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        HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends : Extended State of Emergency Necessitates More Funding for Additional Fiscal Support


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        Takahide Kiuchi's View - Insight into World Economic Trends : Extended State of Emergency Necessitates More Funding for Additional Fiscal Support

        Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

        Market Analysis

        Takahide Kiuchi

        May 08, 2020

        Although the state of emergency declared as part of the country’s Covid-19 countermeasures was originally supposed to end on May 6, the Japanese government has now extended it until May 31. Consequently, non-essential and non-urgent consumer activity has been restrained even further, and estimates now suggest that personal consumption will drop an additional 11.2 trillion yen, with Japan’s 2020 GDP to fall by another 2.0%.

        47 trillion-yen worth of personal consumption vanished in half a year

        When we look at the total effects since April 7 when the state of emergency was first declared, estimates put the loss in personal consumption at 25.1 trillion yen, with 2020 GDP thus showing a drop of 4.5%.
        Moreover, if we run the calculations assuming that the restrictive measures in place will gradually be phased out between June and September, in the half-year period from April to September, personal consumption will have fallen by 47.0 trillion yen, which would mean a drop in GDP of 8.5%.
        Supporting the expense burdens of companies that have taken hits from the Covid-19 pandemic is, it would appear, the basic thinking guiding the government’s corporate assistance. Using this approach to enable companies to continue conducting their business activities, and to allow workers to maintain their living standards, is the aim of these support measures.
        If personal consumption were to decline by 47.0 trillion yen over a half year in keeping with the above calculation, then 42.9 trillion yen—which is the above amount minus 4.1 trillion yen (estimated) lost in ordinary income over the half year—would be the sum required to support companies that were hit by the pandemic and that are most directly affected by personal consumption activity. Of this amount, assistance for personnel expenses in the form of employment adjustment subsidies or individual benefits, as well as rent assistance, would comprise the majority.

        Additional 32.3 trillion yen in government spending needed

        Incidentally, the FY2020 Supplementary Budget totaling 26.5 trillion yen that was passed the other day includes 19.5 trillion yen to “sustain employment and ensure business continuity” as aid for companies and workers. Yet one issue here is that, of this sum, the stipend program providing cash handouts of 100,000 yen per person puts money in the pockets of many individuals who have not been hit by Covid-19, meaning that much of this money will get placed in savings.
        Hypothetically, if an amount equivalent to the maximum 300,000 yen per household—the provision of which to hard-hit households was initially included in the government’s supplementary budget—were actually to be put in the hands of affected individuals, then the substantial amount of assistance for companies and individuals would come out to 10.6 trillion yen.
        The 32.3 trillion yen left over when this 10.6 trillion yen is subtracted from the 42.9 trillion yen we already calculated would thus constitute the additional government spending needed to support companies and individuals.

        Rent assistance alone will require an additional 4.8 trillion yen

        Given the extension of the state of emergency, there is a strong chance that we will see active discussions about a secondary supplementary budget.
        If so, then along with raising the upper limits of employment adjustment subsidies and providing student aid, another major focus point will be giving companies rent support.
        Let’s assume that the percentage of sales proceeds for companies affected by Covid-19 accounted for by rent payments is 10% (regarded as the average for restaurants), meaning that accordingly, 10% of companies’ sales proceeds in the form of this rent would be delayed. If personal consumption falls by 47 trillion yen over a half-year period, company sales (output value) including intermediate input would decline by 70.6 trillion yen (according to the Cabinet Office’s 2017 Input-Output Table, if personal consumption experiences a unit decrease, corporate output value would show a unit decrease of 1.503 (inducement coefficient)).
        If corporate sales proceeds fell by 70.6 trillion yen, rent assistance in the amount of 7.1 trillion yen—or 10%—would need to be provided. The government has stated that it mainly had rent assistance in mind in regard to the 2.3 trillion yen in subsidies for sustaining businesses as included in its supplementary budget. In that case, even for the rent assistance portion alone, the government would need to spend an additional 4.8 trillion yen to make up this difference for the half year.

        Even if additional government spending is unavoidable, securing stable funds is vital

        In any case, this supplementary budget by itself is clearly not enough to support company management or individual living standards. Going forward, there will be no way to avoid having to formulate multiple additional supplementary budgets.
        That said, it would surely be a problem if the government were to go about making this additional expenditure simply by procuring funds through the issuance of deficit-covering bonds. Issuing more deficit-covering bonds would place a heavier burden on future generations, and consequently would also cause the future prospects of the Japanese economy to deteriorate further.
        I believe that during such a national crisis as this, it’s vital for those of the same generation to share this burden together, and for the individuals and companies who have suffered major blows from Covid-19 to be supported by individuals and companies whose suffering has been minimal, or who have the economic leeway to be of help.
        In the creation of new supplementary budgets going forward, I’d like to see the Japanese government avoid relying on simply issuing deficit-covering bonds to get funds as it did with this supplementary budget, and instead ensure solid fiscal resources by working to increase its near-term revenue, and then take any necessary additional financial support measures.

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