Half of Japan’s economy is set to enter a state of emergency as the government strengthens its response to the coronavirus, deepening fears that output will plunge by as much as 20% in the current quarter.
Prime Minister Shinzo Abe will make an emergency declaration for Tokyo, Osaka and five other prefectures, empowering local authorities to urge people stay at home for one month.
He will also unveil details of a record stimulus package worth close to $1tn as he tries to stop the economy entering free fall.
By pushing such a large part of the nation’s output and consumption toward a soft-lockdown, Abe risks contributing towards an economic contraction that some analysts say will be bigger than the hit from the global financial crisis. He must balance that risk against the danger of infections spiralling out of control.
The heightened concern among policy makers is reflected in the ballooning size of the government’s economic measures as Abe faces one of the defining moments of his record-long premiership.
“Right now there isn’t really a choice. You’ve got to prioritise limiting the spread of the virus,” said chief economist Yuichi Kodama at Meiji Yasuda Research Institute. “I think the measures the government has taken so far have been relatively appropriate within the powers they have available.”
Tokyo and its three neighbours, Kanagawa, Chiba and Saitama, make up a third of the nation’s gross domestic product with output equivalent in size to Canada’s and a heavy emphasis on services and retail.
Osaka is a popular tourist destination that is home to appliance and electronics makers Panasonic Corp, Keyence Corp and Sharp Corp.
Add the Kobe region next to Osaka, and Fukuoka, a favourite shopping destination for visitors from China and South Korea, and the areas designated for the emergency make up about 48% of GDP, according to a Bloomberg calculation based on Cabinet Office data.
Under the emergency declaration, local governments won’t be able to fine people who disobey calls to stay inside like they can in Paris in a full-scale lockdown, so the falloff in economic activity is unlikely to be as extreme.
But economists say people will heed the ramped-up warnings more than earlier requests.
“Residents are likely to follow the orders seriously,” said Masamichi Adachi, chief Japan economist at UBS Securities, who now thinks his forecast for an annualised 18% contraction this quarter may have been too optimistic. “There’s not gonna be a V-shaped recovery as consumers will remain cautious about venturing out even when this starts to settle down.
And no one knows if there will be a second wave or even a third wave.”
Consumer sentiment is already at its lowest since the aftermath of the collapse of Lehman Brothers as the virus starts cutting income and jobs. Much of Abe’s stimulus is aimed at giving cash handouts to households, freelancers and one-person businesses that have seen their earnings vanish.
Spending and production was already at a low ebb following a sales tax hike and a series of destructive typhoons toward the end of last year.
The fear is that a move from tightened purse strings to empty wallets could have a lasting impact on consumption trends for a population already fretting about making ends meet in retirement.
“Even for cities that aren’t designated places under the state of emergency, spending patterns will change significantly,” said Citigroup economist Kiichi Murashima, who forecasts an annualised 19.7% contraction in the second quarter. “GDP won’t simply bounce back to the level before the sales tax even by the last quarter of this year.
The impact of the coronavirus isn’t going to just disappear.”
Cases are also rising in the manufacturing power house of Aichi in central Japan, with 227 reported infections as of April 5, the fourth biggest number in the country.
Toyota Motor Corp is based in Aichi, where manufacturing makes up 38% of total output.
An emergency declaration there would further darken the outlook.
Government officials and manufacturers remember how the financial crisis ultimately caused a bigger economic contraction in Japan than it did in the US. Once again, a global recession with hundreds of thousands of job losses abroad means any recovery in demand for production from Japan would likely be muted.
US payrolls fell more than 700,000 in a single month, the latest data shows.
“As US jobs plunge, there’s no question that Japan’s exports will decline,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former Bank of Japan official. “We will see the impact of the coronavirus shift from service sector to manufacturing starting in the summer.”
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