Japan's Prime Minister Shinzo Abe reacts during a budget committee session in parliament on January 30. The government is facing criticism for the country's minimal quarantine procedures. Photo: AFP

As the globe braces for a potential pandemic, few economies are more vulnerable than Japan.

China is ground zero of the rapidly spreading Wuhan coronavirus. But Japan’s longest recovery since the 1980s may be Asia’s biggest victim as the fallout spreads.

Japan’s China addiction

Tokyo’s growth run since late 2012 owes lots to rapid mainland output. Though much of it is Chinese demand for cars, electronics and “Made in Japan” crafts, an explosion of mainland tourism has been a not-insignificant boon. Loosened visa controls, a weaker yen and Mandarin-language advertising campaigns have earned Prime Minister Shinzo Abe’s government its clearest economic victory to date.

Mainlanders are both Japan’s biggest tourism spenders and the core of Abe’s ambitious goal to attract 40 million visitors this year. That aspiration, though, is already in danger as Chinese President Xi Jinping bans tour groups from traveling abroad.

In 2018, roughly one-third of mainland visitors came as part of such packages. Tokyo districts like Ginza, Shinjuku and Asakusa have seen a boom in duty-free shopping areas. In these areas retail workers without Mandarin skills need not apply.

The roughly $16.2 billion increase in Chinese tourism spending here in just the last year explains why. Yet Japan’s tourism boom is now facing a dramatic about-face. China, the biggest trading nation, was having enough trouble navigating the global trade war when the outbreak hit. Growth was plumbing 30-year lows before Wuhan became a hot zone. Now, Xi’s team may be lucky to keep growth north of 5% in 2020.

And Tokyo will be lucky to preserve the health of its biggest investment in years: the 2020 Tokyo Olympics set to begin in August. None other than the Japanese Association for Infectious Diseases is already connecting the dots — and risks. Its president, Kazuhiro Tateda, says Tokyo will “have to be very careful” about coronavirus risks ahead of the Games.

Indeed. But it’s out of Tokyo’s hands if Xi decides not to send a team of Olympians to Tokyo. Or if other major sporting rivals – from the US to South Korea – follow suit.

On Wednesday, Japanese media produced live spit screens dramatizing the risk. One featured Diet members debating how Japan should respond to the outbreak – including heightened health screenings, intelligence sharing with neighboring countries and stockpiling supplies.

On the other: the arrival in Tokyo yesterday of a charter flight evacuating 206 Japanese nationals from Wuhan. Three of them have so far tested positive for coronavirus, raising fears that the evacuation aircraft may have become a mass vector for infection.

Concerns Japan’s economy will catch its own cold has analysts plenty concerned. Given Japan’s increasing reliance on tourism revenues since the 2003 SARS outbreak, the threat to gross domestic product is infinitely higher.

As the China virus spreads, “we would anticipate an overall negative impact on Japan’s GDP, even after reflecting any boosts from fewer Japanese traveling abroad,” says economist Shuji Tonouchi of Mitsubishi UFJ Morgan Stanley Securities.

Even Japan-based scientists are hazarding their own economic prognoses. Ikuo Tsunoda, a microbiology expert at Kindai University, for example, says any public panic could mean even greater economic fallout.

“Rumors make the public panic, and that causes a mess,” Tsunoda explains. One example he cites: the Japanese public’s overly aggressive response to a mad-cow disease scare of the early 2000s.

China mistrust

Mistrust, though, is clearly in the air. During and after the 2003 SARS crisis, China was criticized globally for a slow, opaque and at times dishonest response. There’s hope that Beijing is applying those lessons this time around.

But Kuni Miyake, president of Japan’s Foreign Policy Institute, speaks for many with this warning: when Beijing offers figures on the number of virus cases, “multiply the official number by 10.” Let’s hope this proves to more cynicism than fact. But talking heads like Miyake are right to worry that, for China’s Communist Party, “saving face is more important than casualties.”

China did itself no favors in this regard in 2009 when a giant earthquake hit Sichuan, killing more than 5,300 schoolkids (from what we know). The lessons from 2003 also seemed in short supply in 2011 amid a high-speed train crash in the eastern Wenzhou province. Beijing appeared more interested in keeping BBC and CNN away from the site than providing answers.

And since Xi grabbed the reins in 2012, his press and internet clampdowns have turned China into even more of a “black box” than under predecessors Hu Jintao and Jiang Zemin.

It is through this opaque lens that Tokyo is viewing the coronavirus crisis.

In a January 28 editorial, the Yomiuri newspaper argued that “the Chinese government should take such positions as quickly disclosing information about infected patients and the virus to other countries and seeking cooperation from them.”

Abe’s annus horribilis

The economic uncertainty is making the first month of 2020 a nightmare for Abe’s government. 2020 was supposed to be Abe’s victory-lap year. He entered it as Japan’s longest-serving premier ready to host the Summer Olympics and bask in the goodwill often accompanying such events.

Abe also seemed close to achieving a career-long goal of revising the pacifist constitution to enable Japan to field a conventional military.

Then Carlos Ghosn’s great escape from house arrest in Tokyo wrecked Abe’s New Year’s holiday. The former Nissan CEO’s Jan. 8 press conference in Beirut, in which he claimed to have “fled injustice,” spotlighted Japan’s arcane “hostage justice” legal system. It also belied efforts to spin Abe’s moves to strengthen corporate governance as a reform win.

The January 3 assassination of Iranian Major General Qasem Soleimani presented Abe with another unexpected crisis. Not just because chaos in the Persian Gulf threatens to boost oil prices, but also because it complicated Abe’s decision to send a warship to the region. Since then, public opinion has turned on Abe’s plan.

Now comes a pneumonia-like virus in Asia’s biggest economy at a moment when Japan’s is limping into the new year. In the fourth quarter, Japanese growth is estimated to have contracted by anywhere from 1.5% to 3.7% amid slumping exports and waning consumer confidence.

These figures, though, are already ancient history considering the outbreak now panicking corporate executives. If Japan Inc. was reluctant to raise wages in 2019, the incentives to do are dwindling further by the day. Real wages fell 0.9% in November alone from a year earlier.

The uncertainty factor makes it nearly impossible to assess the fallout for Japanese GDP. Estimates from Nomura Research Institute of a 0.45% GDP haircut seem woefully optimistic, if for no other reason than China’s tour-group ban.

The Bank of Japan must set the stage for fresh liquidity bursts in the days and weeks ahead. Even though its balance sheet already exceeds the size of the economy – more than $5 trillion – the BOJ can’t be viewed as asleep on the job. It must telegraph an emergency-response regime to keep Japan from flatlining.

The same goes for Abe’s team. The $120 billion of stimulus announced in December won’t be enough to fend off this exogenous threat.

The unexpected

The unexpected has a knack for confronting Japan. Examples range from “act of God” events like the 2011 earthquake that precipitated the Fukushima nuclear crisis to the 2019 typhoon that disrupted the Rugby World Cup.

History may indeed record the events of January 2020 as lunacy. After all, the 18 years since SARS have seen myriad pandemic mini-panics — swine flu, avian flu, Zika, Ebola — that came and went. Hopefully China’s latest outbreak will follow this pattern and subside – hopefully.

Even so, the latest tranche of uncertainty is the last thing Japan’s economy needed this year. Tokyo officials are very good at dealing with an immediate crisis. Less so, when no one can say how bad things will be 30 days from now.

All way can say for sure is that the last 30 days auger poorly for the chance Asia’s No. 2 economy can maintain its health in 2020.

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