After the Japanese asset price bubble, in which real estate and stock market prices were greatly inflated, burst in early 1992, Japan has experienced 3 decades of low growth and stagnation, sometimes referred to by the economists as “The Three Lost Decades”.
The Olympic Games were an opportunity to reset that and to boost the economy. However, due to the coronavirus outbreak, Japan’s prime minister Shinzo Abe and the International Olympic Committee agreed to postpone the Tokyo 2020 summer games until next year. This postponement will hit the struggling Japanese economy hard, especially because Japan was very likely to enter a technical recession even before the Olympics were rescheduled.
A look at the Japanese economy
The Japanese national government has been slow in its response to the coronavirus outbreak and didn’t push enough for widespread social distancing. It closed schools for the month of March and recommended that people avoid crowds. But workplaces, shops, and restaurants remained open. Moreover, while the World Health Organization and many countries are pushing to “test, test, test” to help stop the coronavirus pandemic, Japan is limiting tests only to the most vulnerable and at-risk people, in order to avoid hospitals’ collapse.
However, in April the number of cases rose sharply, prompting the Prime Minister Shinzo Abe to declare a state of emergency in seven prefectures on April 7th, which was then extended to the whole country on April 16th. It should last until May 6th. This gives prefectural governors the authority to close schools and other public facilities, but they have no legal power to order people to stay home or businesses to close.
Since there are no decreasing signs of the global disruption caused by the pandemic yet, the Japanese economy is projected to contract by 5.2% in 2020 compared to the previous year, and this will mark its worst downturn since 2009 at the height of the Global Financial Crisis, according to a report released by the International Monetary Fund.
Economists have warned that Japan is on course for a technical recession. In fact, in the first quarter of 2020, GDP is expected to contract overall by an annualized 2.9%, and, if coupled with the data from the final quarter of 2019, that saw the economy shrink at an annualized rate of 6.3%, it implies that Japan is facing a technical recession, defined as two consecutive quarters of falling output.
The Olympic Games were an opportunity to reset that and to boost the economy. However, due to the coronavirus outbreak, Japan’s prime minister Shinzo Abe and the International Olympic Committee agreed to postpone the Tokyo 2020 summer games until next year. This postponement will hit the struggling Japanese economy hard, especially because Japan was very likely to enter a technical recession even before the Olympics were rescheduled.
A look at the Japanese economy
The Japanese national government has been slow in its response to the coronavirus outbreak and didn’t push enough for widespread social distancing. It closed schools for the month of March and recommended that people avoid crowds. But workplaces, shops, and restaurants remained open. Moreover, while the World Health Organization and many countries are pushing to “test, test, test” to help stop the coronavirus pandemic, Japan is limiting tests only to the most vulnerable and at-risk people, in order to avoid hospitals’ collapse.
However, in April the number of cases rose sharply, prompting the Prime Minister Shinzo Abe to declare a state of emergency in seven prefectures on April 7th, which was then extended to the whole country on April 16th. It should last until May 6th. This gives prefectural governors the authority to close schools and other public facilities, but they have no legal power to order people to stay home or businesses to close.
Since there are no decreasing signs of the global disruption caused by the pandemic yet, the Japanese economy is projected to contract by 5.2% in 2020 compared to the previous year, and this will mark its worst downturn since 2009 at the height of the Global Financial Crisis, according to a report released by the International Monetary Fund.
Economists have warned that Japan is on course for a technical recession. In fact, in the first quarter of 2020, GDP is expected to contract overall by an annualized 2.9%, and, if coupled with the data from the final quarter of 2019, that saw the economy shrink at an annualized rate of 6.3%, it implies that Japan is facing a technical recession, defined as two consecutive quarters of falling output.
Source: FactSet
Japan’s biggest challenges are the low birth rate, the declining population and the increase in the number of citizens over 65 years old, which in September 2019 accounted for a record of 28.4% of total population.
An increase in consumption tax is therefore required to sustain the country’s social welfare system. The raise from 8% to 10% will generate ¥5.2 trillion (approx. $48.4bn) of extra revenue annually. Of that, ¥3.2 trillion will be allocated to free preschool education for children age 3 to 5 as part of Prime Minister Shinzo Abe’s drive to expand childcare support. Preschool education will bring significant benefits to child-rearing households, encourage more parents to work, boost their income and possibly lead them to have more children, which could help stem the country’s biggest problem: the low birthrate.
Nevertheless, in the third quarter of 2019, the economy contracted by more than what the analysts expected, as the consumption tax rate hike from 8% to 10% in October, hitting private spending. Consumption fell at an annualized rate of 11%, marking the main cause of the fall in output. Business investments also fell at a 14% pace.
Economists feared that an increase in taxes would have made consumers reluctant to spend, but Mr. Abe argued that Japan needed to raise taxes to pay its obligations. The stimulus measures that Mr. Abe introduced to cushion the impact of the tax rise did not work. This, in turn, raised questions about whether seven years of so-called “Abenomics” — a mix of fiscal stimulus, loose monetary policy and structural reforms implemented by the prime minister Shinzo Abe, since he took office in 2012— have done anything to make Japan’s economy more resilient to shocks.
The weak output data for the final quarter of 2019 clearly show that last autumn’s rise in consumption tax hit the economy even before this year’s coronavirus outbreak shut down tourism from China and disrupted supply chains for Japanese companies. Japan will now have to assess the severity of the fall in demand. Consumption by Chinese tourists has become important to Japan’s economy in recent years, but tourism ceased following the coronavirus outbreak.
Olympic Games postponement
In light of the current spread of coronavirus worldwide, Mr. Abe said it would be difficult to carry out the games by the end of the year. This announcement shook Tokyo in particular. Streets and public buildings were already filled with Olympic branding and giant countdown clocks have helped build a sense of excitement.
The total preparations of the Tokyo summer games cost up to $25bn, and Japanese and international companies have paid more than $3.1bn to make the 2020 games the most heavily sponsored sports event in history. The Tokyo Metropolitan government estimated that from the winning of the bid in 2013 to a decade after the games in 2030 the event would give a ¥32tn ($294bn) boost to the national economy. Shinzo Abe, Japan’s longest-serving prime minister, viewed the games as a way to recover nationally from the 2011 Tohoku earthquake.
The International Olympic Committee said that the games “must be rescheduled to a date beyond 2020 but not later than summer 2021, to safeguard the health of athletes, everybody involved in the Olympic Games and the international community.” Mr. Abe and the IOC agreed to reschedule the games and decided a new date. The games will open July 23, 2021, and close Aug. 8, 2021. As for the Paralympics, they will be held Aug. 24 through Sept. 5, 2021.
The Olympics postponement deals a heavy blow to an already struggling Japanese economy. Tokyo 2020 has been extremely important for the Japanese economy. It has kept the country’s firms, stock market and reforms under the spotlight of international investments since 2013. This allowed Japan to grow domestically, especially through the increasing exposure to tourism and to China. The Japan Tourism Agency announced that 31.9 million foreign visitors went to Japan in 2019, hitting a new record for the seventh consecutive year with an increase of 2.2% from 2018. For comparison, the number of overseas visitors in 2012 was 8.368 million.
However, due to the coronavirus and consequent Olympics postponement, the number of tourists is expected to fall dramatically year on year. Visitors to Japan declined by the largest number since the devastating March 2011 earthquake, tsunami and nuclear disaster, by 58% to 1.09 million in February from 2.60 million in the corresponding month last year, according to Japan National Tourism Organization data released last Thursday. This marked the fifth straight month of declines. A steep drop in visitors from virus-hit China and South Korea, which fell 88% and 80%, respectively, were the main drivers of the fall.
Another sector that will be hit hard is the accommodation one. The IOC and Japan faced difficult logistical implications when deciding the new dates for the games. For instance, most of the apartments in the Olympic Village, where thousands of athletes were due to stay, have already been sold with people due to move in after the games. Some Olympic venues were unavailable next year and hundreds of thousands of nights had been booked in hotels.
Moreover, companies in Tokyo working in the food and leisure industry saw declining sales due to the pandemic and will see their projected 2020 sales fall even more after the announcement of the Olympic games’ postponement.
An increase in consumption tax is therefore required to sustain the country’s social welfare system. The raise from 8% to 10% will generate ¥5.2 trillion (approx. $48.4bn) of extra revenue annually. Of that, ¥3.2 trillion will be allocated to free preschool education for children age 3 to 5 as part of Prime Minister Shinzo Abe’s drive to expand childcare support. Preschool education will bring significant benefits to child-rearing households, encourage more parents to work, boost their income and possibly lead them to have more children, which could help stem the country’s biggest problem: the low birthrate.
Nevertheless, in the third quarter of 2019, the economy contracted by more than what the analysts expected, as the consumption tax rate hike from 8% to 10% in October, hitting private spending. Consumption fell at an annualized rate of 11%, marking the main cause of the fall in output. Business investments also fell at a 14% pace.
Economists feared that an increase in taxes would have made consumers reluctant to spend, but Mr. Abe argued that Japan needed to raise taxes to pay its obligations. The stimulus measures that Mr. Abe introduced to cushion the impact of the tax rise did not work. This, in turn, raised questions about whether seven years of so-called “Abenomics” — a mix of fiscal stimulus, loose monetary policy and structural reforms implemented by the prime minister Shinzo Abe, since he took office in 2012— have done anything to make Japan’s economy more resilient to shocks.
The weak output data for the final quarter of 2019 clearly show that last autumn’s rise in consumption tax hit the economy even before this year’s coronavirus outbreak shut down tourism from China and disrupted supply chains for Japanese companies. Japan will now have to assess the severity of the fall in demand. Consumption by Chinese tourists has become important to Japan’s economy in recent years, but tourism ceased following the coronavirus outbreak.
Olympic Games postponement
In light of the current spread of coronavirus worldwide, Mr. Abe said it would be difficult to carry out the games by the end of the year. This announcement shook Tokyo in particular. Streets and public buildings were already filled with Olympic branding and giant countdown clocks have helped build a sense of excitement.
The total preparations of the Tokyo summer games cost up to $25bn, and Japanese and international companies have paid more than $3.1bn to make the 2020 games the most heavily sponsored sports event in history. The Tokyo Metropolitan government estimated that from the winning of the bid in 2013 to a decade after the games in 2030 the event would give a ¥32tn ($294bn) boost to the national economy. Shinzo Abe, Japan’s longest-serving prime minister, viewed the games as a way to recover nationally from the 2011 Tohoku earthquake.
The International Olympic Committee said that the games “must be rescheduled to a date beyond 2020 but not later than summer 2021, to safeguard the health of athletes, everybody involved in the Olympic Games and the international community.” Mr. Abe and the IOC agreed to reschedule the games and decided a new date. The games will open July 23, 2021, and close Aug. 8, 2021. As for the Paralympics, they will be held Aug. 24 through Sept. 5, 2021.
The Olympics postponement deals a heavy blow to an already struggling Japanese economy. Tokyo 2020 has been extremely important for the Japanese economy. It has kept the country’s firms, stock market and reforms under the spotlight of international investments since 2013. This allowed Japan to grow domestically, especially through the increasing exposure to tourism and to China. The Japan Tourism Agency announced that 31.9 million foreign visitors went to Japan in 2019, hitting a new record for the seventh consecutive year with an increase of 2.2% from 2018. For comparison, the number of overseas visitors in 2012 was 8.368 million.
However, due to the coronavirus and consequent Olympics postponement, the number of tourists is expected to fall dramatically year on year. Visitors to Japan declined by the largest number since the devastating March 2011 earthquake, tsunami and nuclear disaster, by 58% to 1.09 million in February from 2.60 million in the corresponding month last year, according to Japan National Tourism Organization data released last Thursday. This marked the fifth straight month of declines. A steep drop in visitors from virus-hit China and South Korea, which fell 88% and 80%, respectively, were the main drivers of the fall.
Another sector that will be hit hard is the accommodation one. The IOC and Japan faced difficult logistical implications when deciding the new dates for the games. For instance, most of the apartments in the Olympic Village, where thousands of athletes were due to stay, have already been sold with people due to move in after the games. Some Olympic venues were unavailable next year and hundreds of thousands of nights had been booked in hotels.
Moreover, companies in Tokyo working in the food and leisure industry saw declining sales due to the pandemic and will see their projected 2020 sales fall even more after the announcement of the Olympic games’ postponement.
Source: FactSet
On March 19, the professor emeritus Katsuhiro Miyamoto of Kansai University, an expert on sports economics, concluded that the “economic damage” from postponing the Olympics for one year would be about ¥640.8 billion ($5.96bn) and that canceling the games would cost about ¥4.5 trillion ($41.8bn).
Antonio Wang
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Antonio Wang
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