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HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends : Another State of Emergency Declared Makes for a Tough Start to the New Year


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Takahide Kiuchi's View - Insight into World Economic Trends : Another State of Emergency Declared Makes for a Tough Start to the New Year

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

#Market Analysis

#Takahide Kiuchi

Jan. 08, 2021

With the number of new Covid-19 infections growing rapidly, the Japanese government decided on January 7 to issue a one-month state of emergency for the Tokyo metropolitan area as well as Saitama, Chiba, and Kanagawa prefectures. This declaration will be the first one issued since May of last year. It will have an unavoidable impact on economic activity, and thus makes for a tough start to the new year for Japan’s economy.

Declaration of state of emergency will have some effect in suppressing the spread

The direct catalyst for this second state of emergency to be declared was the milestone daily infection total of 1,337 new cases in the Tokyo metropolitan area on December 31, the highest single-day figure yet. Then on January 2, Tokyo Governor Yuirko Koike and the governors of Saitama, Chiba, and Kanagawa prefectures met with Minister in charge of Economic Revitalization Yasutoshi Nishimura, and requested that the government declare a new state of emergency under the Novel Coronavirus Special Measures Law (“Special Measures Law”). Subsequently, at a New Year’s press conference held on January 4, Prime Minister Suga explained that the government was considering issuing a new state of emergency order.
Within the government, there are those who warn of the deleterious effects this new state of emergency declaration will have on the economy, as well as some who are skeptical of how effective it will be in curbing the spread of the virus. To be sure, there is no guarantee that under the current Special Measures Law (with its weak enforceability), the issuance of this declaration will have a profound effect on halting the virus’s spread. And compared to the declarations issued in April and May of last year, it is fully conceivable that the impact of this one could be minor. This is because not only are there fewer industries covered by the call for shorter work hours and business closures this time, but people’s sense of crisis regarding the spread will not be as high as it was last time.
However, we can expect the declaration to have an announcement effect, in that the sense of urgency conveyed by the government through the order will change individuals’ behavior, and will thus contribute to some extent to tamping down the spread.

The state of emergency order will lead personal consumption to drop by 4.89 trillion yen

With the declaration of this second state of emergency, non-essential spending consumption is likely to be depressed to a considerable degree. Based on the Family Income and Expenditure Survey, if consumption items that involve going out are extracted from total personal consumption spending, that portion comes out to 55.8% of all consumer spending. We can suppose that this portion of non-essential consumption will be lost as a result of this second state of emergency being ordered.
Meanwhile, the percentage of Japan’s national income accounted for by Tokyo comes out to 17.8% (Cabinet Office, “Prefectural Income Statistics”, 2017), with Kanagawa prefecture making up 7.1%, Saitama prefecture making up 5.4%, and Chiba prefecture making up 4.8%. Altogether these areas account for 35.0% or slightly over one-third of the nation’s income. If a one-month state of emergency is declared for the Tokyo metropolitan area and these three prefectures, it would result in 4.89 trillion yen in lost consumer spending. This is equivalent to 0.88% of Japan’s annual GDP. If the order were to continue for two months, these respective impacts would be twice as great in scale.
Incidentally, calculations show that as a result of the state of emergency orders that were issued last spring, the losses to personal consumption amounted to 10.7 trillion yen in April and 11.2 trillion yen in May. If the regions covered by this state of emergency declaration are limited to Tokyo and these three prefectures for a one-month period, the adverse effects on the economy will be slightly over 20% of those experienced last spring.
Nevertheless, depending on the spread of the virus going forward, it is conceivably also possible that the regions subject to this state of emergency could gradually expand beyond Tokyo and these three prefectures. Supposing that the whole country were to be covered by the order, this would mean 14.0 trillion yen lost in one month’s time, which would amount to 2.53% of Japan’s annual GDP.
I think there is a significant chance, in light of this second state of emergency declaration, that Japan’s real GDP for the period from January to March this year will be slightly negative versus the previous quarter. If so, we would see negative growth once again as happened in the April-June quarter last year, and the Japanese economy would fall into a “second bottoming out”.

Dealing with the growing number of company failures and closures will be crucial

Even if the regions covered by the state of emergency are just Tokyo and these three prefectures, the order lasts only one month, and the direct inhibitory effect on consumption is merely a little over 20% of that seen last spring, we must be prepared to see some very heavy damage to company management, particularly in the restaurant business and travel-related industries. As for companies that have somehow managed to weather the storm thus far in hopes that the virus would quickly be brought under control, we will likely see more cases where this second state of emergency declaration proves too much to bear and these companies choose to go out of business. That would lead as well to higher unemployment.
Given these points, it seems necessary for the government’s Coronvavirus economic countermeasures to pivot once again towards shoring up the safety net for supporting companies and individuals. The Tertiary Supplementary Budget approved by the Cabinet includes numerous policies that, in anticipation of the post-Corona era, will aim to support companies’ efforts to change their business styles, and to thus help them smoothly change industrial structures. These undoubtedly will be important policies for society after the risk of infection has been contained, but right now it feels as though we have been pushed back from the “post-Corona” concept to being in the thick of the pandemic again. In such circumstances, policies that steadily support companies and workers such as by increasing and extending their subsidies or grants are surely a higher priority.
The government should perhaps consider rearranging the content of the Tertiary Supplementary Budget to be passed at the next ordinary Diet session, and significantly overhaul its economic policies toward bolstering support for Japanese companies and individual citizens.

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