On the 16th of January last year, Japan recorded its first COVID-19 case. Since then, Japan has experienced three waves, each peaking higher than the last. Japan’s economy contracted 4.8% in 2020 and slipped into recession in Q2 following two successive quarters of economic contraction beginning in Q4 of 2019 (-6.3% in Q4 19, -7.8% in Q1 20). Relative to the U.S and Europe, Japan’s economic recovery in 2020 was strong, buoyed from ample foreign demand, which was positive for the first time in December (2.0%) in the last 25 consecutive months, followed by a 6.4% gain in January 2021.
However, as of today, Japan is currently experiencing a fourth wave with a 7-day average of 4,163 new cases since the 23rd of January. With their vaccine roll-out delayed, Japan’s recovery is likely to remain sluggish. As Japan’s recent wave threatens to cancel the Tokyo Olympics, which will have massive financial ramifications for all stakeholders involved from governing bodies to sponsors to broadcasters, we turn to look Japan as part of our series on the recovery of various countries.
COVID-19 Strategy: The Japan Model
At the start of the first wave, after the country’s poor handling of the Diamond Princess cruise ship, Prime Minister Abe Shinzo declared a nation-wide state of emergency, and postponed the 2020 Tokyo Olympics and Paralympics to the next year. The emergency, restricted by clauses in the Japanese constitution, did not compel people to stay home nor penalized businesses that remained open. By the end of May, the state of emergency was lifted as case numbers reached 7-day averages below 50 and Japanese officials prepared to fully re-open to get the country’s recessionary economy back on track. To revive local spending, Abe launched ‘Go-To-Travel’ and subsidized half the fare of travel targeting domestic tourism and related spending; after receiving criticism both in and out of the country, this was suspended in December 2020 to curb movement amidst fears of a third wave.
Japan successfully managed to curb the first two waves despite largely ignoring the default COVID-19 playbook of ‘test, test, test’ and behavioural restrictions used by other countries. Some theories into Japan’s success cite cultural habits that naturally socially distance people, ubiquitous mask-wearing since the 1918 influenza, public health centres with decades of expertise in contact tracing, or obedience of the Japanese people. By December, Japan had only tested 0.31 per 1000 people with its contacts tracers solely focused on severe cases, believing that only 20% of all infected tend to be highly infectious – largely ignoring asymptomatic cases.
Premature End to Restrictions Causes Fourth Wave
Despite its early grassroots response and successes, as the country entered winter in November, Japan experienced a formidable resurgence in cases with the 3rd wave, with cases higher in the elderly, a concern given that Japan is home to the world’s oldest population. Despite a shocking rise in severe cases, burdening the health care systems with a 78.1% overall bed occupancy rate, the newly appointed Prime Minister Yoshihide Suga (upon Abe’s resignation due to non-COVID related health reasons), initially resisted calls for state of emergency declarations, fearing the economic consequences of COVID-19. During the pandemic, suicide rates in Japan rose for the first time in 11 years, especially amongst women who had been disproportionately affected.
By early January 2021, a new state of emergency was declared putting 55% of Japan’s population under restrictions with 7-day averages nearly 6,600 – in contrast, it was 1,000 before the first state of emergency. Merely 1.5 months later, it was lifted for all prefectures (state-like region) but Tokyo, where it was extended for another month.
Experts believe a premature end to restrictions is linked to the fourth wave with the resurgence most pronounced in regions where it ended in Feb, including Osaka, which was the hardest hit prefecture. This suggests that Tokyo is yet to experience is a significant uptick. Experts fear the recent surge may be impervious to past countermeasures as several signs, such as new cases plateaued at higher levels before the 4th wave began, indicate the outbreak will be significant. On the 25th of April, Tokyo and Osaka will re-enter a state of emergency for the third time for 3 weeks.
The third and fourth wave cases are from the new strains found in the U.K., Brazil, South Africa, and one that emerged from an immigration facility in Tokyo that experts call the ‘E484K’ mutation. All are more contagious than the conventional strain.
The only weapon that any country has against a virus is vaccinations; however, Japan had a slow roll-out so far with a start date 2 months after most developed countries. Part of the reason for the delay is its grey population, requiring more clinical tests for a vaccine to be deemed safe. Other reasons include Japan’s low rates of vaccine confidence relative to, for example, the U.S (30%, 50% respectively) and struggles to procure vaccines from manufacturers. Pfizer and Moderna vaccine candidates are both being imported, while AstraZeneca began local production with Japanese drug-maker Daiichi Sankyo Co in March, pending approval for inoculation.
The Pfizer vaccine, which already approved, is currently being used to inoculate 3.7 million front-line medical workers. As of April 23rd, 2.35m first doses have been administered and less than 1% of its population is fully vaccinated. Japan has also begun administering vaccinations to senior citizens aged 65 and older, 20% of the population. Japan expects to begin vaccination of the general public in July.
Vaccines pending approval
2020 Tokyo Olympics
In 2020, the Tokyo Olympics was postponed to July 23rd of this year, the cost of delay added 22% to the original price tag of $12.6bn, although, by one estimate from Japan’s National Audit Board the real cost may be nearly double at $22.3bn. With rising case numbers in Tokyo, the Olympic games could become a super-spreader for the island nation and fuel the pandemic globally as people return home. Having already excluded foreign spectators, Japanese officials have reportedly said cancelling the Olympics remains an option; this will deprive the country of a boost to consumer spending and force Japanese residents to absorb the full cost of staging the event. The go-to methodology in the organizing committee’s playbook, to have the event stay on schedule despite the pandemic, is a combination of serial testing and the bubble model.
Renesas’ Factory Fire
On the 19th of March this year, a fire broke out in a Renesas semiconductor factory, causing damage to 17 machines and the production line for 300mm wafers used in the automotive industry, and adding pressures to the global semiconductor shortage. Repairing the Japanese factory became a national effort as the automotive industry is a key contributor to Japan’s GDP (17.5%) with automotive and chips being its top exports, with favourable tailwinds from an increasing demand for chips globally. Mid-April, Japan’s exports jumped 16.1% (the highest in 3 years) pcp, led by exports of cars, plastics, semi-conductors, and chip-making equipment.
The Japanese chip manufacturer has since restarted production at the plant; however, it is not expected to return to 100% capacity for another 90 to 120 days. Renesas shares dropped 5.5% after reporting the damage and the time required to restart with, Japanese automakers being the biggest drag on the market, in a range of 3.3 – 3.7% decline, while the Nikkei-225 dropped 2.07% and the broader TOPIX index fell 1.09%.
The pandemic forced the Japanese government to put its fiscal reform agenda aside to cushion the blow of the pandemic and speed up recovery. Already holding the world’s heaviest public debt burden, Japan has so far announced around 340.6 trillion ¥ in coronavirus-related stimulus (roughly two-thirds the size of its economy). The stimulus payments include direct fiscal spending to help people stay in employment and prevent business closures, credit guarantees, and loan facilities for SMEs struggling to find financing, in addition to funding green growth initiatives and digital transformation.
Historically, Japan’s interest rates have been at or close to 0% interest for the last 20 years, dipping into negative territory for the first time in 2016 at -0.1%. This has left Japan with no room to use interest rate cuts as a tool to implement monetary policy without the risk of squeezing bank profits. In 2020, as countries around the world cut interest rates by 25 to 100 bps, Bank of Japan’s (BoJ) governor remained wary over interest cuts, instead chose to double the pace of its ETF purchasing program, fixing the upper limit at ¥15tn; the asset purchasing program will also include corporate bonds with a new 0% loan program. With the BoJ holdings nearly 90% of the ETF market, any news of increased purchases is a single big push to the market.
Near the end of March 2021, the BoJ announced it will remove the annual target of ¥6tn for ETF purchasing with all purchases of ETFs coming from ETFs tracking the broader TOPIX index consisting of 2,190 stocks.
As Japan waits for more vaccines to be administered, domestic demand is likely to remain sluggish as restrictions become stricter in the 3rd state of emergency, however, foreign demand for Japan’s exports will provide relief. While the travel subsidy is not expected to resume until the second half of this year, the government has begun to offer a separate ¥7,000 travel discount to locations not experiencing a surge in infections; while this ought to help domestic demand, mobility numbers remain similar across prefectures regardless of emergency status, suggesting that Japanese residents remain cautious even as restrictions are eased, which does not bode well for consumer spending. Conditional on successful containment and vaccine roll-out, growth is expected to accelerate in the second half of 2020 thanks to a sizable fiscal stimulus at home and abroad, further boosted by Japan successfully hosting the highly anticipated 2020 Tokyo Olympics.