases in Japan’s major prefectures is roiling the outlook for the world’s third-largest economy after it had seemingly passed through the worst of the pandemic.

Authorities fearful of the economic fallout are expected to be cautious about again requesting business suspensions, but the wider spread of infections could leave consumers in the mood for self-restraint, economists point out.

They warn that some business operators would not be able to sweat out another consumption downturn and they may well be prompted into cutting employees’ salaries or slashing jobs.

“We have seen a spike of infection cases mainly in Tokyo. I’m concerned this will impact people’s consumption to a certain level,” said Shinichiro Kobayashi, economist at Mitsubishi UFJ Research and Consulting Co.

The state of emergency imposed from early April to late May ravaged the domestic economy. In those two months, spending by households with at least two people fell by 11.1 percent and 16.2 percent year on year, respectively, both record highs.

However, many economists forecast that the Japanese economy would pick up after the full lifting of the state of emergency, assuming that the pandemic would calm down at least partially.

Some recent economic surveys have also shown positive signs. The “economy watcher” survey that gauges business sentiment among people on the front line of the economy conducted in June showed a record increase from the previous month as the number of coronavirus infections slowed down. The survey covers workers in businesses quickly susceptible to economic shifts, such as taxi drivers and retail store and restaurant employees.

Kobayashi said the basic scenario is still unchanged but warns that the recent spike in confirmed infections poses risks to recovery.

If new cases continue to rise, “it could slowly aggravate consumer sentiment. They would be more worried about catching the virus or passing it on others. Then they would voluntarily refrain from going out and spending money,” he said.

Driving these concerns is the increase in COVID-19 cases. Toward the end of the state of emergency in late May, Tokyo’s infections fell into single-digit territory on some days, but the figures began rising again around late June. They have stayed at more than 100 since July 9.

Tokyo Gov. Yuriko Koike eventually asked residents to stay home as much as possible during this past four-day weekend.

Elsewhere, Osaka Prefecture has recently been reporting more than 100 new cases a day while Aichi and Fukuoka are facing upticks of their own.

“It’s very plausible that the pace of economic recovery will be slower than expected,” said Takuto Murase, senior economist at the Japan Research Institute.

He added that the decrease in consumption probably won’t be as bad as it was in April and May. Given that the state of emergency was a huge blow to the economy, the government will be hesitant to declare another one.

On Friday, Prime Minister Shinzo Abe said the government needs to closely monitor the recent surge but is not considering issuing a state of emergency at this point, saying it will work with prefectural governments to conduct more tests for early direction and treatment.

Still, if consumers choose on their own to stay home, it would still bite into demand, especially at retail stores, restaurants and hotels.

And the ramifications would be different this time, economists said.

In April and May, “I think business operators were still motivated to reopen their stores after the lifting of the state of emergency,” so they did everything they could to keep their business afloat and their employees at full strength, said Kobayashi.

But if the situation grows strained again, “that would significantly demotivate business owners and some might close their stores. The biggest concern is that they might cut jobs and salaries,” which would further tighten the purse strings of affected individuals.

Labor surveys by the government show that the number of furloughed employees has shot up in the past few months.

In April, the survey reported a record 5.97 million employees were on furlough, an increase of 4.2 million from April 2019. The figure for May was 4.23 million.

The swell of furloughs is believed to be due to beefed up employment adjustment subsidies implemented in the government’s two massive relief packages.

If companies furlough their workers to protect their jobs, the government now covers up to 100 percent of leave allowances for small and midsize companies. The upper limit used to be set at ¥8,330 a day per person but has been nearly doubled to ¥15,000 between April and September.

As a result, the jobless rate here has not leaped as much as it has in other countries. The seasonally adjusted unemployment rate stood at 2.9 percent in May while it was 2.5 percent in March and 2.6 percent in April.

Kobayashi and Murase both said that coming up with effective measures to boost consumption during the current health crisis will be tough.

Even if the Abe administration were to introduce another cash handout program or reduce the consumption tax, it is unlikely that consumers will be motivated to spend.

One possible stimulus measure, Murase said, would be to facilitate digitalization efforts among Japanese companies, as more firms are embracing telework and e-commerce because of the COVID-19 pandemic.

“I think it’s better to help companies with their business transformations and create new demand instead of policies that would only push consumption in the short term,” said Murase.

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