Likely Tokyo Emergency Adds to Fears Economy Will Shrink Again

Prime Minister Yoshihide Suga’s heavy hint that he will declare an emergency in the area around Tokyo later this week has deepened fears that Japan’s economy will shrink again even with the support of a recent $700 billion stimulus package.

Bloomberg Economics’ Yuki Masujima sees a Tokyo emergency declaration shaving up to 0.7% off the economy for each month it lasts.

Gross domestic product could contract by 5% on an annualized basis in the three months through March and by 10% if the declaration is made nationwide, according to Ryutaro Kono, chief Japan economist at BNP Paribas, writing in a report Monday.

The looming decision will set back Suga’s hopes of stoking growth with his recent stimulus measures and restarting travel subsidies criticized for contributing to the uptick in infections.

“Japan is off to a dire start this year,” said Atsushi Takeda, chief economist at the Itochu Research. “Tokyo and surrounding areas account for a big chunk of the whole economy and this will also cool sentiment and economic activity throughout the nation.”

The prime minister’s warning of action to limit activity mainly at restaurants and bars and a possible emergency declaration comes amid record virus cases in the capital in recent days. Eating and drinking establishments are seen as one of the key locations for the recent spread of infections.

While the action is likely to be less stringent than a nationwide emergency called in April, economists say the likelihood of the economy shrinking this quarter has clearly increased.

Tokyo and its surrounding prefectures account for about a third of Japan’s economic output and would rank as the world’s ninth largest economy based on a breakdown of the Cabinet Office’s regional data from 2017.

The capital logged another 884 cases on Monday, down from more than 1,300 on New Year’s Eve, but still at a relatively high level for Japan. Suga said he will consult with an advisory panel to finalize plans on a possible emergency declaration covering Tokyo, Kanagawa, Saitama and Chiba.

What Bloomberg Economics Says…

“Another state of emergency would put substantial pressure on the economy, which was showing a loss of momentum in 4Q 2020, and disrupt government efforts to support demand.”

— Yuki Masujima, economist

To read the full report, clickhere.

Analysts said any contraction would be smaller than last year’s record 29.2% annualized slide in the second quarter. That’s because the declaration won’t bring full scale business closures like it did last year, according to Masamichi Adachi, economist at UBS Securities.

“This would be different from the previous declaration,” said Adachi. “Still, the psychological impact is hard to measure. What is clear is that Japan’s recovery is now going to be even more underwhelming than other developed nations.”

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