TOKYO – It’s hard to know which figure out of Japan this week is more telling: the economy shrinking 5.1% or the government’s approval rating falling into the low 30s. In reality, both are inexorably linked. One is feeding directly off the other at the worst possible moment for Asia’s second-biggest economy. And together, they speak of the extent to which 2021 is going off the rails for Prime Minister Yoshihide Suga. The breakdown of Japan’s bigger-than-expected contraction in the first three months of the year suggests weakness is everywhere. Private consumption, for example, fell an annualized 1.4%, while business investment, government spending and other key gross domestic product (GDP) drivers also sputtered. Even the rare GDP bright spots signal trouble ahead. A case
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TOKYO – It’s hard to know which figure out of Japan this week is more telling: the economy shrinking 5.1% or the government’s approval rating falling into the low 30s.

In reality, both are inexorably linked. One is feeding directly off the other at the worst possible moment for Asia’s second-biggest economy.

And together, they speak of the extent to which 2021 is going off the rails for Prime Minister Yoshihide Suga.

The breakdown of Japan’s bigger-than-expected contraction in the first three months of the year suggests weakness is everywhere. Private consumption, for example, fell an annualized 1.4%, while business investment, government spending and other key gross domestic product (GDP) drivers also sputtered.

Even the rare GDP bright spots signal trouble ahead. A case in point was the 2.3% rise in exports, which was a fraction of the previous quarter’s 11.7% gain, a worrying sign for an economy still reeling from weak domestic demand.

Japan isn’t getting the bang policymakers hoped from China’s “V-shaped” recovery. Is Japan’s 2021 going to be more of the “L-shaped” variety?

“Looking ahead, the outlook for Japan’s recovery is mired in uncertainty,” says economist Shahana Mukherjee at Moody’s Analytics.

On the domestic front, the country is battling an intensifying fourth Covid-19 wave, which has necessitated a third state of emergency in all major cities.

A notice of temporary closure is displayed (R) at an entrance of a department store in Tokyo on May 18, 2021. Photo: AFP/Kazuhiro Nogi

“A slow domestic vaccine rollout is another challenge which threatens to cause further disruptions,” Mukherjee says. “An immediate risk, therefore, stems from the hit to household confidence and its impact on consumer spending.

“The effects of the resurgence will be amplified by the extent to which new restrictions hit production and eventually erode employment prospects.”

Though China, the US and parts of Europe are generating growth, the headwinds bearing down on Japan are intensifying with Covid-19 cases.

The latest data, adds economist Takeshi Minami at Norinchukin Research Institute, show “the adverse effects from the coronavirus haven’t been shaken off at all.”

Economist Hiroaki Muto at Sumitomo Life Insurance Co speaks for many when he reckons Tokyo “may end up putting together an extra budget” as conditions worsen.

Trump Covid playbook

Suga’s support numbers reflect the gloom.

A new Asahi Shimbun survey finds ratings for the Suga cabinet plummeted to 33% – typically the point of no return for a Japanese leader. Thanks to Suga’s failure to contain the coronavirus once and for all, 80% of Japanese want the Olympics slated to begin in July canceled.

Suga won’t hear of it. That, at least, is his public posture. Suga, in power since September, is now the second Japanese leader in a row reading from the Donald Trump Covid-19 playbook: downplay, spin, do the absolute bare minimum on testing contact-tracing and lockdowns and prioritize the stock market over public health.

Yet by putting a few weeks of Olympic events ahead of all else, Tokyo risks its economic trajectory falling behind all over again.

A demonstration calling for the Tokyo Olympics to be canceled due to the coronavirus pandemic in Tokyo, Japan on May 9, 2021. Photo: David Mareuil / Anadolu Agency via AFP

To understand why, let’s review where Japan was just before Covid hit. In 2019, Japan was enjoying its longest expansion since the 1980s. The economy was riding the wave of a rare, yet reasonably powerful synchronized global growth spurt.

It also had a boost from aggressive Bank of Japan easing, which drove down the yen to boost exports.

Then Covid-19 arrived to change the narrative, and abruptly so. Yet Japan, it’s important to remember, entered the pandemic with a serious pre-existing condition: 15 years of negligible economic reform.

For that, Suga’s predecessor Shinzo Abe deserves considerable blame. Abe was hardly the first prime minister to pledge economic upgrades that never arrived. But he had the best window of opportunity – and generated a great amount of optimism – for a Big Bang to put Japan on a more prosperous and productive path.

Zig-zagging the wrong way

Abe, after all, had three things no Japanese leader had before him: a clear reform blueprint the public wanted implemented, buoyant approval ratings and nearly eight years to get big things done.

Unfortunately, Japan’s longest-serving leader was too busy planning the Tokyo 2020 Olympics to get under the economy’s hood and get his hands dirty.

This failure to raise Japan’s game explains why it fell over quicker than most in 2020. It explains why growth shrank 5%-plus in the January-March quarter. And it explains why, as the rest of the globe zigs toward inflation, Japan is zagging more in the direction of the old demon, deflation: In March, core consumer prices fell an eighth straight month.

Now, the fallout from Tokyo’s latest Covid-19 wave is exacerbating downward price pressures, slamming GDP and making Japan’s pre-Covid expansion a fleeting memory.

Getting growth back on track requires a change in tack. First off is breaking the California-like Covid-19 cycle in which Japan has been stuck since January 2020, says Jeff Kingston, the head of Asian studies at Temple University’s Tokyo campus.

Just like the western US state, Japan flattened the infection curve and reopened too quickly, only to see cases surge anew. Making matters worse is one of the developed world’s slowest vaccination programs.

Japan’s stop-go-stop dynamic, Kingston says, is getting in the way of household spending, corporate planning and government policy.

In 2019, remember, five-plus years of steady growth and heady corporate profits didn’t fill CEOs with the confidence to hike wages. That was always the plan for “Abenomics.” As a weak yen and aggressive BOJ easing filled corporate coffers, the hope was that chieftains would share the wealth with workers, kicking off a virtuous reflationary cycle.

That didn’t happen, largely because of how little heavy lifting Abe did on the supply-side to increase innovation and competitiveness. It follows that companies unwilling to fatten paychecks in 2017, 2018 or 2019 will be infinitely less likely to do so in 2021.

A man walks past an electronic quotation board displaying the closing numbers at the Tokyo Stock Exchange on May 17, 2021. Photo: AFP/Kazuhiro Nogi

Double dip looms

This leaves Japan’s economic engine idling in neutral, if not veering toward reverse.

Last quarter’s contraction wasn’t just worse than economists feared. It was broad-based, confirming that a double-dip recession may be afoot. The ways in which businesses cut investment, consumers closed their wallets and government expenditures fell augur terribly for the rest of 2021.

Suga, and Abe before him, have tossed more than US$2.2 trillion at a cratering economy over the last 14 months. What Japan really needs is a strong and innovative Covid-19 response, including getting its act together on vaccinations.

“The prospects for growth in the rest of the year are looking much weaker,” says economist Robert Carnell at ING Bank. “With Japan still lagging behind even many developing Asian economies when it comes to vaccination rates, we believe a more rapid second-half improvement is unlikely.”

This is all bad news for Suga and his Liberal Democratic Party ahead of a general election that must be held by October. Suffice to say, things aren’t going the way Suga or Japan investors hoped.