Report  Global Economy  2020.03.24

Policies appropriate for the Japanese economy hit by COVID-19

Economic conditions are worsening at a rapid pace in Japan on account of the measures introduced for containing the contagion of disease by COVID-19. Against this background, 16 members of the Canon Institute for Global Studies present their shared opinion about main features of economic policies appropriate for Japan at present. We hope this will help deepen the discussion in wider circles.

COVID-19 has been officially declared a pandemic, and its ending is unforeseeable at this moment. Whereas its influences on the economy are believed to be temporary, both their size and duration are totally unpredictable. One cannot rule out the possibility that the economic deterioration might become one of the most serious in history. In these circumstances, macro-economic policy must be implemented in such an appropriate and timely manner as to reduce adverse impact of the pandemic on the economy as well as to prepare grounds for economic growth going forward. In fact, such attempt has begun in a number of countries, notably by central banks of major countries. The policies adopted so far are obviously insufficient for addressing the problems associated with the novel corona virus. Lock-in of people, i.e., no social events or going-out, not only damages hotels, restaurants, airlines and other industries but also gives an uneven impact on employment. Therefore, strong assistance must be provided directly to individual firms and persons affected by the lock-in policy.

In light of the relationship between the medical/social policy to combat COVID-19 and macro-economic policy to address its economic impact, the best macro-economic policy is to contain COVID-19 and lift the bans and restraints on economic activity like lock-in. In the present circumstance, however, it is unavoidable to employ policies which limit person-to-person contacts and thus curb personal consumption. In other words, some anti-pandemic policies are in place to depress economic activity on purpose. As long as the disease is spreading in the country, there is no room for unbridled expansionary economic policy, which increases the risk of contagion through person-to-person contacts. Otherwise, contagion would become more serious, darkening the prospect for sustainable economic growth in the offing as well.

At the same time, the government is responsible for supporting the direct victims of the anti-pandemic policies, i.e., individual firms and persons whose incomes and cash-flows are hit by the policies, obvious examples being part-timers, free lances and other self-employed workers in the industries that face consequences of the policies.

Firms will go bankrupt if they lose cash-flows and fail to repay their debt. Individuals cannot sustain their living if they lose incomes and fail to pay rent, utilities and other necessities. The government has to provide them with financial resources necessary for these minimum payments. This is not a macro-economic policy geared to economic growth. Expansionary macro-economic policy is now incompatible with anti-pandemic/anti-contagion policy, and which of the two must get the first priority appears unequivocal at the moment.

There are a variety of ways for such supports. For example, government-assisted emergency lending for individuals without screening or collateral may support their living. If it is administered properly with Mycard numbers (similar to US SSN), their repayment can be made as an add-on to their income tax payment next year, which will minimize the risk of non-repayment by the borrowers. The tax authority can also waive the repayment by those whose incomes have dropped to a minimum threshold. This is tantamount to cash assistance to those who truly needed that support, in which sense this will be a reasonably fair system. Assistance to firms can also be provided in a similar fashion. The gist is that the assistance be given to individual firms and persons that are pressed for funding for payment.

Different types of policy proposals have been published elsewhere in Japan, and some so-called emergency economic policy items have attracted attention, e.g. sales coupons/vouchers, subsidy to dining and tourism. However, these policies are intended to increase personal consumption through person-to-person contacts, which is definitely counter-productive from the viewpoint of anti-contagion medical/social policy. The government must not employ such policies that stimulate personal consumption without safeguard.

A reduction in the consumption tax has also been proposed by a few circles to ease the virus-led negative impact on the economy. As is discussed above, however, that tax reduction will increase the risk of disease contagion by a premature increase in personal consumption. Again, this is incompatible with the anti-contagion medical/social policy. In addition, the consumption tax constitutes a permanent basis on which the system of social security, together with its financing, is built for generations to come. It is the very fundamental source for medical and senior care expenses. If the tax system that defines the framework of the society from a long-term perspective were altered by an opportunistic purpose, e.g., if the consumption tax were tinkered with in order to meet the sudden, temporary crisis of COVID-19, that would damage people’s confidence in solid and sound government management of the nation longer term. Therefore, the government must not employ a policy of the consumption tax reduction against the COVID-19 crisis. Instead, the government must put in place temporary, time-limited policies – e.g., emergency credit facilities and cash payments -- against a sudden, temporary crisis.

Now that COVID-19 is spreading at home and abroad, the top priority must be placed on containment and prevention of contagion, followed by government financial assistance for firms’ cash-flows and persons’ living necessities. Both of these must be implemented immediately. After the disease is contained, the restrictions on economic activity will be lifted, thereby opening room for policy discussion aimed at macro-economic expansion. All the policies must be decided upon, keeping in mind both priority and right sequencing.

Signed by (alphabetical order)

Toshihiko Fukui

Ryozo Hayashi

Akinari Horii

Isao Kamae

Megumi Kashiwagi

Keiichiro Kobayashi (main drafter)

Daisuke Kotegawa

Jun Kurihara

Yukihiro Matsuyama

Kunihiko Miyake

Kumiko Okazaki

Tetsuji Okazaki

Kiyoyuki Seguchi

Miyako Suda

Taishi Sugiyama

Kazuhito Yamashita

On March 24, 2020