TOKYO – Japan’s Shinzo Abe just did what no leader with a 32% approval rating can afford to do – he angered millions in his nation’s biggest city.
It all stemmed from one of the prime minister’s more ambitious ideas to shore up gross domestic product (GDP) as Covid-19 slammed consumer demand. At first sight, his US$16 billion “Go To Travel” campaign seemed a not-so-irrational plan to drive domestic tourism via government subsidies.
Under the scheme, the government was to foot 50% of the bill of citizens’ domestic holidays. All travelers needed to do was book a holiday with agencies affiliated with the program, in person or online. Most major tour operators were involved.
All good. But then Abe issued a shocking addendum to the plan, Tokyoites had their invitations withdrawn.
The change reflected concerns about a resurgence in coronavirus infections in the capital. The trouble is, residents of Japan’s business center pay by far the biggest share of income taxes.
He has excluded 10 million people from the place where disposable income greatly reduces the hoped-for GDP jolt.
And needless to say, many Tokyoites were not happy about the inequity of not getting subsidized vacations to holiday hot spots like Okinawa, Kyoto or Hokkaido.
The real story, though, is how few economic levers are available for Abe to pull as the pandemic intensifies.
Japan’s Covid comeback
On Wednesday, Japan reported more than 1,100 new infections, the first time infections had risen above 1,000 in a 24-hour period. That dark milestone casts doubts on the government’s ability to flatten the curve anew and kick-start the economy.
It’s a worrying turn of events for a country which looked, in June, to have safely navigated its way through the novel coronavirus crisis.
To be sure, Japan still stacks up well among Group of Seven powers. The 32,000 confirmed cases the 126 million Japanese have produced is nine and a half times fewer than the UK’s number, and six and a half times fewer than Germany’s.
Closer to home, Japan has 18,000 fewer cases than tiny Singapore, population 5.8 million. Outbreaks are relative, though, and Japan’s overall trend is concerning.
Tokyo Governor Yuriko Koike is again making noises about another state-of-emergency declaration. Abe’s team is resisting her call.
An earlier declaration, which empowered regional governors to suspend various business activities, and which ran from early April until late May, shoulder-checked the economy.
During that period, consumption by households with at least two occupants plunged by 11.2% year-on-year in April and 16.2% year-on-year in May, each drop setting a record. Such figures belie optimism that Japan only contracted 2.2% in the January-March quarter.
Earlier this month, the Bank of Japan’s surveillance team reported that confidence among top manufacturers was the lowest seen in 11 years. That, it’s important to remember, was back when CEOs still reckoned Japan was a Covid-19 success case and might be able to avoid the worst of the crisis.
Even June figures “show that companies believe it will take a long time for the economy to recover,” notes economist Yoshikiyo Shimamine of Dai-ichi Life Research Institute.
Since then, surveys from banks and news organizations suggest most Japanese CEOs think it will take at least two years to recover.
‘Go To’ is gone
All this is causing whiplash in Tokyo, which at this very moment had expected to be hosting the 2020 Summer Olympics.
This was the year Abe’s government planned to welcome a record 40 million international visitors, as part of years-long efforts to raise Japan’s tourism game. In the first half of 2020, though, it has welcomed only 4 million.
Hence the domestic travel strategy – which is now blowing up in Abe’s face.
The flip flop did little to improve public perceptions about Abe’s haphazard handing of the pandemic. A recent Mainichi newspaper poll found that 60% of Japanese are downbeat on the national government’s Covid-19 response.
And fully 69% say the “Go To” program should be scrapped for all regions.
The coronavirus is fueling suspicion from Japanese prefecture to prefecture, particularly on social media. Local press reports are awash with tales of “please-don’t-come-here” tweets and updates targeting Tokyoites.
Odd, again, considering how Tokyo’s tax base supports rural – and de-populating – regions throughout the country.
Yet until and unless Abe’s government generates more confidence in its more Covid-19 response, his “Go To” campaign probably won’t get a critical mass of Japanese to travel in-country. Across Japan, all signs are grim.
Earlier this month, the Kyoto City Tourism Association reported a 99.9% drop in capacity at 55 hotels surveyed in the ancient city, relative to 2019. Bullet trains are empty, too.
Osaka, Japan’s second city, just had its first 200-plus infections day. Yoshimura Hirofumi, the Osaka governor, said: “Considering the positive rate in virus tests is as high as 10%, I think the number of infections will increase further.”
Until this week, Iwate reveled in being the only prefecture out of 47 that had no confirmed infections. On Wednesday, it reported two.
Nagoya Mayor Takashi Kawamura said his city’s “situation is completely different from the one between February and April. We are feeling the strain on the number of hospital beds available, and there are even residents waiting to be admitted.”
These multiple dire dynamics are partly what prompted Fitch Ratings to cut the outlook on Tokyo’s sovereign credit rating to negative from stable. That followed a related move in June by S&P Global Ratings.
“The coronavirus pandemic has caused a sharp economic contraction in Japan, despite the country’s early success in containing the virus,” Fitch said Wednesday. “Sharply wider fiscal deficits in 2020 and 2021, as we project, will add significantly to Japan’s public debt, which even before the pandemic was the highest among Fitch-rated sovereigns as a share of GDP.”
So far, Abe’s government has thrown more than $2 trillion of economic stimulus at the virus, equal to roughly 40% of gross domestic product. The Bank of Japan’s balance sheet has already outgrown Japan’s entire $5 trillion economy.
Abe’s government can always toss more cash at a traumatized consumer sector. It could order up a second round of 100,000 yen, or $952, per person payouts. Yet that, too, could have fiscal implications. Since 2014, Abe has hiked sales taxes twice – once to 8%, then to 10%.
Both steps were taken, ostensibly, to pay down government debt. Both had the opposite result. The moves tanked the economy and government debt increased as Tokyo borrowed to revive growth.
The 40-million-visitor plan for 2020 was all about filling public coffers – both for the national government and municipalities. Shortfalls abound, though, since Japan was forced to hit the “pause” button on incoming tourism.
Hence Abe’s determination to jumpstart a domestic tourism boom. Japan surely needs a burst of spending. Fitch thinks the third-largest economy will shrink by 5% in 2020. Though the ratings agency affirmed Japan’s rating at “A,” Fitch has given notice that Tokyo is on the verge of seeing its sovereign rating drop even further below China’s “A+” grade.
Covid kills confidence
Tokyo only accounted for roughly 30% of Wednesday’s record infections tally. In other words, the latest resurgence of cases appears national in scope.
Chief Cabinet Secretary Yoshihide Suga admits some prefectures in rural areas face shortages of accommodation, such as hotels, to quarantine patients with even mild symptoms of Covid-19.
He blames recent infection surges on “clusters” around the nation – about 550 pockets of people have been infected in particular locations.
As Japan works to address these areas, now looks like a bad time to travel, or to expect even a modest economic recovery.
The pandemic resurgence might “significantly demotivate business owners and some might close their stores,” noted economist Shinichiro Kobayashi at Mitsubishi UFJ Research and Consulting. The biggest concern, Kobayashi, said, “is that they might cut jobs and salaries,” which could set things back even more.
That’s the other problem with the timing of Abe’s “Go To” scheme: disposable income may be in no more supply than the economic confidence needed to get consumers to deploy it.
In the interim, Abe’s team is finding that conventional stimulus measures aren’t enough. The key is working with the BOJ to put more cash into the hands of consumers. Considering Fitch’s announcement, it’s likely some serious unconventional monetary maneuvers are in store.
“Another key function central banks are playing in the midst of the Covid-19 crisis is that of financing national governments’ deficit spending,” says economist Hideo Hayakawa at the Tokyo Foundation for Policy Research. “Of course, no central bank openly admits to monetary financing, but that, in effect, is what is happening.”
It might happen more as credit rating officials sound the alarm and threaten formal downgrades. Fitch, for example, thinks Japan’s gross general government debt ratio will rise to about 259% of GDP in 2020 and climb above 260% in 2021-22.
If Abe’s government does not find new ways to instill confidence, both in public safety and citizens’ incomes, Japanese tourists won’t be going anywhere. And nor will Abe’s approval ratings.