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Japan's COVID-19 relapse trumpets need for urgent economic action

Second state-of-emergency declaration looms as daily infections rise above 1,000

| Japan
Local tourism industry workers welcome travelers at the Hakone hot spring resort on July 23, the day after Japan's travel subsidy campaign started: the country is headed the wrong way.   © Kyodo

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

That loud ticking sound emanating from Tokyo's political clock bodes the imminent explosion of costs resulting from Japan's tepid COVID-19 response.

Up until last week, the world's third-biggest economy seemed to be dealing successfully with the coronavirus. Prime Minister Shinzo Abe basked in global headlines pondering what others could learn from Japan's low infection and death rates. Now, Japan is witnessing 1,000-plus new infections daily, with talk of a second state-of-emergency declaration.

Yes, Japan's 35,000 cases are fewer than New York's Westchester County. And its 126 million population has 16,000 fewer cases than Singapore, population 5.8 million.

Still, outbreaks are relative and Japan is headed the wrong way. Its previous emergency decree, lasting from early April to late May, shoulder-checked an already feeble economy. That prompted Abe to devise a ginormous stimulus jolt amounting to more than $2 trillion, 40% of gross domestic product.

The Bank of Japan, meantime, has already supersized its balance sheet to exceed the nation's $5 trillion economy. It hoarded roughly half of outstanding government bonds and cornered the stock market via exchange-traded funds.

The economic fallout of recent months, though, suggests that Japan Inc. needs more thrust -- and a better, more targeted stimulus. Both Team Abe and the BOJ must act swiftly to devise fresh steps to stabilize growth. The more coordinated the efforts, the better.

Abe must start by dispensing with the denial about Japan's COVID-19 problem. Instead of following U.S. President Donald Trump's playbook, prioritizing stock market stability over underlying growth, Abe should heed Tokyo Governor Yuriko Koike's support for more sweeping lockdowns and a slower reopening.

Abe, right, should heed Tokyo Governor Yuriko Koike's support for more sweeping lockdowns and a slower reopening. (Photo by Akira Kodaka)

Even if the truth lies somewhere in between, Abe's $13 billion "Go To Travel" scheme to incentivize domestic travel may backfire, and end up causing more infections. Hence polls in the Mainichi newspaper showing that 69% of voters want the plan scrapped.

Next, Abe should name a COVID-19 recovery czar. Finance Minister Taro Aso, who turns 80 in September, has been mostly AWOL as Japan's recession deepens. And if you ask the average Japanese on the street, few could name the current economy minister -- Yasutoshi Nishimura, to save a Google search. Strategy needs to be centralized and policymakers empowered to think out of the box.

One such step would be to revoke Japan's last two sales tax hikes. A 2014 increase to 8% was characterized as a fiscal-consolidation play. The resulting recession, though, necessitated more government borrowing to restore growth. The latest step to 10% in October resulted in a 7.3% contraction in the fourth quarter. That left Japan on an incredibly weak footing heading into this pandemic.

Fitch Ratings is not buying Abe's debt-reduction spin. Last week, the ratings agency lowered its outlook for Japan's sovereign credit rating from stable to negative. As the pandemic intensifies, Fitch predicts "sharply wider fiscal deficits in 2020 and 2021" that "will add significantly to Japan's public debt."

In other words, if Japan does not boost consumer demand enough to expand GDP, a downgrade from today's A rating is imminent. All the more reason for Abe's administration to pump more cash into households. At the very least, do another round of 100,000 yen ($956) payouts per person.

Even better, signal that additional payments may be on tap. The idea that more help might be coming could cajole households to spend, not just save the money. This is becoming increasingly important as the risk of another emergency declaration increases.

Here is where an Abe economy czar could be working with BOJ Governor Haruhiko Kuroda. Since 2013, Kuroda has trained his monetary "bazooka" on bonds, stocks and asset-backed securities. What Kuroda has not done is pump enough liquidity into household balance sheets. Not unlike the mistake Washington made after the 2008 global crisis.

One idea mooted about is getting parliament to issue BOJ debit cards in, say, 100,000 yen increments. Only once the full amount is spent would the balance be topped up. That's a big leap for a change-averse political culture, but Kuroda's pledge that the BOJ will do "whatever it can" makes it debate worthy.

One thing Kuroda & Co. can do immediately is hoard outstanding local-government debt. The postponement of the Tokyo Olympics is a blow to regional economies that hoped to woo foreign tourists. Taking debt off municipal balance sheets would free them to borrow anew to fund revitalization efforts.

The BOJ could also work with Team Abe to pump more liquidity into traumatized regional banks so they extend more credit. The same with smaller companies on the verge of failing.

But all that hinges on getting a handle on COVID-19. That means more testing, increased contact tracing, a broader embrace of teleworking and fully prioritizing long-term public health over economic growth. Japan cannot enjoy the latter without protecting the former.

Otherwise, Tokyo will be veering from one lockdown to another for some time to come. It is not the kind of ticktock Japan can afford.

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