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HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends : Heightened Risks to the Japanese Economy from COVID-19


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Takahide Kiuchi's View - Insight into World Economic Trends : Heightened Risks to the Japanese Economy from COVID-19

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

Market Analysis

Takahide Kiuchi

Feb. 14, 2020

The Covid-19 continues to spread day by day, and at present it shows no signs of abating. In considering the effects it will have on the global economy, and on the Japanese economy as well, it might be helpful to reflect on our experience with the first SARS (severe acute respiratory syndrome) which was rampant in 2003.

Compared to SARS, the adverse economic effects here will be quite severe

In the period from April to June 2003, when SARS was spreading rapidly, China’s real GDP growth rate was about 9% higher than during the same period a year earlier, reflecting a temporary drop of approximately 2% from the roughly 11% growth seen in the prior quarter. If the same thing happens with the current Covid-19 outbreak, the effects on the global economy would surely be far greater than they were at that time. This is quite simply because the scale of the Chinese economy within a global economic context has grown substantially larger in the interim.
According to statistics from the IMF (International Monetary Fund), the proportion of the world’s GDP accounted for by China’s nominal GDP went from 4.3% in 2002 up to 16.3% in 2019, a nearly fourfold increase.
Supposing that China’s GDP for the January-March period this year were to see 2% drop like the one that occurred with SARS, global GDP would be directly dragged down by around 0.33%. We would also need to factor in the effects of China’s economic deterioration spreading to other countries. Given that since SARS, China has become deeply woven into the world’s global value chain, the impact of production suspensions in China could conceivably be even greater and reach the production activities of other nations.
Given all of this, if China’s GDP were to drop by 2%, global GDP would presumably be depressed by 0.4% to 0.5%. Incidentally, it is projected that a 2% drop in China’s GDP would cause Japan’s GDP to fall by 0.1% over a one-year period.
These are estimates of the impact to the world’s and Japan’s annual GDP growth rates for 2020 in the event that China’s GDP falls by 2% for the January-March period this year and does not recover within a year’s time. If this conspicuous economic downturn were to conclude in roughly a single quarter, as was the case with SARS, the impact to the annual GDP growth rates would be about one quarter of those estimates respectively.

In the mainstream scenario, Japan’s 2020 GDP to drop 0.14%

In terms of the effects of Covid-19 on Japan’s economy, the most important channel to consider is the deterioration of inbound demand in the form of reduced tourist numbers coming to Japan. The Chinese government banned group overseas travel—including Japan—at the end of January. With regard to travel to Japan from China, group tours account for roughly 40% of all inbound Japanese tourism. In addition, the Japanese government has restricted entry by foreigners (including Chinese persons) who have previously stayed in certain regions of China.
Looking at the figures for the month of May 2003 following the SARS outbreak, the number of Chinese tourists visiting Japan was a massive 69.9% lower than in the same month in the previous year, while the overall number of tourists visiting Japan was a substantial 34.2% lower by the same metric. However, at that time, conditions were on the way to recovering within a few months of the downturn. This time, even if inbound tourism numbers were to fall by similar percentages compared to back then, the blow to the Japanese economy would undoubtedly be even greater. That is because between 2002 and 2019, the number of Chinese tourists visiting Japan grew by 21.2 times, or by 6.1 times in relation to the overall numbers of tourists coming to Japan.
Assuming that the effects of Covid-19 lead Japan’s annual inbound tourist numbers for 2020 to fall by the same percentage as during SARS (approximately -15% vs. the previous year), it would mean a loss of 776 billion yen (0.14%) for Japan’s GDP in 2020. At present, this would seem like a realistic estimation.
If we add to this scenario the impact on Japan’s economy that would result if the Chinese economy shrank by 2% in the January-March period and then picked up in the April-June period, Japan’s GDP in 2020 would be brought down by 0.2%. The Japanese economy would thus avoid falling into a severe recession, and a recovery trend could likely be maintained. This is the mainstream scenario at the current moment.

In the risk scenario, GDP could fall by 0.45%

On the other hand, if we assumed hypothetically that the dramatic slump in inbound Japanese tourism following the SARS outbreak had lasted for another full year (approximately -49% vs. the previous year), and we recalculated the impact of Covid-19 based on this assumption, then Japan’s 2020 GDP would in fact drop by 2.475 trillion yen, or 0.45%.
Factoring in as well the impact to Japan’s economy in a case where China’s economy shrinks by 2% from January to March and does not recover in a year, Japan’s 2020 GDP would be depressed by around 0.6%. In this case, the Japanese economy would very likely enter into a severe recession phase. However, at the present time this estimation is too pessimistic, so we could perhaps regard it as a so-called “risk scenario”.
Incidentally, growing inbound demand is one important growth strategy of the government’s that can be expected to lead to a potential improvement for Japan’s rate of economic growth. On top of the effects of the ongoing deterioration in Japan-Korea relations since last year, the impact of COVID-19 has led inbound demand to take a double whammy. If this is merely a temporary phenomenon then there will be no problems, but even as the effects of Covid-19 fade away, if inbound demand fails to regain its former vigor, the government’s growth strategy would go seriously awry.
Instead of the short-term economic impact Covid-19 will have, the more important concern is surely how it will affect the medium- and long-term prospects for the Japanese economy.

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