TOKYO – “Risks to Japan’s recovery are intensifying.” So begins the latest Moody’s Investors Service report on the global No. 3 economy as it faces coronavirus infection wave No. 4. The timing could hardly be worse as business and household confidence were beginning to show signs of life. Confidence among Japan’s biggest manufacturers increased to the highest in more than two years in April amid solid overseas demand for electronics, with many of these shipments heading to China. At the same time, imports in March beat expectations, jumping 5.7% from a year earlier. To many analysts, it’s a sign that Japan’s economy may have bottomed after an abysmal 2020. Yet the coming wave of infections is almost certain to stop the recovery in its tracks.
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TOKYO – “Risks to Japan’s recovery are intensifying.”

So begins the latest Moody’s Investors Service report on the global No. 3 economy as it faces coronavirus infection wave No. 4. The timing could hardly be worse as business and household confidence were beginning to show signs of life.

Confidence among Japan’s biggest manufacturers increased to the highest in more than two years in April amid solid overseas demand for electronics, with many of these shipments heading to China.

At the same time, imports in March beat expectations, jumping 5.7% from a year earlier. To many analysts, it’s a sign that Japan’s economy may have bottomed after an abysmal 2020.

Yet the coming wave of infections is almost certain to stop the recovery in its tracks. Tokyo Governor Yuriko Koike – who has been a firebrand since the pandemic started, and, some would say, an example of leadership that the national government lacks – recommends yet another national state of emergency to contain Covid-19 once and for all.

That strategy, of course, drags its own problems in its wake.

“Domestically, the downside risks are rising,” says Moody’s analyst Shahana Mukherjee. “The risk is that the renewed curbs will delay a meaningful revival.”

No sweets for Suga 

To say 2021 isn’t going as Prime Minister Yoshihide Suga hoped would be an understatement of Olympic proportions.

With a general election expected in October, Suga’s plan was to ride a post-Covid-19 rebound into another term as ruling-party leader. That, coupled with the feel-good factor from the Summer Games set to begin in July, virtually ensured victory.

That was then. Now, both assumptions are rapidly going sideways, putting Suga in a very tough spot partly of his making. Japan’s vaccination program has barely hit first gear yet. Among Group of Seven members, Japan isn’t just in seventh place, it’s a very distant seventh.

As of April 9, Japan had vaccinated 0.8% of its 126 million residents. That compares with 48% in the UK and 34% in the US.

An elderly man receives a dose of the Covid-19 vaccine in Setagaya district of Tokyo on April 12, 2021 as Japan begins vaccinating the elderly. Photo: AFP/Stringer/Japan OUT

Takahide Kiuchi at Nomura Research Institute speaks for many when he calls the performance gap “staggering.” Tomoichiro Kubota at Matsui Securities adds that “markets are at their wit’s end right now with the vaccination rate slower in Japan.”

There are myriad theories for why Japan is so glaringly lagging: an onerous drug approval process; bottlenecks in the global procurement and supply department; a long history of vaccine hesitancy. Yet the Suga government’s weak communications skills make a bad situation far worse.

Though Japan’s Covid-19 caseload per capita pales in comparison with the US, France and Italy – it’s had fewer than 9,700 deaths – the stop-go-start-stop strategy is taking a toll. Since already struggling businesses and worried consumers must hold out longer, Japan’s recovery hopes will be delayed further and further.

Most economists agree that the US will return to growth this year, while the UK and eurozone do so in early 2022. Japan’s return to the plus column might not be until 2023. If Toyota Motor, Toshiba Corp. and Fast Retailing’s Uniqlo brand were reluctant to hike wages significantly in 2019, they’re far less inclined to do so in 2021, 2022 and perhaps 2023.

Japan falling further behind peers in the economic recovery cycle could spell trouble for a Nikkei Stock Average up 50% over the last 12 months. The risk is of a sudden “Wile E. Coyote” – a moment where investors look down and realize underlying economic fundamentals might are not there.

Suga’s approval numbers are already tanking, gyrating between the high 30s and low 40s. By Japanese political standards, that puts him well into the danger zone.

Worse, his options are dangerously limited. Since mid-2020, when Suga was then-prime minister Shinzo Abe’s chief cabinet secretary, Tokyo threw well over $2.2 trillion of stimulus at the economy – roughly 40% of gross domestic product. That is rapidly pushing Japan’s national debt well beyond the 250% of gross domestic product mark, limiting fiscal options.

Even if the Tokyo Olympics set to begin in July happen – and at time of writing they are –no foreign spectators will be allowed. This means Japan must find another way to boost growth now the record 40 million visitors around an event on which Japan was relying for growth won’t be coming.

Prime Minister Yoshihide Suga is not providing the kind of dynamic leadership Japan needs to navigate it through the endless pandemic. Photo: AFP

A long-term failure to act 

As Abe’s top strategist from December 2012 to September 2020, Suga bears some responsibility for the failure of “Abenomics.”

It was initially touted as a Thatcherism/Reaganomics hybrid with Japanese characteristics. And with a three-phase assault on the 12 years of deflation that preceded Abe: aggressive monetary easing, fiscal pump-priming and bold structural reform.

The Abe-Suga tag team only delivered on the first part. The Bank of Japan head they hired in March 2013, Haruhiko Kuroda, took monetary policy into uncharted territories. He hoarded government bonds and stocks via exchange-traded funds, while driving interest rates negative. By 2018, the BOJ’s balance sheet topped the size of the nation’s $5 trillion annual GDP.

Fiscal policy, though, was another story. Though the ruling Liberal Democratic Party upped spending, it hiked sales taxes twice – in 2014 and 2019 – in ways that generated fresh headwinds.

The real failure, though, was the general absence of deregulation – the most important phase of the three.

Abe spelled out a lengthy list of priorities to end deflation and boost wages: modernizing labor markets; cutting bureaucracy; empowering women; rediscovering Japan’s fabled innovative spirit; supporting a wave of new startups; revitalizing regional economies hollowed out by China’s rise; internationalizing corporate governance to increase return on equity.

Mostly, though, Abe only delivered on the last item. His moves to get Japan Inc. to up competitiveness, hire more outside directors and give shareholders a bigger voice are paying dividends for investors. For the average household, though, Abe’s embrace of 1980s trickle-down economics was a dud.

Even in the years before Covid-19, wages, broadly-speaking, had barely perked up despite record corporate profits. That was a direct consequence of how Abenomics devolved over time from Big Bang to a series of tiny pops. All the while, Abe, with Suga at his side, delegated revival efforts to a BOJ ill-equipped to recalibrate growth engines.

The weak yen, and the export boom it fueled, was little more than a sugar high. That became painfully clear to the LDP once Covid-19 arrived, quickly knocking the economy on its back.

Now Suga faces three levels of a troubling political dilemma. Fiscal latitude is limited; the BOJ is fast losing traction; and the pandemic has halted the longest Japanese expansion since the 1980s.

This last problem also bears Suga’s fingerprints. All through 2020, he was at Abe’s side as the government prioritized short-term economic growth and stock valuations over long-term public health. The Donald Trump playbook from which Abe and Suga cribbed is again threatening Japan’s 2021.

In a futile effort to limit the economic damage, Abe, and now Suga, opted for a stop-go-stop mitigation regimen. Yet Japan has veered from one state of emergency to another, learning little each time. As yet another one beckons, Japan is looking more like California than South Korea or Taiwan.

The Western US state initially flattened the coronavirus infection curve, and was heralded as a success case. It got sloppy, though, re-opening too fast. Japan even subsidized domestic travel with its “Go To” program. This Trumpian approach relegated Japan to a sort of limbo between reopening and closing down anew. Each zig and zag sets back household and business confidence.

The Olympic flame is conveyed towards its destination via a small craft. Japan’s dreams of an Olympic economic bonanza are looking similarly rickety. Photo: Ken Satomi / Yomiuri / The Yomiuri Shimbun via AFP

Will he last?

It also sets back Suga’s hopes of being prime minister for longer than a year.

Suga hoped his April 16 Washington summit with US President Joe Biden would put him back on the offensive. Yet the tête-à-tête barely made a ripple in geopolitical circles or the global media. Other than vague statements about cooperating on digital-economy matters and having Taiwan’s back, it was an elaborate photo-op that’s fading into the background.

All it took for China to reclaim the spotlight was a stronger-than-expected 18.3% growth surge in the first quarter, driven by heady domestic consumption.

Ditto, the news that the high-profile, regional investment pow wow, the Boao Forum for Asia, will commence on Sunday as an in-person event to signal China really is open for business.

Participants are serious players; they include Apple’s Tim Cook, Blackstone Group’s Stephen Schwarzman, Bridgewater Associates’ Ray Dalio and Tesla’s Elon Musk. What better way, notes DBS Group economist Chris Leung, to “improve the understanding of its position” and that China is back in a position where it “welcomes all investment” into the country?

And while this is underway, what might Suga be doing this weekend? Implementing Japan’s newest Covid-19 emergency decree.

Japan’s “poor performance” in managing Covid, limited testing capacity and glacial vaccination rollout are an intensifying headwind all their own, the British Medical Journal warned last week. “Plans to hold the Olympic and Paralympic Games this summer must be reconsidered as a matter of urgency,” says Kazuki Shimizu of the London School of Economics.

As China looks set to grow 8% plus this year, Japan is back to staving off deflationary pressures. Suga is now stuck with Abe’s failure to act when the economic sun was shining. The opportunity cost of Abe squandering a pivotal moment when China was racing head will now be borne by future generations.

First, though, Suga must tend to the fallout. The speed with which growth tumbled as Covid-19 arrived is proof enough that the economy was running on fumes. And as a fourth Covid wave hits an economy on its back, 2023 is suddenly looking a very long way off.