TOKYO – Japan’s Yoshihide Suga had that rarest of things on Monday – good news on Asia’s second-biggest economy.
The Bank of Japan’s closely-watched Tankan survey of business sentiment rebounded in the latest quarter. It’s still in negative territory amid Covid-19 disruptions. But the -10 reading, up from -27 in September, suggests conditions are stabilizing.
Well, make that were stabilizing.
Three other data points this week point to a resumption in the drop in demand that ended Japan’s longest expansion since the 1980s. One is the more than 3,000 new coronavirus cases the nation is recording per day as a third wave of infections intensifies.
Two is the prime minister’s approval rating, which at 40%, is leaving Suga with a dwindling supply of political capital to break Japan’s economic fall.
Three became apparent on Monday evening. The same day that the Mainichi newspaper announced a 17-point drop in support for his cabinet from 57% in November, Suga announced a temporary suspension of the subsidized “Go To” travel program for two weeks.
These data sets are intricately linked.
The first – hints of improving economic health – is thanks largely to the “Go To” scheme. Tens of millions of Japanese taking planes, bullet trains and buses around the nation to enjoy subsidized vacations filled the void left by cratering exports and the non-Olympics.
Yet all that traveling is a vector for Covid-19. That has created an economy-versus-public-health dilemma for Suga’s 90-day-old government. Suga’s unsteady, and often aloof, leadership during this crisis is ravaging his support rates.
To many observers, the two-week interruption, from December 28 to January 11, is as tardy as it is timid. There’s no complementary effort by Tokyo, for example, to increase testing and contact tracing.
“The surge in cases threatens to upend the ongoing recovery in household spending,” notes economist Michael Wolf at Deloitte Touche Tohmatsu Ltd.
And herein lies why the bounce back in business sentiment is sure to fizzle in the weeks ahead.
Economic disasters, political challenges
Japan’s 126 million people aren’t technically grounded or locked down, but the loss of government subsidies will slam top-line growth anew. It also may create a public-shaming dynamic that has tens of millions foregoing New Year’s festivities, a major gross domestic product (GDP) jolt each year.
The external scene seems no more promising. The US economy, the world’s biggest, is reeling amid its own fresh Covid-19 wave. Europe, too. And while China is growing, the 2% pace many expect for Asia’s key trading power isn’t much of a coattail for neighbors to ride on.
That leaves domestic stimulus. Beginning in March, the former government led by Prime Minister Shinzo Abe began throwing unprecedented fiscal life preservers at a sinking economy. By the time Abe resigned on September 16, Tokyo had unleashed US$2.2 trillion of rescue stimulus, or 40% of GDP.
Three months in, Suga is already deploying financial reinforcements. Yet a key part of that $700 billion package was a six-month extension of the “Go-To” campaign. The program has been a cornerstone of plans to keep the economy on a recovery path to ensure his premiership continues beyond a single year.
Though Abe lasted nearly eight years, the longest stint ever by a Japanese leader, the six preceding governments each came and went in a blur within 12 months. In change-averse Tokyo, one year doesn’t afford leaders the necessary time to get significant legislation implemented.
Suga had hoped to be the second consecutive leader to break this cycle. The plan was to put some key reform wins on the scoreboard early on.
Tokyo’s failures
Possibilities included sharp reductions in mobile-phone bills, boldly reducing Japan’s carbon footprint and increasing funding for fertility treatments to head off a worrisome demographic trajectory.
Yet Suga, who has a long record in government, has been surprisingly inept at advancing legislation. Now, with approval ratings sliding and coronavirus cases surging, Suga seems to have missed his window to call a snap election.
This raises the odds that Suga, like six pre-2012 governments, will also be a short-timer.
The new Covid wave, and its economic fallout, could seal that fate. Suga’s reputation as an old technocratic hand is taking hits by the day.
Nearly a year after Japan recorded its first Covid-19 infections, the national government still has not rolled out a comprehensive testing program. Early attempts at creating smartphone apps for contract-tracing purposes flopped.
China, Singapore, South Korea and Taiwan succeeded where Asia’s most advanced economic system so far failed.
For this, Abe’s government deserves considerable blame.
Abe took a page from the US playbook by leaving most of the coronavirus response to local leaders, including the high-profile and rather more dynamic Tokyo governor, Yuriko Koike. Whereas Abe prioritized the economy and the stock market, Koike advocated broader social-distancing and work-from-home orders.
Today, she’s once again urging more assertive steps against the pandemic than Suga’s team.
The divide could push Suga’s support further lower in the weeks ahead. Historically, a 40% approval rating is the point of no return for Japanese leaders – lame-duck territory. And that limits Suga’s latitude both to right the economy in the short run and implement vital structural reforms for the longer term.
Already, Suga is suffering from his association with Abe. For 2,821 days, Suga was Abe’s loyal chief cabinet secretary. Suga was along for every step, misstep and punting forward of the economic upgrades Abe had promised. In September, when Abe turned the keys over to Suga, the promise was for continuity.
That could be just the problem, though. Abe’s failure to modernize labor markets, catalyze a wave of startups, empower women and cut bureaucracy amid China’s rise left Japan uniquely vulnerable to the pandemic’s economic fallout.
It hardly helped that Team Abe raised the consumption tax twice, in 2014 and 2019, at a time when the BOJ was struggling to end deflation.
That October 2019 hike to 10% proved particularly disastrous. It drove GDP down 7.3% in the October-December 2019 quarter, leaving Japan on a terrible footing as the coronavirus arrived.
Suga boxed in
Clearly, Abe’s Liberal Democratic Party didn’t know a once-in-a-century pandemic would soon be tearing Japan Inc apart. But a quick Google search of Herbert Hoover’s name could’ve dissuaded Abe’s team from tightening fiscal policy amid a deflationary cycle.
It now falls to Suga to pick up the pieces, and to do the heavy lifting on reforms that Abe didn’t. The trouble is, Suga must do so in a uniquely uncertain and volatile environment.
Case in point is the economy surged at a 22.9% annual rate in the last quarter. Driving the jump was personal and business spending thanks largely to the “Go To” travel scheme.
Now, the bounce in the BOJ’s Tankan survey “bolsters our view that Japan will recover quickly once the third wave of coronavirus is brought back under control, with output likely to be back at pre-virus levels in mid-2021,” says Tom Learmouth of Capital Economics.
The new wave of infections, though, could delay the revival of which Learmouth speaks.
Japan’s GDP, it’s worth noting, remains 3.9% below the level of the last three months of 2019. The economy is very likely to lose more ground into 2021 even as Covid-19 vaccines arrive. And that may be as late as June.
It’s important to remember that while investors are “relieved” by the better-than-expected Tankan results, the improvement overall is “a modest one,” notes economist Masahiro Ichikawa at Sumitomo Mitsui DS Asset Management.
Adds Jacoline Loewen, author of finance books including Money Magnet: “Japan’s Tankan poll of business sentiment was more positive, but with pessimists still the majority.”
In jeopardy, too, is the Tokyo Olympics, originally scheduled for July 2020. With the Covid-19 surge, will the world, and Japan, be ready for the Games in July 2021?
That event had has been the centerpiece of plans to attract an unprecedented 40 million foreign tourists in 2020. Their non-appearance means signs of life in manufacturing are being overshadowed by declines in demand for services.
“The outlook for ongoing improvement for manufacturing overall contrasts with that for mild worsening for non-manufacturing overall,” says economist Takeshi Yamaguchi of Morgan Stanley MUFG.
The worry is that Covid-19 infection trends will quickly turn a mild worsening of economic conditions into a deep one in early 2021. That, as the BOJ faces a dearth of easing options.
More BOJ liquidity might help. But with Covid cases increasing anew, economist Yusuke Shimoda at Japan Research Institute says “uncertainty over the outlook is weighing on companies’ sentiment.”
That hardly seems promising as economic recoveries go.