A masked Japanese citizen is reflected in an electronic board showing stock prices. Photo: AFP

The eerie quiet on the streets of Tokyo is a timely metaphor for the strange calm descending on Japan’s stock market.

The ghastly coronavirus panic that wrecked equity returns in March has given way to a rally. Market conditions seem oddly normal. Since its recent March 19 low, the Nikkei 225 Stock Average is up 17%.

It’s a resurgence that makes less sense each passing day as the number of Covid-19 cases jumps before investors’ eyes. And it raises an obvious question: Have punters lost their collective minds?

Japan, remember, hobbled into 2020 after gross domestic product (GDP) shrank 7.1% in the last three months of 2019. That downshift occurred before Tokyo confirmed its first coronavirus case. Now, as the number of Covid-19 cases increases steadily, so is the near-apocalyptic chatter of disaster to come.

One unconfirmed projection from a professor affiliated with the Ministry of Health reckons Japan’s death toll could reach 400,000, with 850,000 patients needing ventilators. That “could” assumes Japan’s government sticks with its current “lockdown lite.”

So far, Prime Minister Shinzo Abe’s government is doing just that, making social distancing more of an option than a demand.

Before the storm

Ultimately, the “state of emergency” Abe declared on April 7 is more rhetorical than real. The vast majority of Tokyoites are still going to work, jamming into rush-hour trains and busses. Even if large department stores and schools are closed, restaurants, cafes, hair salons, home improvement centers and a range of other businesses are open.

Trading at the Tokyo Stock Exchange is also largely business as normal. But the financial conditions underpinning investors’ bets are anything but.

On the same day Abe declared his “emergency,” he unveiled a record US$1 trillion coronavirus rescue plan. Abe’s government needs to spend considerably more to stabilize GDP. The stimulus plan sounds big, purporting amounting to 20% of GDP.

Japanese Prime Minister Prime Minister Shinzo Abe in a face mask amid the Covid-19 pandemic. Photo: AFP/The Yomiuri Shimbun

Without generous steps to subsidize the wages of tens of millions of workers and cut through Tokyo’s notorious bureaucracy, though, US-style job losses could be in store.

What accounts for investors’ bullishness on Japanese shares? For one thing, Japan’s relatively low Covid-19 case tally – just over 8,100.

For another, Japan’s traditional role as safe haven. And Japan Inc is ridiculously liquid. As of mid-February, non-financial companies were sitting on more than $2.6 trillion of cash.

Yet any appreciation of how dire things could get, financially-speaking, seems in short supply. The months ahead will see the global economy veer perilously into any number of uncharted territories.

In recent weeks, comparisons to the 2008 global crisis have been the default for policymakers, economists, businesspeople and investors alike. They’re meaningless, though.

Recession from hell

The “Lehman shock” that slammed markets 12 years ago may prove to be a minor one relative to the coming coronavirus shock. This latest crisis is, after all, a health calamity with the human equivalent of a credit crunch layered on top.

Underlying it all is a global financial system overseen by a cast of leaders unready for primetime and unlikely to cooperate on global solutions.

There’s never been a scenario where the world’s top economies simultaneously shut down production and avenues of consumption, and for an indefinite period.

It didn’t happen during World War II or World War I before it. It didn’t occur amid the Napoleonic War. Nor did it happen during pandemics of generations past – not during the 2002-2003 SARS outbreak nor the 1918 influenza crisis nor, from what we know, the Black Death of the 14th century.

Or amidst Japan’s radiation crisis at Fukushima in 2011 or the terrorist attacks on New York and Washington a decade earlier.

Shinjuku Station in Tokyo is devoid of the usual crowds as Japan enters a state of emergency. Photo: AFP

What this cacophonous sequence of events portends for the second half of 2020, and into 2021, is anyone’s guess. As social distancing edicts expand, food shortages will crop up around the globe. Not only from a human labor standpoint, but from a cargo and logistics one, too.

The result could be a bull market in famine. Last week, the World Bank warned that the biggest jump in poverty since 1997 could be afoot in developing Asia. Unresponsive, incompetent governments could fall, Arab Spring-style.

And let’s say an even “greater depression” than the one in the 1930s really does occur, as economists including Nouriel Roubini warn. “The question is,” says a man who predicted the 2008 subprime loan crash, “are we going to have a three-quarter severe recession worse than 10 years ago, and then by the fourth quarter we have a recovery? Or, is it going to get worse?”

The odds of the latter scenario are higher than Roubini wants to admit. The last such meltdown, after all, ended badly for the global order. Wall Street’s 1929 crash, and the financial carnage that followed, set the stage for Nazi Germany and Imperial Japan to upend the 20th century.

None of this means history is certain to repeat itself, but those betting on a “V-shaped” recovery for export-led economies like Japan are dreaming. Japan might even be lucky to trace the “W-shaped” trajectory that JPMorgan Asset Management thinks is possible.

Three horsemen

There are three added problems to consider. The first is the dearth of growth engines.

In 1997, amid the Asian financial crisis, nations harnessed heady demand from US consumers. America’s rapid growth and voracious appetite for Asian goods did more to bail the region out than the International Monetary Fund’s cash.

In 2008, China filled the void. The tens of trillions of dollars of stimulus Beijing churned out was producing 8.7% annualized growth by the end of 2009. In 2013, when the Federal Reserve “taper tantrum” hit emerging markets, global commerce was operating normally. So were tourism flows.

Not this time.

Second, Donald Trump’s ongoing trade war. The tariffs the US president imposed on China hit the Japanese and South Korean economies hard in 2018 and 2019. They were a contributing factor behind Japan’s fourth-quarter GDP plunge. That and a terribly timed sales tax hike to 10% last October.

A less reckless US leader would suspend levies on hundreds of billions of dollars of Chinese goods and those on steel and aluminum. That leader would temporarily lift sanctions on Iran, Venezuela and other Trumpian foes on humanitarian grounds. That leader would commit to forgo any additional assaults on global trade, including taxes on auto imports.

You’d think, too, that Trump would give multilateralism a try with the IMF warning the coming “great lockdown” recession will indeed be the deepest since the 1930s. Or that Goldman Sachs predicting a 35% contraction in global growth in the second quarter would have Trump arranging emergency Group of Seven or Group of 20 conference calls.

The second-quarter loss Goldman estimates will be four times anything experienced during the Lehman debacle. And this gets at problem No 3: Dearth of policy ammunition.

Bank of Japan Governor Haruhiko Kuroda speaks during a meeting of the Budget Committee of the upper house of parliament in Tokyo in a file photo. Photo: AFP/The Yomiuri Shimbun

The last crash saw major central banks slash rates to zero and beyond. Governments ramped up historic stimulus rescues. Few more so than Japan. This time, though, Tokyo has a low-ammo dilemma at the very worst moment.

Sure, Abe’s team can ramp up fiscal stimulus. But his failure to modernize a rigid, aging economy these last seven-plus years is sapping Japan’s growth potential. The Bank of Japan, meantime, can add more liquidity, but so are peers everywhere.

Tokyo’s post-Lehman response – all stimulus, little reform – left Japan Inc even less prepared for this coronavirus reckoning. Tokyo’s largess – and its efforts to weaken the yen 30% – reduced the urgency for CEOs to increase competitiveness, productivity and innovation.

After all, if Abe’s moves to tighten corporate governance were so great, how come Japan isn’t a hotbed of inbound investment and mergers-and-acquisitions deals?

All of this makes the air of normalcy in Japanese stocks all the more perplexing. Perhaps, in relative terms, Japan may seem a worthy shelter from the coming financial storm. But a look under the surface at the economy’s frailties makes Japan Inc a surreal safe haven indeed.