Beyond the obvious health concerns about the COVID-19 pandemic, last year I expressed my concerns that the potential threat to the economic wellbeing for Japan’s citizens would be almost as dire as the virus itself. As Japan extends its fourth state of emergency in an effort to slow the surging cases of COVID-19 across the country, the Japanese government’s response has been criticized for being too deferential to economic concerns at the expense of public health. While it might be tempting to look back over the last 18 months and think that the dire predictions about the economy were overstated, it would be more accurate to recognize that the pandemic aggravated all the fault lines that already existed in the Japanese economy.
Any look back on the coronavirus pandemic in Japan needs two caveats. Firstly, the pandemic is an ongoing crisis creating economic ramifications that will be felt for years and probably decades ahead. The third state of emergency declaration in Japan this past spring, for example, led economists to revise their projections for the Japanese economy from modest growth to a prolonged recession with another three months of negative growth. Secondly, there is still too much we simply don’t know about the pandemic, or the various responses to it, to draw many conclusions. The point of revisiting conclusions about the pandemic’s economic impact on Japan from a year ago, is not to affirm or reject any projections that were made – but rather to take an inventory of the factors that originally informed those projections, and from there to make better projections, while also identifying what is resilient and what is vulnerable in Japan’s economy.
For Japan, the key objectives in managing this crisis have been both to cushion the inevitable hits to employment and income, and to facilitate international cooperation, aiming to prevent hoarding and higher costs to consumers due to disrupted trade flows. The problem Japan faced in this wasn’t just the economic disruption caused by the pandemic itself, but also that its policy tools for reinvigorating the economy seemed to be virtually exhausted even before the virus struck. Pitted against a global economy that was already seeing productivity stagnating and rising unemployment, a pandemic which demanded lockdowns and social isolation felt like the finishing blow. Worse still, global cooperation seemed to have cratered – and with it the possibility of a coordinated global economic response.
The problem Japan faced in this wasn’t just the economic disruption caused by the pandemic itself, but also that its policy tools for reinvigorating the economy seemed to be virtually exhausted
But there is also a sense that the damage could have been much worse, and the economic harm was at least not as bad as the Lehman Shock in 2008. The pandemic led the Japanese economy to contract by 29 percent on an annualized basis, which is very significant but still less than the economies of the U.S. and EU. In December 2020 real wages fell for the tenth consecutive month, reaching their worst level since 2014. Exports initially dropped 11.1 percent, their lowest since 2012, following China’s contraction at the beginning of 2020, and accounted for roughly half of last year’s economic contraction.
Export sales, however, are rising at their quickest pace in three years; along with the rebound in global demand, this helped manufacturing return to positive territory. Despite the contraction, fiscal and monetary stimulus measures helped drive up asset prices and in February 2021 the Nikkei 225 index of Japanese stocks hit 30,000 for the first time in thirty years – a limited measure of economic health, but at least one that reflects a degree of corporate optimism about the economy. While unemployment (at least reflecting the number of people still looking for work) climbed to 2.9 percent, it was still healthier than 5.5 percent unemployment reached in 2008 even though cash earnings were at their lowest in twelve years. Private consumption slowed, but still recovered, rising by 2.2 percent in the final quarter of 2020. The tourist and hospitality industries, though, bore most all the sunk costs for foregone tourism revenue, which was expected to have been 5 trillion yen in 2020, and with the Olympics being held without international visitors any tourism gains from those events will be lost as well.
The government’s social and commercial restrictions sparked criticism but reflected the tricky balancing act between containing the virus and mitigating economic damage
For its domestic response, the central government produced stimulus packages that totaled roughly two-thirds of Japan’s economy. These covered direct funding to individuals along with initiatives such as digital infrastructure and carbon-reducing technology, both with an eye towards the shape of Japan’s post-COVID economy, as well as financing and loan guarantees for small- and medium-size enterprises impacted by the pandemic. Overall, these measures were mostly successful – or at least, Japan’s economy was no more tied down than we would usually expect given the usual boat anchors of its aging population, productivity, or the value of the yen. Separately from the direct stimulus programs, many of the government’s various social and commercial restrictions were calibrated to avoid economic damage to small medium enterprises (SMEs), which sparked criticism about possibly lax pandemic countermeasures but reflected the tricky balancing act the government was undertaking between containing the virus and mitigating economic damage.
Japanese firms cut capital spending (spending on plants and equipment) in keeping with the decline in exports and global demand, suggesting that they did not dip into their corporate savings as much as they could have – something also suggested by Japan’s flat wage growth. With 53 percent of Japanese companies on the Topix index being cash solvent (compared to 14 percent of U.S. companies), there is certainly a sense that more could have been done to support workers’ incomes.
On the international front, it can’t necessarily be said that global cooperation reemerged to solve the crisis, given that a major aspect of the economic response was to reconfigure and diversify global supply chains to prevent disruptions in a single node (in this case China) from cascading through the system. While the pandemic may have given these initiatives added momentum, regional economies have already been aiming for supply chain diversification for several years now. Global supply chains have been more resilient than many expected, since no single country can provide what supply chains can – oddly enough, the enduring image of economic disruption from the past year was a container ship stuck in the Suez Canal rather than anything related to the pandemic. The combination of built infrastructure, labor markets, expertise, as well as the massive costs involved with relocating supply chains even if suitable new locations can be found makes fundamental supply chain relocation prohibitively expensive. The instinct for national self-reliance will remain strong, especially and troublingly for medical supplies, but the fact that a major regional trade agreement (RCEP) could be reached in the midst of everything points to the fact that the status quo of globalization still has the support of most all of the world’s leaders.
All told, it could be that Japan’s economy is more resilient than expected. Japan’s government certainly did what it’s best at through its massive stimulus programs and facilitation of international cooperation, and it must be noted that neither is a small feat. Totaled up, the stimulus packages undid any fiscal belt-tightening of the last few years and had to overcome the usually intransigent and powerful opposition of Japan’s deficit hawks. Maintaining advancing economic cooperation, meanwhile, has faced headwinds not just from the pandemic but also from the trade wars between China and the United States. Of course, it bears repeating that Japan has been far less effected by the pandemic than other major economies, which has saved the government (so far) from implementing even more stringent and disruptive measures to prevent the outbreak of the disease. Regionally, the hit to Japan’s economy has been comparable to that of South Korea and Taiwan when adjusted for the relative impact of the disease, suggesting that the surest path to economic resilience is successfully combatting the virus.
Japan’s economy did what it has been designed to do, for better and worse
This resilience, however, is unevenly spread – and it would be more accurate to say that the “shock absorbers” of Japan’s economy, women and nonregular employees, took the worst of the impact. While the number of regular employees rose 360,000 from the previous year, the number of nonregular employees dropped 750,000 – 70 percent of which were women. Effectively almost all of the “gains” made under Abe’s Womenomics initiative were erased. While roughly twenty advanced economies also experienced such “she-cessions,” there should be a real concern that structural factors (status of nonregular employees, availability and cost of daycare, and so on) may make the losses in Japan more permanent. Even the low unemployment number may belie hidden and lasting damage to the economy and society, since the number fails to count either people who have stopped looking for work, or those who have lost income resulting from reduced hours and shifts.
Japan’s economy did what it has been designed to do, for better and worse. For most in Japan, the economic disruption from the pandemic has been far smoother than it could have been, but for those on the margins the damage has been predictably devastating, speaking to Japan’s majoritarian biases in its economics and politics. If anything, the economic impact of COVID-19 should underline the fact that initiatives like Womenomics and attracting foreign labor, which are essential to the productivity and health of the Japanese economy, need much more political support so that future gains are entrenched rather than lost at the first downturn. Japan needs to do better, but for reasons that go well beyond the pandemic.