The virus throws Japan into severe recession

Japan is in recession. But in an international comparison, the economy is doing relatively well in the fight against the virus. How come

Private consumer spending in Japan has shrunk sharply: a department store employee in Tokyo wears a mask and dresses a mannequin.

NEven before the Tokyo government declared a virus emergency in April, the Japanese economy had already fallen into a severe recession. In the period from January to March, real gross domestic product shrank for the second quarter in succession, namely by 0.9 percent compared to the previous quarter. As everywhere in the world, economists and analysts expect the economic downturn to accelerate in the current quarter as a result of the coronavirus pandemic. The worst is yet to come, according to headlines in Japanese media.

The virus pandemic is having a double blow on Japan’s economy. The economy had already shrunk by 1.9 percent from October to December, mainly as a result of the increase in the consumption tax from 8 to 10 percentage points. Against the virus recession, the government is now preparing the second fiscal package to stabilize companies and the population economically. This includes rent subsidies and wage subsidies for small and medium-sized companies. At the beginning of April, the government had already decided on an economic stimulus program worth 108 trillion yen (915 billion euros). This corresponds to around 20 percent of annual economic output, with the net impulses financed by new borrowing being much lower.

With fewer than 17,000 confirmed infected people and around 750 deaths, Japan, with its one third larger population, has so far coped with the pandemic far better than Germany, which has almost 8,000 deaths. But as early as February, the country was visibly affected by the pandemic with the outbreak of the virus on the Diamond Princess cruise ship, which was anchored in Yokohama under quarantine. Because the domestic contagion remained low for a long time, the government waived the tough exit restrictions that European countries have been gradually introducing since the end of February. Nonetheless, the absence of Chinese tourists and shrinking foreign trade weighed on the economy at the beginning of the year. Private consumption and corporate investment also fell, as a sign of uncertainty and concerns about the economic consequences of the pandemic.

Japan’s economy is shrinking less than Europe or America

With economic output shrinking by 0.9 percent at the beginning of the year, Japan is in an international comparison less badly than other large industrialized countries. In the United States, the economy shrank by 1.2 percent, in neighboring South Korea by 1.4 percent, in Germany by 2.2 percent and in France by as much as 5.8 percent compared to the previous quarter. The discrepancy is explained, among other things, by the fact that the European states and the American state of New York introduced extensive exit restrictions as early as March and temporarily shut down public life. Japan’s Prime Minister Shinzo Abe, on the other hand, only declared a state of emergency at the beginning of April, which led to the closure of many shops in the country.

Last week, the Tokyo government lifted the state of emergency for 39 of the 47 prefectures, which generate about half of the country’s economic activity. In the metropolitan areas of Tokyo and Osaka, where the state of emergency still applies, more shops have since opened their doors again. This is possible because there was no strict ban. The virus emergency in Japan is described in terms of three gentle forms of closing (“lockdowns”) of the economy, because the government and prefectures cannot impose a curfew under current law. Recommendations and urgent requests to stay home or close shops are not punishable by law.

Nevertheless, the official state of emergency caused public life in Japan to dry up more than it did in March. Economists’ expectations for the contraction in the current quarter from April to June point to a smaller minus than in European countries. For Germany, for example, economists expect real gross domestic product to shrink by 10 percent in the second quarter. According to surveys in Japan, however, “only” a decline of around 5.5 percent compared to the previous quarter is expected for the Asian country. That could suggest that the gentle slowing down of public life in Japan is less harmful than the tougher antivirus measures in Germany. The economic forecasts are currently fraught with greater uncertainty than usual.