Postponing the Tokyo Olympics could lead Japan’s 2020 GDP to fall 2 trillion yen, or 0.36%

On March 23, Prime Minister Shinzo Abe signaled for the first time that the Tokyo Olympics and Paralympics, which are set to be held in July, might be postponed. While Abe stated that cancellation of the games was not on the table, this move would seem to suggest that a postponement has been all but decided.

Postponing the Tokyo Olympics by one year, for example, would not mean a proportionate hit to the Japanese economy this year. However, the anticipated related consumer demand would end up being pushed back until next year. The Bank of Japan has estimated that roughly eight trillion yen has been allocated to special procurements related to the Tokyo Olympics, but a considerable portion of this has already been spent on things like stadium construction.

The loss in demand from this delay consists of spectator ticket purchases, facility operation costs, and security expenses, among other things. In terms of the direct effect of the Tokyo Olympics for the Tokyo Metropolitan area, this demand is estimated to be worth 1.979 trillion yen. With this nearly 2-trillion-yen demand pushed back to next year, it is estimated that Japan’s nominal GDP in 2020 would see a drop of 0.36%.

Falling demand in connection with the novel Coronavirus

The following estimates show, on a factor-by-factor basis, the extent of the decline in Japan’s 2020 GDP as a result of various factors related to the novel Coronavirus (if these effects persist for one year).

Among these various factors, it was initially the slump in inbound demand that was having the most significant adverse effects on the Japanese economy, but subsequently the downturn for China’s economy and restrained domestic consumption have become proportionately greater factors at work.

Going forward, the situation will enter a new phase in which the worsening economic conditions in foreign countries besides China—principally the US and Europe—will exert increasingly negative effects on the Japanese economy. While it is likely that China’s economy has seen serious negative growth for the January-March period versus the prior period, it is expected to make a recovery in the April-June period.

Meanwhile, the US is widely forecasted to see a double-digit drop in its real GDP growth rate in April-June versus the previous period on an annualized basis. And in the Eurozone, the April-June period will inescapably experience major negative growth. For this reason, Japan’s export environment will simply have no way to avoid a dramatic downturn for a time.

In terms of domestic industry, the sectors that are currently suffering the greatest blow are tourism, the accommodation industry, and amusement-related industries, which are feeling the effects of lower inbound demand and restricted consumption of domestic services. In these areas, mainly SMEs and micro enterprises (with the exception of the aviation industry) are the ones taking the strongest hit.

If the spread of the novel Coronavirus in Japan can be stemmed moving forward, the impact of the public’s self-restrained consumption of domestic services should gradually lessen. In its place, export-oriented industries centered on large enterprises will likely suffer a greater blow.

Negative growth for four consecutive quarters, similar to that seen following the Lehman Brothers failure

Japan’s real GDP for the October-December 2019 period posted serious negative growth, at a quarter-on-quarter annualized rate of -7.1%. As a result of impact from the novel Coronavirus, the January-March 2020 period will likely mark a continuation of this negative growth, albeit at a lesser rate.

Meanwhile, given the possibility that rapidly worsening economic conditions in Europe and the US in the April-June period could lead later on to a further downturn in Japan’s export environment, there is a growing chance that the July-September period might also see negative growth. If the Tokyo Olympics end up being postponed, that possibility would only become even more likely.

Were that to happen, Japan would have to prepare itself for four consecutive quarters of negative growth. Following the Lehman Brothers failure (and the global financial crisis), Japan also posted negative growth for four quarters in a row, and now it could well be poised to see something similar.

Incidentally, the Lehman Brothers failure resulted in a real GDP growth rate of -3.4% in FY2008, followed by -2.2% in FY2009. With regard to the real GDP growth rate for FY2020, we must be prepared to see negative growth in the range of 2% to 3% as well.

At least when it comes to short-term impact, the deleterious effects of the novel Coronavirus on the economy are arguably already equivalent to those in the aftermath of the Lehman Brothers collapse.

Avoiding a financial crisis will be the most crucial economic countermeasure

A major feature of the global economy in the wake of the Lehman Brothers failure—beyond the short-term economic slump that occurred—was the structural changes it provoked, namely the drops in the labor productivity growth rate and potential growth rate and the more general loss of economic potential. What brought these things about was the financial crisis. The downturn in the money market and the decline in banks’ financial intermediary functions resulted from the fact that money could no longer be circulated freely.

If we can just avoid a financial crisis this time, then even if the short-term economic slump is on par with what followed the Lehman Brothers collapse, our subsequent economic position will be different than it was back then, and the situation will be more likely to normalize relatively quickly. In this respect, the role to be played by central banks in averting a financial crisis will be a significant one. Precluding such a crisis is itself arguably the most crucial economic countermeasure that can be taken.

The most important thing in Japan’s case is to avoid causing any disturbances to the bank’s procurement of US dollars. If a major such disturbance were to occur, not only would banks default on their foreign currency-denominated debts, but trade would also severely shrink, and grave effects would be visited on real economic activity as well.

This is because approximately 70% of Japanese imports involve contracts and payments denominated in US dollars. Consequently, if importers cannot procure US dollars through the banks, imports of raw materials and other goods will be delayed, and this will create serious disruptions to our domestic production activity. This is why the slump in economic activity after the Lehman Brothers failure was more severe in Japan than in all other major powers, even though the epicenter of the financial crisis was elsewhere. Maintaining the stability of the dollar is very much a vital matter for Japan.

From this perspective, the Bank of Japan must take the maximum possible measures to ensure that banks and companies have access to the dollar.

• Takahide Kiuchi
  

  Executive Economist