THERE’S MORE at stake in Tokyo’s prospective emergency measures to contain the coronavirus than the fate of the metropolis’s great bars and restaurants. Bullish scenarios for a muscular global economic rebound may have to be reassessed.
The International Monetary Fund has penciled in world growth of 5.2%, and a 6.9% boost for Asia. Morgan Stanley predicted a global gain of 6.4%. But Japan may be heading for a renewed contraction after Prime Minister Yoshihide Suga said Tuesday he’s considering declaring a state of emergency in the capital and surrounding districts. The steps may slice 0.7% from gross domestic product each month they are in force, according to Bloomberg Economics.
It’s not a leap to see Japan return to recession. Growth lost altitude toward the end of last year; retail sales plummeted in November and Tokyo consumer prices slid the most in a decade.
The dour start to 2021 in the world’s third-largest economy jars with the rosy projections for a global expansion that began to proliferate late last year. What happens in Japan matters to the rest of the world. Tokyo and its surrounding prefectures would almost qualify for Group of Eight membership if they were a country. While China is the main game in Asia, Japan isn’t too far behind. The country remains a big exporter and an important source of foreign investment to the rest of the world. Global economic trends tend to start in the country — from population decline to property busts, from too-low inflation to quantitative easing.
As renewed lockdowns and climbing coronavirus infections greet the new year, how Japan emerges from the pandemic will be a lesson — or omen — for the rest of the world’s leading economies.
Suga’s likely emergency declaration probably won’t be draconian. There’s little he can do without cooperation from provincial officials, a product of constraints in Japan’s political system that can be traced to reconstruction from World War II. Suga can’t clear the streets, for example, as some of his counterparts in the UK, France, and Southeast Asia can. Restaurants are likely to be asked to close early, and work-from-home further encouraged. Governors will have more authority to request that folks and firms go along with stricter curbs, but they will still have very little power to enforce them, Scott Seaman, Asia director at Eurasia Group, said in a note.
This doesn’t mean the prime minister’s move will lack potency. It will provide important cues for a citizenry that tends to value social cohesion and prioritize the interests of the community over those of the individual. One of the first things that hit me in Japan during a two-year assignment around the turn of the century was how common it was for people to wear masks if they had a sniffle. In this, too, Japan was ahead of the pack.
For all Japan’s fiscal and monetary firepower, Suga hasn’t caught a break since he succeeded Shinzo Abe in September. He’s been a captive of events, and lacks his own electoral mandate. The parliament’s five-year term ends in October, and the popularity of the Liberal Democratic Party government is sagging. In theory, getting to grips with COVID would strengthen Suga — both within the LDP and at the ballot box. But such is Suga’s poor hand that a jump in infections might be an ally as much as a foe. Until COVID-19 appears to be contained, no leader is going to look good. What internal LDP contender would want the job now anyway? As well as getting the blame, whoever sits in the corner office can’t really get out in the country to test campaign themes until the disease abates.
It’s not only Suga who is stuck. Haruhiko Kuroda, governor of the Bank of Japan (BoJ), is casting about for new ideas on monetary policy. In December, Kuroda said the BoJ would undertake an assessment of its policies, which have been focused on controlling the yield on 10-year government bonds, and keeping the benchmark interest-rate negative. Curiously, he sounds like he wants to keep both. So what’s the review all about? The BoJ probably wants to widen the scope of yield fluctuations around the level of zero. But you don’t need a three-month review to accomplish that. It’s possible Kuroda had in mind a formula that might eventually establish conditions under which exit from mega-easy money might occur, or equally, allow him to go the other way and deepen his commitment to stimulus. The way bad news is piling up, greater easing looks the most appropriate route.
It’s a very unhappy new year for Japan’s political and economic leaders — and maybe for the rest of us.
BLOOMBERG OPINION