Economics Japan Economics – Macro Watch: State of emergency likely changes people's behaviour

After headline Economy Watchers DI in February marked lowest level since April 2011 when the Great East Japan Earthquake hit, it fell further in March as confirmed by March service PMI. Deterioration was notable in hotel & restaurants.

03 Apr 2020

Deteriorating Economy Watchers DI

Source: CAO

Tokyo sees accelerating coronavirus cases

Since last week, the increase in new confirmed COVID-19 cases has been accelerating, especially in Tokyo. The governors of Tokyo and other prefectures thus continue requesting the general public to stay home and avoid the crowd or going out at night, but we still see many people continuing on with their ordinary lives. We have been monitoring the number of calls to the Tokyo Novel Coronavirus Call Centre of the Tokyo metropolitan government as an early indicator of infections that have not been confirmed. The jump to more than 1,000 for the first time on 1 April is worrisome.

People’s behavior likely to change in state of emergency

Governors of prefectures can request and instruct the public to stay home and close down events and shops on a legal basis, but there is no penalty against violations of these requests and instructions under the law. In other words, the government has no power to put Tokyo in lockdown. That said, we think a declaration and governors’ instructions could have material impact on the behaviour of people and businesses. This could mitigate the risk of more infections but additional damage to the economy is inevitable, in our view.

PM said the government will announce a fiscal package next week

PM Abe said in Diet that the government will announce a fiscal package next week. It looks likely that the size of the package will exceed the largest one after GFC (April 2009) at ¥57 trillion (12% of GDP then). Fiscal spending (so called “fresh water”) is uncertain, but is likely to exceed ¥20 trillion (our current assumption is ¥30 trillion). The package is likely to include grants to affected firms to protect employment and cash handouts to relatively low-income households, in addition to large loan guarantees to support corporate financing.

BoJ Tankan and February data were not so bad but provided no relief

The headline large manufacturers’ business condition DI was -8 in February, down from 0 in December, in line with our expectation but better than Bloomberg consensus (-10). Many firms did not recognise how severe the COVID-19 shock would affect their businesses at the beginning of March. Like the BoJ Tankan, February major data was rather decent. However, the decline in March service PMI suggests sales fell last month.

Next week: fiscal package, Economy Watchers survey, consumer sentiment, CAI

Our focus remains on the development of the COVID-19 and policy responses. The government plans to announce a fiscal package. On data, we pay attention to March Economy Watchers survey, which reports small firms’ business sentiment. Also, consumer sentiment in March and BoJ’s consumption activity index for February are worth watching.

Authorized clients of UBS Investment Bank can log in to UBS Neo to read the full report.