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        HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends : Japan’s State of Emergency Declaration and Emergency Economic Measures

        NRI JOURNAL

        Innovation magazine that generates hints for the future

        クラウドの潮流――進化するクラウド?サービスと変化する企業の意識

        Takahide Kiuchi's View - Insight into World Economic Trends : Japan’s State of Emergency Declaration and Emergency Economic Measures

        Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

        Market Analysis

        Takahide Kiuchi

        Apr. 08, 2020

        In an effort to halt the spread of the novel Coronavirus, the Japanese government declared a state of emergency on April 7, pursuant to The Special Measures Act on New Influenza. On that same day, the government also reached a cabinet council decision unveiling a large-scale economic stimulus package totaling 108 trillion yen.

        Expanding telework as the key to effectiveness

        The duration of the declared state of emergency is a one-month period, lasting until May 6. Seven prefectures were designated as regions falling under the declaration, namely Tokyo, Saitama, Chiba, Kanagawa, Osaka, Hyogo, and Fukuoka, the combined economic scale of which equals 47.5%—nearly half—of the country’s GDP (according to the Cabinet Office’s “2016 Prefectural Income Statistics”) .
        The Prime Minister explained that the aim of the declaration order was to reduce person-to-person contact as much as possible, thereby protecting the country’s medical care system. Strong fears that this system could be pushed beyond its capacity to handle patients—a so-called “health care system collapse”—were also part of the background that led the government to declare a state of emergency.
        Prior to the government’s declaration, places like Tokyo and Osaka had strongly encouraged citizens to refrain from going out on weekends, and this has already verifiably had considerable effects. The problem is what measures can be taken during the week, but given the state of emergency that has been declared, it would not be surprising if the governors of the covered prefectures were to start ramping up their appeals for companies to promote telework. In that case, companies would likely accelerate their push for telework, after first preparing themselves for a sizeable hit to their business operations.
        If that happens, the adverse effects on economic activity would be quite severe, and the situation could well come close to what is happening in the West.

        Personal consumption estimated to drop by 6.8 trillion yen in the seven prefectures

        With this situation in mind, let’s consider the impact that the state of emergency declaration will have on the Japanese economy. As a result of the strong stay-at-home recommendations issued in Tokyo pursuant to the state of emergency declaration, it is being postulated that non-essential and non-urgent personal consumption—which makes up around 56% of all personal consumption—will decline. In that event, estimates show that personal consumption in Tokyo would fall by 2.5 trillion yen in one month, while Japan’s annual GDP would take a 0.4% hit.
        Meanwhile, if all seven prefectures subject to the state of emergency declaration were to be issued strict stay-at-home demands, similar calculations suggest that personal consumption would decline by 6.8 trillion yen overall. This would be equivalent to 1.2% of annual GDP, an extremely large blow.
        We also have to consider the possibility that the state of emergency could last even beyond one month, and the possibility that stay-at-home demands could persist even if the state of emergency does end. In that case, the adverse effects on the economy would be even worse.
        It goes without saying however, that even if this causes the economy to worsen for a time, the state of emergency declaration would be justified as long as it’s meant to safeguard the health and lives of citizens, by curbing the spread of the virus and averting the collapse of the medical system.

        Focusing on the scale of the FY2020 supplementary budget

        The economic stimulus package unveiled by the government via cabinet decision on April 7 was extremely large in scale, totaling 108 trillion yen. This figure amounts to roughly 20% of the country’s GDP.
        However, we shouldn’t suppose that this could potentially lead to an unprecedented floating effect. This 108 trillion-yen package includes 26 trillion yen in economic measures that were already decided at the end of last year, and it also includes financial assistance, 26 trillion yen in tax and social insurance premium deferments, and other components. Absent these measures, the economy would deteriorate even further due to corporate bankruptcies and households falling into poverty, and in that sense, positive economic effects will arise from these policies too.
        Nevertheless, if we were to guess at what kind of boost the economy would receive from additional fiscal measures, we would have to look closely at the FY2020 supplementary budget. The scale of the FY2020 supplementary budget stands at 16.81 trillion yen. The funding for this is to be met by new issues of construction bonds totaling 2.33 trillion yen and deficit-financing government bonds totaling 14.48 trillion yen.

        The main breakdown of the supplementary budget is as follows.

        1. Develop preventive measures against the spread of infection and the medical treatment system, and develop new pharmaceuticals: 1.81 trillion yen
        2. Sustain employment and ensure business continuity: 10.63 trillion yen
        3. Recovery of economic activity through public-private efforts in the next phase: 1.85 trillion yen
        4. Build a resilient economic structure: 917.2 billion
        5. Reserve fund for combatting COVID-19: 1.5 trillion
        6. Transfer to special account for national debt consolidation funds: 99.9 billion yen

        Economic floating effect estimated to be around 0.9% of GDP

        Now, let’s estimate the economic floating effect that will come with these economic measures. Among the six items above, the third—which is to be spent after the novel Coronavirus problem has been settled—won’t produce an economic floating effect for the time being, and can therefore be eliminated from consideration here. The fifth might or might not even be spent, and the sixth won’t give rise to an economic floating effect, so these can also be left out. The remaining fiscal spending in that case would come to 13.36 trillion yen.
        On the other hand, if the 2.33 trillion yen in newly issued construction bonds were regarded as construction investment-related spending, the remaining fiscal spending other than that would total 11.29 trillion yen. When it comes to this construction investment-related expenditure, if we suppose that 70% of this (minus portions for land expropriation etc.) contributes to boosting GDP, then this would amount to 1.63 trillion yen.
        As for this 11.29 trillion yen, the crux of which consists of subsidies to companies and households, the percentage of this that would go to consumer spending or investments wouldn’t necessarily be all that high. If we assumed this percentage to be 30%, the GDP boosting effect would come out to 3.31 trillion yen.
        When we add these two figures together, the total would be 4.94 trillion yen. This would have the effect of boosting GDP by 0.90%.

        The key is expanding the safety net

        Thus, the actual economic floating effect coming from the stimulus package wouldn’t be as great as one might imagine from its 108 trillion-yen scale. There is simply no way that this economic stimulus package could cancel out the dramatic economic downturn arising from the stay-at-home demands enforced through the state of emergency declaration.
        That said, the most important aspect of this current stimulus package is that it expands the so-called “safety net” for relieving companies and households that have taken a massive blow from the novel Coronavirus problem, so that they can return to their former level of economic activity once this problem has been settled. I think we can safely say that the stimulus package is playing a significant role in this regard.
        However, with the ongoing uncertainty about when the novel Coronavirus problem will be resolved, the current measures probably won’t do enough to sufficiently expand the safety net. The government will likely have to roll out additional measures going forward, responding flexibly to the circumstances changing day by day.

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