The “corona shock” has dealt a powerful blow to Japanese companies’ views of the country’s economic prospects. That much was clear from the Bank of Japan (BOJ)’s March “Tankan” business sentiment survey released on April 1, which showed large manufacturers’ feelings dive into negative territory for the first time in seven years.
The business sentiment total is derived by subtracting the ratio of firms that state the economy is in “bad” shape from the ratio of those that say it is “good.”
The March Tankan delivered a total of minus 8, around the same level as before the start of Prime Minister Shinzo Abe administration’s “Abenomics” economic stimulus initiative and the BOJ’s large-scale quantitative easing policy.
Japan’s big nonmanufacturers had been especially bullish, but sentiment fell even among these companies by 12 points from the previous Tankan in December 2019. That was the worst drop since the March 2009 survey following the collapse of the Lehman Brothers investment bank and the start of the global financial crisis. The results for small and midsized companies were similarly grim this time around.
We must furthermore be aware that the results reflect only part of the novel coronavirus’ impact on the economy, such as the severe decline in Chinese tourist numbers. About 70% of respondent companies had submitted their answers by the first half of March, meaning the deterioration of the situation in the latter half of the month is mostly not reflected in the survey results.
Since mid-March, numerous events have been canceled and stay-at-home advisories have been increasing, spelling hard times for the hospitality and restaurant industries. Meanwhile, manufacturers including automobile companies are suspending production and sales in Europe and the United States as cities there go into lockdown.
The Tokyo 2020 Games have also been delayed for a year, another link in the lengthening chain of bad economic news for Japanese firms. And with the spread of the coronavirus continuing unabated, even an auto industry titan like Toyota Motor Corp., which has some 6 trillion yen (about $9.3 billion) in capital on hand, has sought another 1 trillion yen in financing from Japan’s megabanks to weather the expected storm.
The Japanese government is supporting private firms’ cashflow and providing wage subsidies to keep people employed. However, there are small- and medium-sized firms going under even now amid the unprecedented plunge in demand. There is also a rising trend to cut non-permanent workers loose; the first ripples of a growing wave of layoffs.
And yet the government’s response to this economic perfect storm has been blunt and slow.
Prime Minister Abe has promised “economic measures unprecedented in scale, exceeding even those following the Lehman Shock.” However, we are now at the point in this pandemic when preventing the virus’ spread must take greater priority than stimulating economic activity. Building a policy around boosting demand is unlikely to have much effect right now.
Some European countries are providing income support to medium and small firms and their employees during the coronavirus crisis. Japan, too, must move to implement policies to guarantee the basic livelihoods of workers and the survival of companies that employ them. The government should be aware that, should it allow this foundation to crumble, economic recovery from the “corona shock” may well be impossible.