Japan: Testing the Limits of Pandemic Economics

Coronavirus has brought the entire world economy down to its knees, gasping for a breath of fresh air, production cycles all around the world have come to a halt, supply chains disrupted, and many businesses are on the brink of a shutdown. Social distancing is the measure being adopted throughout the world to reduce the spread of this disease leading to the imposition of total lockdowns in various countries, be it a developed or an underdeveloped nation.

One developed nation facing the brunt of the virus is Japan, which is actually trying to cushion the impact the virus is having by declaring a state of emergency. However, it seems like the end of the tunnel is near for Japan and that the government has already planned to launch a multipronged economic stimulus package to restart the economy.

The package has been announced in two phases with a value of ¥117 trillion (translating to about $1.1 trillion), which is about 20% of Japan’s GDP, to expand cash payouts to its citizens as the virus threatens to push the world’s third-largest economy into depression. Japan will sell additional bonds worth more than ¥18 trillion to fund the package, adding to its huge debt which is almost 257% of its GDP. However, since the debt is owed to itself, there is little chance of a debt crisis. According to the Japanese Economic Minister, Yasutoshi Nishimura, the economic package is set to boost the real Japanese GDP by 4.4%.

The first phase of the package aims to curb job losses and bankruptcies, while the second round of aid, after the virus is contained, will try to support a V-shaped economic recovery; wherein even after suffering a sharp recession, the economic stimulus will be able to support the economy on the steep curve to recovery. The package is designed to give more than ¥6 trillion in cash payouts to households and small businesses and ¥26 trillion to allow deferred social security and tax payments. Apart from this, the government announced an increase in direct fiscal spending amounting to a whopping ¥39 trillion to help the economy get back on its feet.

Japan is planning to distribute ¥300,000 to lower-income households that have lost their livelihoods due to the virus along with households with children. Moreover, the government has encouraged businesses to keep workers on their payroll and has also proposed subsidies for the same. Additionally, it has offered to defer income and regional tax payments for a year for virus-hit companies, which has led to multiple small businesses reducing their property taxes to near zero. Furthermore, the government has offered emergency loans for those facing wage cuts or job losses due to a virus.

China, the home ground of the virus, has been facing global backlash due to the inefficient measures to contain the virus’ spread. As is known, most MNCs have set up production facilities in China owing to the low-cost of production in the country. This is also the case with Japanese companies, however, as a part of its economic package, the Japanese government has announced $2.2 billion to help its companies to shift their manufacturing units out of China, accommodating both the shift to Japan and other countries in the world. The Japanese government intends to shift all high value production to Japan and to diversify production across South East Asia. The world has indeed realised the consequences of depending on one country too much. This is a change we can expect to see in the post lockdown world when instead of concentrating production in one country, the global economy will move on to having diverse models to prevent complete disruption of production cycles (like this one) in the future.

The impact on the Japanese economy has been severe with the pandemic slowing down the economy of China, followed by that of the US, two of Japan’s largest trading partners. Anyhow, the Japanese government’s stimulus package might not be successful. The small businesses are disappointed at the size of the package to mitigate the economic fallout due to the virus, they say that not only is it insufficient, it might also be a little too late. The Reuters Corporate Survey found 46% of firms felt the government’s stimulus was somewhat not enough and 29% deemed it quite insufficient, keeping Abe’s government under pressure to top-up last week’s spending package. While 5% said it was too much, just 21% said it was sufficient and appropriate.

The poll indicates how not only the amounts are insufficient but the measures are too, people ask for bolder steps like sales tax cuts for small businesses apart from the very insufficient cash payouts. The companies demand higher public spending and more support for financing. While the package might superficially seem enough, when one delves deeper into the public opinion, we find how the package is actually insufficient and unsatisfying. However, the question is if the world’s most indebted country can afford to increase its spending in a bid to stimulate the economy?


Kashish Jindal

A compulsive stationary-addict, I love to organise and buy tonnes of new notebooks; can watch The Harry Potter series thousands of times and still gasp when Harry returns from the dead.

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