Japan's Economy, Already Wobbly, Faces Big Coronavirus Blow

Japan said Monday that its economy had shrunk at an annualised rate of 6.3% in the previous quarter. If the economy shrinks again in the first quarter of 2020, the country will officially fall into recession

By Ben Dooley and Eimi Yamamitsu
Published: Feb 17, 2020

bg_japan economy_gettyimages-1196649998Image: Kazuhiro Nogi / AFP via Getty Images

TOKYO — Japan’s economy has already been staggered by a devastating typhoon and a wallet-shutting tax increase. Now the coronavirus that has brought business in neighboring China to a virtual standstill threatens to knock Japan into a full-blown recession.

Japan said Monday that its economy had shrunk at an annualized rate of 6.3% in the three months that ended in December, the worst contraction since mid-2014. The results predated the virus epidemic but were affected by a monthslong slump in Chinese demand for Japanese exports.

Officials had been optimistic that an easing of the effects of Typhoon Hagibis and the consumption tax increase would return the country to growth as the new year began. But then the coronavirus began its deadly spread in China, halting the lucrative flow of tourists from that country and further imperiling Japanese exports.

If Japan’s economy — the world’s third largest after the United States and China — shrinks again in the first quarter of 2020, the country will officially fall into recession for the first time since a brief dip in 2015. A recession is generally defined as two straight quarterly contractions.

It’s unclear how long the virus outbreak will continue, but the entire global economy could suffer from a prolonged shock in China, and some economists are already predicting slower growth for the year. The virus’ ripple effects are hitting Japan particularly hard: China is its largest trading partner and by far its biggest source of visitors, many of whom come ready to shop.

The spread of the coronavirus inside Japan itself also presents a wild card. The country has had the most confirmed cases outside China, with more than 400, including those from a cruise ship quarantined in Yokohama. Last week, Japan recorded its first death from the virus.

But China’s ban on group travel as it tries to contain the outbreak is the more immediate economic threat to Japan. The effects can already be seen in places like Shun Natori’s sweets shop in what is normally one of Tokyo’s busiest tourist districts.

The Lunar New Year holiday is high season for Chinese tourism to Japan, but the small streets and alleys surrounding Natori’s business have been unusually quiet for weeks. The nearby Sensoji temple — famous for its enormous red lanterns and throngs of selfie-taking tourists — is nearly empty.

The last time things were this slow, Natori said, was in March 2011 after an earthquake and tsunami caused a nuclear meltdown, scaring tourists away from Japan for months.“The best thing would be if things get busy again,” he said.

That seems unlikely to happen soon. At least 400,000 travelers from China are expected to cancel trips through March, according to data from the Japan Association of Travel Agents. Japanese airlines have suspended flights as demand has plummeted.

Officials have begun to express concern about the outbreak’s effect on their country’s fragile economy, which in recent quarters had defied gloomy projections and eked out modest growth even as sales of Japanese goods and services abroad continued to decline.

Japan is “starting to see a large impact on the tourist industry and regional small and medium-size enterprises,” Prime Minister Shinzo Abe recently told lawmakers.

Japan on Friday announced a limited $96 million package of emergency funds that will be used in part to help businesses struggling because of the outbreak. That followed the government’s approval of a $120-billion stimulus package late last year, an economic injection that came as Japan tried to stave off recession after the tax increase and the typhoon.

The country’s consumption tax was raised to 10% from 8% in October, a move that officials said was necessary to support expanded public services as the population rapidly ages and pay down the national debt, the highest among developed nations. But it has also depressed consumer spending.

Days after the tax increase went into effect, Typhoon Hagibis slammed into Japan, battering its main island, causing enormous damage and further suppressing economic activity.

As Japan has recovered from the storm, its industrial output rose slightly in December. But now the coronavirus poses a serious threat to a crucial market for the goods being produced. Japanese manufacturers are major suppliers to Chinese companies, sending them everything from precision machine tools to components for smartphones and cars.

Even before the outbreak, Japanese companies were struggling to cope with the effects of China’s economic slowdown — a result, in part, of its trade war with the United States. Japanese exports to China were down 7.6% in 2019 from the previous year.

The epidemic has also affected operations of Japanese companies inside China. In response to the virus, Chinese authorities extended the Lunar New Year holiday, effectively shutting down manufacturing work for many Japanese companies.

The toymaker Tomy lowered its earnings estimates for the end of the financial year, which closes March 31, because of a slowdown in production in China, Japan’s national broadcaster, NHK, reported. Nintendo has said it will delay shipments of its Switch console to Japanese consumers as a result of the outbreak.

Addressing investors this month, Hiroki Totoki, a top executive at Sony, warned that the outbreak could have a “major impact on our supply chain, logistics and sales,” potentially erasing a projected increase in earnings growth.

But perhaps no businesses in Japan are feeling the effects of the epidemic as much as those dependent on tourism, which has grown significantly in importance to the Japanese economy in recent years. The number of visitors to Japan has more than tripled over the past decade, reaching 31 million in 2018, according to government statistics.

More than 30% of those visitors came from China — almost 9 in 10 for vacation — making the country the largest source of tourists to Japan.

While visitors from South Korea and Taiwan — second and third in Japan’s tourism rankings — spend most of their money on sightseeing, Chinese travelers tend to shop.

Busloads of Chinese bargain hunters — leery of high taxes and knockoff products at home — descend on Tokyo’s upscale shopping districts to buy foreign and domestic goods in a flurry of consumption known in Japan as bakugai, or “explosive shopping.”

By propping up domestic consumption as Japan’s population declines, visitors from China make an outsize contribution to the country’s bottom line.

“If you look at consumption patterns of Chinese visitors to Japan, a lot of people are buying things like makeup,” said Keiji Kanda, a senior economist at the Daiwa Institute of Research, adding that “places like department stores and drugstores are likely to be heavily impacted.”

Some hope, though, could be around the corner. Natori, who owns the sweets shop near the Sensoji temple, said he was looking forward to the cherry blossom season, when tourism usually booms.

In anticipation of that, he plans to use the downtime to “think up a seasonal menu.”

Click here to see Forbes India's comprehensive coverage on the Covid-19 situation and its impact on life, business and the economy‚Äč

©2019 New York Times News Service

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