The Journal The Authority on Global Business in Japan

The coronavirus pandemic has forced new complexities on Japan and the response is evolving. Apart from the policy challenges faced by government, businesses are also finding their way through rapidly changing conditions that make planning for the future difficult. On April 24, the American Chamber of Commerce in Japan and the Asia Society Japan Center held a joint webinar to discuss these matters and the outlook for Japan’s economy and financial markets.

Three leading Tokyo experts—Goldman Sachs Japan Co., Ltd. Vice-Chair and Chief Strategist Kathy Matsui, Morgan Stanley Japan Senior Adviser Robert Feldman, and Wisdom Tree Japan Senior Adviser Jesper Koll—offered expert assessment of the situation and presented forward-looking scenarios. The goal was to help companies with strategic planning to capitalize on the new opportunities that will emerge from Covid-19.

Koll began the panel discussion by setting the stage and intro­­ducing consensus expectations for major economies. He mentioned two points:

  • Wide dispersion is observed in the growth forecasts, meaning that we are challenged with great uncertainties
  • While both the United States and Japan will experience increases in unemployment, the incoming employment shock is expected to be smaller in Japan, and both countries will see their budget deficit double

Feldman first discussed the difficulties in forecasting diseases, presenting how the actual number of Covid-19 cases in Japan had spiked in late March, despite an improving trend in model predictions. He warned that, although the weekly average of new cases as of late April appeared to be decreasing, we need to be careful. The processes, such as human movement and cluster formation, that generate the bell curve are very random. Therefore, contagion forecasts should be taken with a grain of salt and we should always question the underlying assumptions.

As for the economic outlook, an investor survey by Morgan Stanley showed that almost 50 percent of investors expected a return to the gross domestic product levels seen before the outbreak to happen only in the second half of 2021. Morgan Stanley forecasts even slower recovery, as the first effective vaccine will only emerge in 12–18 months. Until then, social distancing will need to be observed. As Kevin Rudd, president of the Asia Society Policy Institute, noted in an earlier webinar, “When the loss can be large, too much too early is better than too little too late.”

On the policy side, Feldman highlighted that fiscal policy interacts with the spread of the disease. He warned that although some US states are now seeking an early exit from social distancing, this option will consequently lead to slower recovery because more activity will contribute to a continued spreading of the coronavirus.

Turning to Japanese policy, he highly valued the early announ­ce­ment by Prime Minister Shinzo Abe that schools were to be closed and the aggressive target to reduce interaction by 80 percent, as well as Tokyo Governor Yuriko Koike’s strong and effective statements asking people to stay home despite her lack of legal power to enforce this request. Her efforts to get the national government and surrounding prefectures on board were also praised by Feldman. However, he called for a longer state of emergency—something that has come to pass with Abe’s extension through May 31—more testing, including those for antibodies, and mitigation of legal risk in healthcare.

Matsui, who is credited with coining the term “Womenomics,” speaking at the ACCJ Women in Business Summit in 2019.

Matsui discussed the market’s response to Covid-19, recent lessons from China, and potential opportunities resulting from the crisis. The Japanese equity market collapsed by more than 30 percent at its worst point, but has since retraced half of that decline, outperforming the rest of the world since March. This indicates that—at least in the investment community—the world is looking ahead.

Some lessons for Japan and the rest of the world may be drawn from China’s experience. Much of China had gone into lockdown by late January, and most provinces saw new cases stabilize by mid-February. Beijing then called for a reopening in low-risk areas in March, and there has been a gradual recovery in economic activity since. The industrial sector has rebounded fairly quickly—Chinese steel production, for example, has returned to the pre­vious year’s level—while consumer spending has been much slower, implying there is an uneven nature to recovery.

However, there is no major credit crunch as in the 2008–09 global financial crisis, and world governments are providing unprecedented levels of stimulus. Therefore, once new infec­tions stabilize, and lockdowns are relaxed, economic activity should gradually return.

Matsui also shared her views on the next set of challenges beyond the current defensive measures, including the need to stimulate final demand for both consumers and businesses.

In conclusion, she highlighted potential opportunities arising from the pandemic. The crisis has turbo-boosted the need for IT and digital infrastructure for teleworking and education—specifically investments in cloud solutions, networks, data centers, and cybersecurity. The pandemic has also accelerated the shift to e-commerce, the penetration rate of which has been lower in Japan (seven percent of total retail sales) compared with that in other countries (23 percent in China and 13 percent in the United States).

She also noted that, while we all hope to return to “normal,” there is great uncertainty about what the definition of that will be after Covid-19 is under control. Companies are likely to become increasingly pressured to accelerate operational restructuring, mergers and acquisitions (M&A), and industrial consolidation.

Koll pointed out that the global economic policy response to the pandemic has been well-coordinated and massive, very much in line with Australian Prime Minister Kevin Rudd’s call for “bold, fast, and big” action. However, traditional fiscal policy—public investment or tax cuts—accounts for barely seven percent of the new measures. The vast majority comprises new programs designed to boost private purchasing power through help such as income support, direct handouts, and zero-cost loans. A new financial socialism has been created, and the risks are high that a majority of people will become dependent on government spending and public grants for their livelihood. So, when the pandemic ends, withdrawal from current stimulus programs will become a key new challenge.

Koll is a frequent speaker at ACCJ events covering Japan’s market and economic potential.

A second point made by Koll was that we have not observed a currency shock in the current crisis, with major currencies stable and the Japanese yen rate remaining within the range of ¥105–110 to the dollar. This is an important stabilizer for corporate Japan and indicates that we are moving in the right direction of global coordination.

Koll’s third point was that the economic growth path is begin­­ning to diverge. As China recovers while the United States continues to struggle, Japanese corporations are facing a new challenge. With senior managers called back to Japan, many Japan headquarters now face difficulties in managing localized operations in China.

For Abe, balancing the trade-off between the economy and the pandemic has been the top priority, and Koll notes that, since the launch of Abenomics, the number of suicides reversed a two-decade uptrend and dropped rapidly as the economy improved—down to a three-decade low last year. Given the impact that economic well-being has on suicide and other deaths of despair, the life-versus-livelihood debate is expected to become more agitated as recessions deepen.

Koll expects that Covid-19 will serve as a catalyst for new oppor­tunities in e-government, healthcare, regional development (medical supercenters and research and development facilities), education, M&A, and more startups.

Abe has mentioned two stages in fiscal support:

  • Immediate government support for crisis management
  • Longer-term incentives to create new investment opportunities

The second is essential because simply returning to business as usual is unlikely to be the way forward, as Matsui also mentioned.

The initial comments by the three panelists were followed by a Q&A session, which covered issues such as:

  • The outlook for consumer spending
  • Prospects for the Japanese equity market
  • How massive stimulus programs will be funded, including any higher taxes
  • Corporate governance
  • Japan–China ties amid Tokyo’s urging companies to return to onshore operations

Final comments covered promising areas for immediate invest­­ment, including IT infrastructure in healthcare, education, and the energy sector, where enhanced resilience will be important. The pandemic has broken entrenched business practices in Japan and has opened opportunities for change that Abenomics may have failed to incentivize.

The crisis has turbo-boosted the need for IT and digital infrastructure for teleworking and education.