In January 2020, world leaders gathered in Davos to discuss the economic outlook for the year. The heads of governments and global corporations agreed that the world economy would recover in 2020, thanks in part to good policies. As we know, the recovery didn’t happen. The world was hit by a pandemic and spent the year in severe economic crisis.
A crisis exposes the weaknesses of a society. In Japan, a delay in digitalization became evident. Amid the turmoil, the Yoshihide Suga administration, which has emerged as an emergency rescue cabinet during the crisis, immediately announced the creation of a Digital Agency, which is expected to be enacted in the parliamentary session of 2021 and launched within the year.
The Japanese economy is slowly recovering. In the second quarter of 2020, GDP growth rate was a grim -28%. The third quarter showed a recovery of 23%, but there are still many problems. Unemployment and bankruptcies have been kept under control for now, but that effort is barely being supported by government subsidies and benefits, and there are concerns that they will expand rapidly in the future. In light of this situation, the government announced a massive economic stimulus package on Dec. 8. Some of the measures include new ideas that have never been seen before, such as a ¥2 trillion Green Fund, mainly for environmental measures and a Digital Fund for digitalization. The government also may issue emergency restrictions in the Tokyo region as soon as possible.
What will the economy look like in 2021, given these circumstances? Will the turmoil be contained or will more await us?
According to the IMF’s outlook, global growth is expected to return from negative to positive (-4.4 to +5.2%), and Japan is expected to see positive growth (-5.3 to +2.3%), albeit at a slower pace of recovery. With the start of vaccinations in the U.K. and other countries, we can hope that the health crisis will be brought under control.
Yet, we should recognize that the situation isn’t bright, and the optimistic outlook at that Davos meeting has been greatly undermined. According to a conservative forecast by the Japan Center for Economic Research, it will take four years for the economy to return to its pre-COVID-19 state. We have limited knowledge of the new virus strain, and the lessons learned from the 2020 Davos meeting should be taken seriously.
It’s noteworthy right now that asset prices continue to soar even as economic activity remains sluggish. That’s the result of strong fiscal and monetary policies by multiple countries to deliver funds to the market. Sure, high stock prices are good things in themselves. But excessive liquidity may have caused asset prices to become overvalued. It’ll be crucial to know whether asset prices will fluctuate due to a shock and whether this dynamic will have further adverse effects on the real economy.
In this area, the concern is the growing conflict between the United States and China. With a new U.S. administration coming onboard, China may attempt to test the new president. The biggest shocks can come from these small events.
In Japan, credit rating agencies are maintaining the ratings of companies with rising debt. As a result, there has been no change in corporate ratings even with the economic downturn. That means, banks’ bad debts have been kept in check without increasing. Depending on how the economy shakes out in 2021, however, there is a risk that these conditions will change, and corporate overindebtedness and the bad debt of banks will become more apparent.
There are also calls for public capital injection into industries, such as airlines, that were hit hard by COVID-19. The United States and some countries in Europe have already taken such measures.
But which industries should receive public money? The Financial Reconstruction Law sets out a framework for public funds for the banking industry, but there are no rules for other industries. The government will be required to manage the economy, avoiding making arbitrary decisions while at the same time implementing policies in a flexible manner to contain the economic turmoil.
The government recently announced its economic outlook for fiscal 2021. It is an optimistic 4.0% growth rate for the next fiscal year. This rate is higher than the average forecast of 3.5% by private institutions.
The difference between the public and private sector forecasts arises from the difference in the outlook for public spending, while there is no significant difference between the public and private sectors for other items, such as household consumption and business fixed investment.
That suggests that the government is confident in its own policy management while the private sector is concerned about it. That being the case, the management of the economy in 2021 will be a challenge of unprecedented scope.
Heizo Takenaka, a professor emeritus at Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.
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