Worshippers attend a fire festival at Furo-gu Shrine in Okawa, Fukuoka Prefecture, on February 10, 2020. Japan's culture is a tourism draw but heat is draining from the sector as the coronavirus spreads its chill. Photo: AFP/ Yomiuri Shimbun

When regulating interest rate policies, Bank of Japan officials typically pore over data on production, retail sales and goods prices. These days, they’d have better luck hanging around eerily quiet airport arrival halls around the nation.

Japan’s tourist arrival tally was already plateauing before the Wuhan coronavirus seized global headlines. That dynamic, beginning last year, owed much to deepening tensions between Tokyo and Seoul.

From August to September 2019, only 1.2 million South Koreans ventured to neighboring Japan, less than half the number during the same 2018 period – about 2.9 million.

That damage may have seemed acceptable to Japanese Prime Minister Shinzo Abe. It was, after all, Abe’s restrictions on exports of vital chemical materials to South Korea in July 2019 that provoked the public backlash.

Abe was responding to a Seoul Supreme Court ruling demanding Japanese giant Nippon Steel compensate forced labor dating back to World War II, but Tokyo says that issue was covered by a treaty, and related compensation, way back in 1965.

The drop in tourist numbers was acceptable because Chinese arrivals were more than picking up the slack. As of January, mainlanders accounted for 30% of all arrivals and 40% of total tourism consumption.

Alas, Japan had to kiss that business goodbye as coronavirus fallout had airlines canceling flights to China, Beijing banning tour groups and Japan-based economists standing nervously at drawing boards fearing the worst.

Macro flu

Count International Monetary Fund officials among those concerned cratering tourism could torpedo Japan Inc’s 2020. The mysterious flu emanating from China is “an emerging downside risk to Japan’s economy” that will be transmitted through the tourism channel, Paul Cashin, IMF’s mission chief for Japan, told Reuters on February 11.

Reading between the lines at Bank of Japan headquarters in Tokyo, though, the IMF could be too optimistic. In recent days, BOJ Deputy Governor Masazumi Wakatabe has been making the rounds, warning about China’s “very large” impact on Japan’s ability to grow in 2020, a year that includes the Tokyo Olympics set for August.

The BOJ, Wakatabe said, is paying “maximum attention” to how the virus disrupts supply chains and inbound tourism flows.

“The BOJ won’t hesitate to take additional easing steps if risks become very large and increase the chance that the momentum toward achieving its 2% price target will be lost,” he said.

The Trump-Xi trade war had Japan limping into 2020. The economy grew only 0.4% in the third quarter from the second. In the fourth, it is forecast to have contracted by 0.9% quarter on quarter, based on a survey from the Trading Economics portal. Most of that hit was to exports, making Japan arguably the biggest collateral damage victim of the US-China brawl.

Tourism infection spreads

Now add tourism to the casualty list. Abe’s bold plan to woo a record 40 million visitors to Japan this year is already dead on arrival. The coronavirus has spread to nearly 30 countries and has also close to home – in Yokohama.

That port city neighboring Tokyo is the site of a frantic effort to contend with 3,700 people quarantined about the Diamond Princess cruise liner. On Monday, the number of reported cases of the respiratory infection aboard doubled to 135. That accords Japan the dubious honor of most virus patients outside China.

Media in Japan are breathlessly covering hospitals’ efforts to prepare for the worst – and of households being unable to find hand sanitizers or face masks. Much coverage also details the eerie silence at arrival halls at Tokyo airports Haneda and Narita, Osaka’s Kansai International and others from Sapporo to Fukuoka. And desolate duty-free shopping centers from Ginza to Kyoto.

All this threatens to undo not only Tokyo’s multi-billion-dollar investment in the 2020 Olympic Games, but what has arguably been Abe’s most convincing reform success. Though the tourism boom is a more than decade in the making, changes on Abe’s watch since late 2012 deserve credit.

Two in particular – a 30% yen depreciation and relaxed visa rules, particularly on mainlanders.

Other Abe reforms looked grand at first but unraveled over time. A case in point was moves to strengthen corporate governance that were undone by scandals at Toshiba, Kobe Steel, Nissan Motor and elsewhere. The headlines generated by former Nissan CEO Carlos Ghosn’s escape from house arrest in Tokyo to Lebanon dented Japan’s reformist cred.

Losing Korea

The lost tourism risks now confronting Japan can’t be treated with policy tweaks. Tokyo’s troubles with Korea’s 50 million people have only grown thanks to Abe’s efforts to whitewash Japan’s wartime aggression.

His government’s systemic downplaying of the Japanese military’s role in running military brothels only pushed South Korea – many of the brothels’ victims were Koreans – further away.

Abe’s ban on chemical material exports to South Korea was a particular own-goal. Trade between the two neighbors dropped to $18.5 billion in the fourth quarter of 2019 from $21.2 billion in the corresponding period in 2018. Not an epic fall-off, but one that matters at the margins as the battered Chinese economy loses momentum.

It’s counter-productive, too, at a moment when Japan should be tightening trade ties with Asia’s top economies. The current administration in Washington has proven itself to be a highly unreliable partner. And yet, Abe’s policies have made it harder for South Korea’s Moon Jae-in and China’s Xi Jinping to join hands.

That’s the context confronting Japan’s economy as coronavirus risks could its 2020. IMF officials like Cashin are staying mum on specific estimates of gross domestic product damage.

Truth is, no one really knows. It all depends on where today’s rough tally of 43,000 coronavirus patients – and the related death toll – is three months from now.

Time for multi-faceted action

Comparisons to the 2003 SARS crisis are great sport, but no two potential pandemics are alike. In the interim, the BOJ and Abe’s government need to do all they can to support growth.

That goes for others around the globe, too. It’s better for the Federal Reserve, European Central Bank and People’s Bank of China to risk doing too much on the stimulus front than find themselves behind the curve.

In the BOJ’s case, it could mean increasing liquidity, even just slightly, while laying out a defense plan should global demand stumble. Behind the scenes, Governor Haruhiko Kuroda should be gaming out disaster scenarios. Again, better to be accused of too much action than complacency.

The government, meantime, should consider temporary safety nets for tourism-related companies and workers. Abe’s 40 million-visitor imperative is a wise one. Japan Inc invested heavily in an industry sure to pay ever-growing dividends in the years ahead. All the more reason to keep its infrastructure up and running – and ready to drive growth in 2021, 2022 and far beyond.

While Tokyo is at it, why not an about-face on trade tensions with Korea and China? Increased outreach and lowering barriers with Seoul and Beijing would pay their own dividends. So would devising deeper currency-swap arrangements, linking bond and stock markets or pooling nearly $2.5 trillion of foreign-exchange reserves into a giant rainy-day fund.

None of this is possible, though, without greater political will and vision. The coronavirus threat will, with any luck, pass in the months ahead and save the Tokyo Olympics from ruin. But Abe’s dreams of morphing Japan into a tourism mecca are bumping up against geopolitical risks he has the power to cure. 

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