The likely extension of Tokyo’s state of emergency is worth the tradeoff against the risk of a renewed uptick in virus cases that could threaten the staging of the Summer Olympics, according to economists.

Suppressing activity for a little longer won’t add too much extra damage to an economy that is already showing some signs of recovery even under existing restrictions, economists said. At the same time, ensuring there is no rebound in virus infections will help maintain the case for staging the games set to start in July, they added.

Still, the added possibility of an Olympics without foreign spectators would increase the hit to the economy, with a decision due in the coming weeks. Tokyo Olympic organizers are finalizing plans to restrict overseas spectators from attending events, the Mainichi newspaper reported Wednesday, citing unidentified people.

“The Tokyo Metropolitan Government, in particular, likely fears that the Olympics can’t take place if the current rules are relaxed and case numbers go up again,” said economist Mari Iwashita at Daiwa Securities Co.

Prime Minister Yoshihide Suga said Wednesday that he was considering extending the emergency state in the capital and surrounding areas by about two weeks from March 7. His comments were the strongest indication yet that the extension will go ahead, though Suga said a formal decision would come after further consultations with experts.

Given a choice between inflicting a short delay in the economy’s recovery and avoiding an uptick in infections that could influence decision-making over the staging of the Olympics, Suga looks set to take the safety-first option. Opinion polls also show strong popular support for extending the emergency, already in place for nearly two months.

“A two-week extension would mean a ¥360 billion negative hit,” said Junichi Makino, chief economist at SMBC Nikko Securities Inc. “That would push gross domestic product down by 0.05 percentage point.”

Most of the economic damage from the emergency has already occurred and an extension in the Tokyo region would largely push back spending for a faster recovery later, analysts said. Economists surveyed last month see the economy shrinking 5.9% in the first three months of this year under the emergency, following a 12.7% jump last quarter.

The likely extension of the state of emergency won’t add too much extra damage to the Japanese economy, which is already showing some signs of recovery, economists say. | BLOOMBERG
The likely extension of the state of emergency won’t add too much extra damage to the Japanese economy, which is already showing some signs of recovery, economists say. | BLOOMBERG

A continued suppression of activity now would result in pent-up demand emerging more clearly in spending during the Golden Week holidays in early May, according to economist Hiroaki Muto at Sumitomo Life Insurance Co. Consumption was already holding up better than expected last quarter, Muto added.

Keeping the Olympics on track is likely part of the thinking behind extending the emergency. Still, holding the games without fans from abroad would blunt the recovery in the summer.

The cancellation of tickets and the impact on tourism would cause an additional economic loss of about ¥196.1 billion, according to economist Takahide Kiuchi at Nomura Research Institute Ltd.

Organizers of the Tokyo Olympics will decide later this month whether to allow spectators from overseas, organizing committee head Seiko Hashimoto said at a news conference on Wednesday.

Under the emergency, local governments have instructed bars and restaurants to close at 8 p.m., and advised people to avoid going out unnecessarily. The measures, while limited, have helped many parts of the country bring infections under control, but have proved damaging for many retail and restaurant businesses.

Despite the lingering voluntary restrictions, there is evidence that after a drop at the start of the emergency, activity has been picking up as the emergency was lifted early in some cities and as cases fell.

The seven-day average of new infections in Tokyo was at 278 on Wednesday, well below the 500 threshold cited by the government as one of several requirements for lifting the emergency.

Bloomberg Economics’ high-frequency, alternative data show that economic activity was already picking up in February in Japan, beyond levels in other developed countries.

Bloomberg Intelligence’s Catherine Lim forecasts that Japanese retail sales could rise this month, even if the state of emergency is extended. Consumer sentiment may be brightening amid declining COVID-19 cases, helping to boost purchases of Uniqlo clothing and curb Muji’s apparel-sales fall in March, she said.

Still, lifting the emergency could trigger a renewed uptick in numbers in the capital and would go down badly with voters.

“We have the Olympics and the July Tokyo government elections coming up,” said SMBC’s Makino. “If the emergency state is lifted early and cases jump again to the point of another shutdown before the elections, it’ll be like throwing mud in the face of the Tokyo governor and the national government.”

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