In the last year and a half, Japan’s economy has experienced three consecutive shocks. The first shock struck Japan in early 2019, when Japan’s manufacturing sector was adversely affected by the US – China trade war and slowing economic growth. This economic effect was exacerbated by a second shock of demand caused on 1 October 2019 by the 8-10% hike in the consumption tax. Just as Japan’s economy was recovering, a third COVID-19 shock struck the severest blow, plunging Japan into a full-blown recession.
COVID-19 forced a one year postponement of the Summer Olympics in Tokyo in 2020. The 2020 target has been set ambitiously at 40 million for international tourists. Hosting the games in 2020 and low interest rates lead to community construction programs around the country. With the attraction of international capital inflows, real estate prices and the Real Estate Investment Trusts (REIT) index rose gradually. In comparison to other sectors, domestic banks increased loans to the real estate sector and invested in REITs.
While tourism, construction, and real estate development helped offset declining manufacturing activities in 2019, some potential risks emerged — construction, real estate development, and inbound tourists now have a profound effect on economic growth.
Before the pandemic, there was concern that Japan may fall into a post-Olympic recession triggered by a fall in real estate prices. Most construction projects were completed in early 2020, and due to oversupply, some real estate prices were overvalued. This problem is sped up by the COVID-19 pandemic.
Some businesses in the hosting, restaurant, and retail sectors have entered bankruptcy since February 2020. The REIT index has dropped significantly — economic and social activities are likely to only pick up moderately from June, once the emergency period is over. But Japan’s recovery process will be slow due to public concerns about COVID-19 containment, and limited testing availability. Bankruptcies will increase and bank loans will turn into non-performing loans as economic suffering continues to continue.
Japan’s economic growth contracted two consecutive quarters at an annualized rate of – 7.3% for the fourth quarter of 2019 and – 3.4% for the first quarter of 2020, compared to the previous quarter. Performance is predicted to deteriorate by another -20% for the second quarter.
The actions of the Japanese government have been slow compared to the United States and Europe (We have other interesting articles about real estate crowdfunding in Europe here) although the amount of support is comparable. The government unveiled an economic package of about 21 percent of nominal GDP in early April 2020.
The package consists primarily of deferred tax and social security payments, and the provision of subsidized loans and bank loan guarantees. Wage support for employing firms is included in the package, but complicated applications and the slow process of approval have discouraged many firms from applying. The package includes cash transfers of around 3 percent of nominal GDP to firms and individuals. Additional cash support for the companies affected is likely to be needed.
Initially , the government wanted to provide cash to targeted households (US$ 2800 per household) but it switched to providing cash to all individuals (US$ 935 per person), as complaints about the complicated eligibility requirements emerged. For this reason, the passage of the relevant bill at the Diet was delayed until the end of April 2020. The crisis has revealed inadequate e-government services along with a lack of publicly issued ID numbers that are linked to payroll, taxes and social security services.
Compared with those of its US (read more about real estate in US) and EU counterparts, the BOJ’s response to COVID-19 is limited. By loosening the collateral requirement to September 2020, the BOJ initiated in March a temporary liquidity operation to commercial banks at 0 percent interest with maturity within one year (most only three months). But the BOJ lowered the loan rate by just 10 basis points and did not provide interest subsidies on the loan rates. Conversely, the European Central Bank provided banks with substantial interest subsidies with three-year loans.
The BOJ moderately increased purchases of corporate bonds and trading papers, mainly to support large companies. For precautionary reasons, many large companies already have cash and deposits, and issue such bonds and notes.
The impact of these purchases on overall corporate financing conditions is limited as market sizes are relatively small — about 11% of total nominal GDP — compared to corporate-sector bank loans amounting to 60% of nominal GDP. The BOJ increased the amount of purchases from the stock exchange trading fund (ETF), but the impact on the household sector is limited as stock holdings of households account for only 10 percent of total financial assets.
Since early March 2020, the BOJ’s balance sheet grew by just 5 percent. The increase was largely a result of borrowing from the Federal Reserve providing banks with liquidity from the US dollar. While this can help big banks with foreign-market exposures, it is largely unrelated to many local banks and credit unions.
The BOJ increased its purchasing volume of corporate bonds and commercial papers at the end of April. The temporary liquidity activity extended qualifying assets and qualifying financial institutions, but such steps seem inadequate to encourage additional lending by banks to small businesses impacted by the COVID-19 crisis. In response to criticism that smaller firms are not being given sufficient support, the BOJ held an emergency meeting in May to implement a new loan program for banks that will extend credit to smaller firms with small interest subsidies. While this is a positive move, the BOJ’s restricted acts clearly reflect the little space left for monetary accommodation since currency easing has persisted since 2013. It may also reflect the BOJ’s aversion to take higher risks, as it already carries a high risk by large purchases of stock ETFs.
COVID-19 is testing the government and the BOJ and demanding that they be more innovative and flexible to provide much needed economic support.