17 Feb 2020 16:23 IST

Japan’s frail economy will struggle to fight virus

Bank of Japan Governor Haruhiko Kuroda

The GDP contracted by an annualised 6.3% last quarter and that’s before the Wuhan outbreak

Japan’s economic immune system looks vulnerable to the coronavirus. The country’s GDP contracted by an annualised 6.3 per cent last quarter, and that’s before any effects from the Wuhan outbreak. Monetary policy is overstretched, the yen vulnerable and demand is tepid. It will take creativity and courage to head off a prolonged downturn.

The weak initial readings were hit by Typhoon Hagibis and a poorly timed consumer duty hike in October. Although the preliminary numbers are often revised sharply, other indicators are equally concerning. Consumption fell nearly 3 per cent on a quarter-by-quarter basis. Even worse, Japan Inc cut capital expenditures by 3.7 per cent. The upcoming hit to shopping and business sentiment could be even more severe as an epidemic radiates out of central China.

Government officials unveiled a $120 billion stimulus plan in December, but it does not appear to have inspired much confidence yet. The final package was hoped to deliver an additional $110 billion in private-sector and other spending on top of government outlays, Reuters reported in December, but that now looks optimistic. The upcoming summer Olympics in Tokyo could be hurt by the virus, too.

Rolling back the two percentage-point tax increase might help, but also could send a panic signal. The Bank of Japan, for its part, has already pushed benchmark rates into negative territory. Governor Haruhiko Kuroda could tinker with bond purchases and try to protect exporters with a softer currency. But aggressive easing threatens pensions, punishes banks and adds to government debt already around 200 per cent of GDP, which could ultimately constrain Tokyo’s ability to support its growing population of retirees.

Fiscal support will be key to slowing the rate of fall, but if supply chains remain discombobulated and consumers stay home for an extended period, the private sector must pitch in. Unfortunately many conservative executives are still hoarding capital in cheap deposit accounts where negative rates don’t apply. Ministry of Finance data showed non-financial corporations held $7 trillion in liquid assets, including $1.8 trillion in cash and deposits, by the end of September. That money could be put to better use, but getting it into the system could mean forcing banks to charge fees for those deposits, or even tax them. That might be less unpopular than a prolonged recession.