2020 will be remembered in history as the year of COVID-19, which began to overshadow the globe earlier that year. By late 2020 the pandemic has had a few notable influences over the economy.
First of all, the pandemic has caused some glitches to occur in the globalized businesses which had prospered on account of efficient supply-chain networks linking the most cost-effective production sites global-wise. The pandemic has made the risk of network disruptions materialize, which has hence awakened businesses to a need for upgrading their management of a variety of risks including inventory management. One Japanese business leader made a pithy remark a few months ago, “we need to change our business model from just-in-time management to just-in-case management.”
The pandemic has also cast a shadow over the international political scene. It has sharpened the conflicts that had been growing between the U.S. and China in the areas of international trade, investment and defense since the end of Obama administration. These political conflicts also hamper efficient use of global resources together with the rising just-in-case business management.
Digital transformation (DX) has gained momentum under the pandemic. Change from brick-and-mortar sale and face-to-face negotiation to e-commerce and e-business had been expanding even before the pandemic unfolded, but the change has accelerated saliently thereafter. The denotation of DX now includes on-line education, medical treatment, and work. DX will enhance productivity growth while the glitches in globalization will curb it. The net effect of the two depends on characteristics and actions of individual industries and companies.
Under the pandemic, governments have increased intervention in the market. The government spending in the form of temporary payment for relief has arrested the rapid declines in economic activity accompanying the pandemic in a number of countries. After the economy hit the bottom in Japan, its government introduced economic stimulus measures named Go to Travel and Go to Eat, whose effects have still been uncertain. On the monetary policy front, the central banks in the U.S. and other developed countries have provided the economies with ample liquidity aimed at preventing bankruptcies from arising out of liquidity shortage in a more aggressive manner than they did during the global financial crisis of the late 2000s.
What impact will these developments have on the macro-economy, particularly those of the U.S. and Japan? On the aggregate demand side, personal consumption fell sharply in spring on account of lockdowns associated with the pandemic before it recovered as the lockdowns were lifted. In light of the accumulated savings in the personal sector, pent-up demand will be released to support a spending spree after medicines and vaccines become available. Business investment will expand on account of acceleration of DX. Fiscal spending will continue to increase in tandem with populism on the political front, which will bloat public debt. In the financial market, bank lending has geared up after the pandemic in contrast to the past when monetary ease resulted in mainly liquidity expansion in the interbank market.
Growth in the supply side of the economy had been supported by economic globalization and DX. Now that the globalization has been bridled by the pandemic as well as populism, the course of supply-side growth critically depends on DX. In this regard Japan has lagged far behind other countries. Japan’s delay in DX can be attributed to conservatism of adhering to the old systems and practices. Conversely, one may say that Japan’s economy will be able to achieve gains only by catching up with other countries. Let us hope to make 2021 the year of DX supporting the new systems and practices, and vice versa.