After a dramatic fall in GDP Japan now faces the impact of the coronavirusby David Warren / February 26, 2020 / Leave a comment
2020—the year in which Japan should be the centre of world attention, with the Olympics and Paralympics in Tokyo in August—has not started well for the Japanese Government. New economic figures show a dramatic shrinkage in Japanese GDP over the last quarter of 2019—6.3 per cent on an annualised basis, compared with the 3.8 per cent that forecasters had expected after Typhoon Hagibis, which killed nearly 100 people in October, and in the light of weak global demand.
The general assumption is that the slump has been caused by the Japanese sales tax increase from 8 per cent to 10 per cent at the beginning of October. We have been here before. In 1997, the Japanese government raised the tax (which had been introduced only eight years earlier) from a measly 3 per cent to 5 per cent, but the simultaneous Asian financial crisis meant that the Japanese economy promptly tipped into recession. Politicians were so haunted by this experience that it took 17 years for any government to think about a further hike, until Prime Minister Abe nudged it up again in 2014 to 8 per cent, only to see Japanese growth, never very dramatic over the last three decades, fall into technical recession again. History now appears to have repeated itself for the third time.
The additionally worrying factor is that these figures predate the coronavirus. With the likelihood of a sharp falling away of Chinese tourist numbers, the negative impact of the slowdown in the Chinese economy on Japanese firms investing in and trading with China, as well as the damage to Asian supply chains, we must expect the first quarter figures for Japan in 2020 to reflect the growing crisis. With China’s share of the world economy now at around 16 per cent—four times that at the time of the SARS outbreak in 2002—the effects on global GDP are likely to be grave. Finance Minister Taro Aso urged countries with the fiscal space to take “bold policy measures” to boost growth at the G20 finance ministers meeting in Riyadh on 23rd February.
Is this a self-inflicted wound, as some commentators argue, and what policy tools can Japan use to avoid recession?
The Governor of the Bank of Japan, Haruhiko Kuroda, has struck a reassuring and calming note, stressing that the central bank will take whatever steps are necessary to deal with the effects of any pandemic, and reaffirming the Bank’s expectation that the Japanese economy will pick up again as global demand rises from the middle of the year. Whether this will involve adjusting interest rates, already in negative territory, is not clear. A fiscal stimulus of $120bn has been announced.
There is some incredulity among commentators at the way in which the government has nonetheless prioritised fiscal consolidation over stimulating consumer demand—at precisely the moment when some other major developed economies are moving in the other direction, with the US deficit topping $1 trillion (on the back of an economy performing more strongly) and the new Conservative government in the UK apparently on the verge of opening the fiscal taps with an expansionary budget for infrastructure investment.
But Japanese policymakers have never been excessively influenced by world fashions. The question on their minds is a longer-term one: how to manage an economy against a background of an aging and shrinking population. By the middle of the century, over 40 per cent of Japanese will be over 65, and the ratio of people of working age to those who have retired will have fallen dramatically. Social security spending accounts for nearly 60 per cent of the government’s core draft budget for 2020 (excluding debt servicing and local government transfers). Unfortunately, while 2 per cent on sales tax is a drop in this particular ocean, it has the undesirable effect—even with the government’s exemptions and compensating payments—of discouraging already conservative consumers from spending.
Meanwhile, gross Japanese debt remains, as it has for many years, nearly two and a half times the size of the economy. Should we care? Very little of the debt is on the international markets, and the costs of borrowing in Japan are nugatory. The Nikkei index reacted slowly in the first half of February to the negative data emerging about the wider economy. The Bank of Japan continues to buy exchange traded funds to stabilise the stock market, and government debt to keep interest rates low. For the last ten years or more, the Cassandras have warned about the intractability of Japanese debt: at some point, we have been warned, the chickens will come home to roost. But the economy—fuelled by greater political stability under Prime Minister Abe since 2012, and greater policy clarity with his signature “Abenomics” (monetary easing, fiscal stimulus and structural reform)—has remained unexcitingly but reassuringly stable.
Coronavirus may well make a difference, not least as the number of confirmed infections across the country begins to spread. If the impact on the world economy is as serious as some fear, it may expose the relative paucity of policy instruments available to the Japanese. If Prime Minister Abe is unwilling to challenge business orthodoxy by raising more in taxes from profitable companies than nervous consumers, he has no option but to pump more money into the economy, and double down on the fiscal stimulus. It will not solve the underlying problems. But—with speculation that government spending in the UK will top 40 per cent of GDP this year, and the Congressional Budget Office predicting that US debt will reach nearly 100 per cent of GDP by 2030—the Japanese will not be alone.