The world will be sending off 2020 with no clear prospects yet of any solution to the issue of Covid-19, which suddenly emerged at the beginning of the year. It is likely that the aftermath of the pandemic will strongly color our economic and social activity in 2021 as well. Given these circumstances, it is my hope that the economic policies of all countries are dramatically transformed in anticipation of the post-Corona era to come.

Changes in consumer behavior will alter industrial structures

Governments in every nation have taken measures to proactively support companies and workers who suffered major blows from the Covid-19 crisis, though mechanisms including special lending systems and subsidy programs. This has helped to alleviate the pain of the crisis, and has enabled companies to continue to run their current businesses, while also allowing workers to remain employed at their current companies.
Recently, signs of a new surge in infections have appeared in many countries, and as a consequence, Europe along with Japan and the US now face the smoldering crisis of a “double-dip” recession in which GDP growth could be negative once again at the start of the new year. Meanwhile, with more vaccines now being administered, it is conceivable that the risk of infection will gradually decrease toward the latter half of 2021, and that this development will encourage the normalization of economic activity in all countries. Even still, given people’s entrenched caution toward the risk of catching the virus, consumer spending on travel, dining, and amusement-related activities will be more selective than before, and overall expenditures will probably not return so easily to their pre-pandemic levels. The result of all this will be a so-called behavioral modification, which will be a driving force urging a transformation in industrial structures.

Switching to policies “on the offensive” to spur a transformation in industrial structures

Next year, as consumers become more selective in their spending, differences in quality and competitiveness between those companies whose customers return and those seeing fewer customers come back will gradually become more apparent. Continuing to prop up companies that have lost their competitive ability using state funds will no longer be an appropriate policy, given the national burden and in terms of economic efficiency. With the change of circumstances, policies for supporting companies and workers that are reasonable right now will become backwards or negative ones, hindering the transformation of our industrial structures and preserving inefficiencies of our economy.
The government will be required to undertake a major shift, adopting new policies to support companies that have lost some of their competitive edge to transform their business types and to help workers change jobs. This entails a transition from “defensive” policies made in response to the Covid-19 crisis, toward policies “on the offensive” that look ahead to the post-Corona world. If such policies succeed and prompt a change in our industrial structures, it will quicken the pace of our economic recovery from this crisis.

Simultaneously promoting policies to improve the productivity of SMEs

Incidentally, it will surely be important for Japan not only to pursue this transformation of industrial structures in anticipation of the post-Covid era, but also to make parallel efforts to raise the productivity of small and medium-sized businesses, which has long been a challenge.
While the most severe blows from the Covid-19 crisis were suffered by restaurants, hotels and inns, retail, wholesale, and other segments of the distribution and service industries, which have a relatively high proportion of SMEs, these industries have extremely low productivity in Japan when compared internationally. If these four industry categories could shrink the gap between their labor productivity and the US standard by one-quarter, according to my estimations, that alone would boost the overall labor productivity of the Japanese economy by 8.3%.
In order to raise productivity for SMEs overall, it will be important to have policies that aim not only to improve the productivity of existing SMEs and promote the participation of highly productive SMEs, but also to prevent profitable SMEs from going out of business. This is because it is not so rare for highly productive and outstanding SMEs to be forced to close down because of a shortage or lack of successors to fill positions. This is arguably a great loss for Japan’s economy.

Taking advantage of the Covid-19 crisis to enhance Japan’s economic potential

The Japanese government’s Growth Strategy Committee has highlighted policies that involve using subsidy programs etc. to help SMEs which have been hit by the Covid-19 crisis to improve their productivity and competitiveness through a change in business type. It has also set forth policies that will strongly support M&A to help the survival of SMEs dealing with issues of succession.
The government is even considering measures to promote the M&A activities of SMEs with tax incentives. For instance, it is looking into introducing a measure that would allow companies to record a portion of their acquisition costs as a reserve—so that they can handle any unexpected losses that may occur after acquisition—and to include that portion as a deductible expense. This would help companies maintain employment post-acquisition and encourage salary raises, with a certain proportion of increases in employees’ gross salaries being tax deductible.
If companies become more active in changing business types and pursuing M&A, this will mean more and greater business opportunities for banks as well. While banks have already been actively involved in M&A from their experiences handling issues of succession, in order to encourage banks to share a broader scope of corporate information and foster more successful company matching, the government will likely need to position itself to contribute more proactively to private sector initiatives.
Looking to the post-Corona era, I have high expectations that companies will undergo these changes in business type in response to new consumer demand, and that they will actively engage in M&A to facilitate business successions, ultimately leading to a smooth transformation of industrial structures that will engender higher productivity. If this is achieved, Japan will be able to show itself to the world as an economy that managed to take advantage of the Covid-19 problem and succeeded in enhancing its potential.