Japan’s Suga Risks More Economic Pain if Limited Emergency Fails

Japanese Prime Minister Yoshihide Suga’s bet that a less-stringent state of emergency will limit the economic damage of virus containment runs the risk of compounding the pain if it proves insufficient.

The economy now risks shrinking again for the first time since the summer with analysts recalculating projections in light of Suga’s emergency declaration covering great Tokyo and requests on Friday by Osaka and other prefectures to be added to the list.

The full economic impact may depend on whether the lighter measures are enough to rein in the spread of Covid-19.

Success will mean solving the country’s health crisis without sacrificing too much economic activity and perhaps boosting Suga’s credentials as a long-term leader of Japan. Failure could mean more deaths in a prolonged emergency that goes nationwide, a much bigger hit to the economy and Suga’s demise as prime minister later in the year.

Japan’s Suga Risks More Economic Pain if Limited Emergency Fails

Even before the declaration, Suga was facing a tighter timetable than his global peers to keep a lid on the virus and fuel the recovery with an Olympic Games scheduled for the summer and a national election due by the autumn.

“We just don’t know how long the measures will stay in place, especially given that the steps aren’t that restrictive,” said economist Harumi Taguchi at IHS Markit. “We really don’t know if they’re going to be enough to contain the virus.”

Tokyo reported 2,392 new cases on Friday following a record 2,447 the previous day. That’s far more than the 100 plus daily infections seen in the capital before the April emergency, adding to fears that the lighter measures may be inadequate.

Concern continues to build that hospitals will soon run out of beds for serious cases. As cases mount nationwide, Osaka is seeking to be added to the emergency zone along with neighboring Kyoto and Hyogo prefectures.

“There’s no doubt there’s going to be a hit from the emergency in the first quarter,” Finance Minister Taro Aso told reporters Friday. “I really don’t know how effective the measures are going to be.”

Even a good scenario that sees the current measures lasting one month in the greater Tokyo area only will hurt because the capital and its surrounding prefectures generate about a third of Japan’s gross domestic product. Factor in Osaka, Kyoto and Hyogo and the emergency will encompass around 46% of the economy.

Japan’s Suga Risks More Economic Pain if Limited Emergency Fails

Bloomberg Economics’ Yuki Masujima calculates a good scenario shaving 0.4% off the economy per month compared with 0.7% per month if tougher restrictions are brought in across the country.

“Tougher nationwide restrictions would likely wipe out growth for the whole of 2021,” Masujima said.

What Bloomberg Economics Says...

“The one-month period looks ambitious to us, considering last year’s state of emergency -- with tighter restrictions -- was maintained for a month and a half to combat a much smaller wave of infections.”

-- Yuki Masujima, economist

For the full report, click here.

Economist Takahide Kiuchi at Nomura Research Institute Ltd., estimates a two-month emergency limited to greater Tokyo would cause an 13.1% drop in consumption this quarter and up to a 10% annualized fall in GDP. If the restrictions last two months and spread nationwide, the fall in consumption will almost double, according to the former Bank of Japan board member.

While economists agree the economy will suffer, not all of them see a contraction as clearcut.

Before more prefectures began asking to be added to the emergency list, Naohiko Baba, Tomohiro Ota and Yuriko Tanaka at Goldman Sachs projected the economy ekeing out annualized growth of 0.2% during the emergency-affected quarter. They also estimate that half the population could be vaccinated by the summer, leading to a stronger recovery than the consensus view.

Japan’s latest emergency measures certainly look nothing like the lockdowns reinstated in some parts of Europe recently. They’re also far less sweeping than measures in the spring that kept much of the country homebound for five weeks and triggered the economy’s worst contraction on record.

Japan’s Suga Risks More Economic Pain if Limited Emergency Fails

Instead, bars and restaurants have been asked to close by 8 p.m. and people to avoid going out after that hour. Businesses and schools are allowed to stay open. A national travel discount campaign to boost the tourism industry, already suspended through this weekend, remains on hold during the state of emergency.

The emergency is set to run through Feb. 7, with compliance voluntary, though Suga is seeking to amend Japanese law so the rules can be enforced.

“Our sales will decline as hours are cut,” said Takeshi Niinami, chief executive officer at major beverage maker Suntory Holdings Ltd., who also serves on a key government economic advisory panel. “But some people will still dine out until 8 p.m. Young people are tired of voluntary restrictions.”

©2021 Bloomberg L.P.

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