The Economics of Declaring a State of Emergency in Japan 2020

 On April 7, Prime Minister Abe declared a state of emergency based on the revised Law on Special Measures against Swine Flu and Other Influenza. It covers the major regions of Japan - Tokyo, Saitama, Kanagawa, Chiba, Osaka, Hyogo and Fukuoka - and asks the public to "self-restrain" for about a month.
 The declaration of a state of emergency is different from the lockdown seen in the West. By declaring a state of emergency, the governor of the target area can ask residents to refrain from going out on an unneeded basis, and can also ask managers and event organizers to suspend the use of certain facilities.
Lockdowns in the West are often accompanied by penal provisions. In Japan, the big difference is that residents are asked to "self-restrain" voluntarily. In this sense, unlike lockdown, it may be less effective in deterring the spread of infectious diseases in the absence of penal provisions. In addition, overseas, the compensation for absence from work is often combined. Tokyo's Governor Yuriko Koike is firming up her policy of compensating stores that are closed or operating at reduced hours for lost time. The government is negative about this absence compensation.
 Consider the economic damage of declaring a state of emergency. The total nominal GDP of the Tokyo metropolitan area (Tokyo, Kanagawa, Saitama, Chiba), Osaka, Hyogo and Fukuoka is about 244 trillion yen. Including Tokyo, the world's largest city (metropolitan area), its GDP exceeds that of Italy, which ranks eighth in the world. This is almost half of Japan's nominal GDP. It will be one of the top economies in the group of developed countries.
 The government will set the areas and duration of the state of emergency, but the specific measures will be left to the governors of each municipality. There will be a wide range of industries that will be primarily affected by the declaration of a state of emergency. In addition to tourism and passenger businesses, which have been affected since the latter half of January, movie theaters, exhibition halls, department stores, supermarkets, hotels, museums, cabarets, barbershops, and cram schools, which are assumed to be subject to suspension of use as "facilities used by a large number of people" under the Special Measures Law, will undoubtedly suffer significant economic damage. On the other hand, supermarkets can sell daily necessities such as food and medicine. Convenience stores will also be open as usual. It is also recommended that employees work from home for general corporate activities on weekdays. The public transport network also remains in normal operation. On the other hand, there will be more demand for home delivery services and online businesses. If school closures continue, the demand for alternative online classes will also increase. One of the author's areas of expertise is idol economics. The outbreak of outbreaks at live music venues in Tokyo and Osaka has prompted government demands that they be avoided as spaces prone to being "sealed, dense and close." Most of the idols are in the live house business. Recently, there has been a spate of cancellations and postponements of performances at live music venues. This has serious economic implications for the idol business as well. At the same time, there is an accelerating trend to build up video distribution services using the Internet and to sell products (such as autographed photos of idols) online. There is a possibility that the form of business may change significantly in response to the crisis.
The OECD has estimated the economic damage of the lockdown in each country( According to them, an instantaneous shock can cause a 20-25% drop in GDP in almost any country, and the range of industries affected ranges from 30-40% of the total. Of course, even if GDP falls by 20-25% in the short term, what happens to economic growth in a year depends on the size and duration of the lockdown. In the Japanese case, it's not as severe as the lockdown. Let's assume that the instantaneous decline in the region's GDP is about 20%, which is the minimum in the case of a lockdown. If we look at the economic damage in the Tokyo metropolitan area and other areas, the instantaneous drop would be about 49 trillion yen, or 20% of the region's GDP. The final outcome of this economic downturn, of course, will depend on whether the declaration of a state of emergency is really over in the short term (one month) and the extent to which the economy recovers afterwards.
 The OECD estimates that the fall in consumption will be greater than the fall in production. The initial impact of consumption will be a drop of more than 30 percent in the developed world. Spending on fashion, museums and amusements, hotels and restaurants, or transportation, such as taxis and trains, will be drastically reduced. Of course, even before the state of emergency was declared, these industries were suffering a sharp decline in sales due to the COVID-19 shock.
However, Japan's domestic supply chain is still strong, barely preventing a sharp economic crisis that would cause both production and consumption to shrink. It is an important safety net to support the economy if the logistics of daily necessities and other goods are not compromised. Of course, the primary purpose of declaring a state of emergency is to deter the spread of infection. In particular, it is the government's aim not to put any more strain on the health care system. If these objectives are working, the worst of the human losses can be avoided as much as possible, and the social and economic recovery after the end of the infection can be facilitated.
 IMF staff have likened this  COVID-19 shock to a wartime economy.
They divided the "war" into two phases.
"Phase 2: The epidemic will be under control with vaccines/drugs, partial herd immunity, and continued but less disruptive containment measures.
The epidemic will be under control with vaccines/drugs, partial herd immunity, and continued but less disruptive containment measures. As restrictions are lifted, the economy returns-perhaps haltingly-to normal functioning.
In order for the recovery phase of Phase 2 to go smoothly, it will be important in Phase 1 to ensure that human lives are not lost, jobs are secured, and companies do not go bankrupt. This means that the policies of Phase 1 are crucial to winning the war.
The menu of policies given by the IMF staff is as follows.

 Many of the IMF's economic policies are included in the emergency economic measures announced by the Japanese government on April 7 and the responses to date. The Japanese government will also fund a stockpile of the therapeutic drug Favipiravir (Abigan) for 2 million people.
The flat-rate benefit, which had been the focus of Japanese policy debate, has now become an income limit. For example, a household whose monthly income has plummeted to a level where it is exempt from resident tax can obtain a fixed benefit of 300,000 yen ($2,800) by self-assessment. It is expected that about 10 million households will receive the benefits.

 In the newspaper "Evening Fuji" dated April 4, I expressed my strong concerns about income-limited fixed benefit payments.
The following is a few additions to the comments made in that newspaper.
1) Even if we give 300,000 yen ($2800) to 1 million households, the total amount is only 3 trillion yen ($280 million).
(2) To prevent a decline in the overall economy, a scale of 12-20 trillion yen is needed. It has been pointed out that we are not at the stage of stimulating aggregate demand. However, if the macroeconomic decline is left unaddressed and fiscal policies are implemented on an insufficient scale, a chain of job losses and bankruptcies will ensue. An emergency measure that would save all this would be difficult in reality. Quantitative support on a macro scale will also be a requirement in Phase 1.
3) 100,000 to 200,000 yen ($930 to $1,900) should be provided to all citizens. Or, as Yosuke Yasuda, an associate professor at Osaka University, recently suggested, 10,000 yen ($93) per week, or a flat benefit for all citizens by the time the infection ends. This is a very effective policy in a world of uncertainty about when an infectious disease will end. Also, during Phase 1, the government should at least decide to adopt consumption tax cuts. The consumption tax cuts will play a strong role in the economic recovery in Phase 2. It also supports constant consumption when Phase 1 is unexpectedly prolonged.
4) In the case of self-employed people, it is difficult to prove with documents that their income has decreased in the last two months. Isn't that why the restrictions on claims are so tight, and as a result not enough money is going to the people?
5) The political ambitions of the LDP's Fumio Kishida policy research council chairman and the austerity of the finance ministry have led to poor fiscal policy.
 As for income limited benefits, economic critic Hajime Yamazaki illustrates one of the problems with them.
 "Give 300,000 Yen($2800) to a household with a reduced income? What would a cunning president say? Employees. I will be taking a pay cut for a while this month due to the corona. You should apply for and receive 300,000 in benefits on the grounds that your income has decreased. It's okay! The total doesn't hurt the employees... It's a fool's errand to want to put conditions on benefits."
 This means that it doesn't reach the people who really need it, and if it does, it's too late.
 For some reason, the IMF's list of measures does not include "financial compensation" for work stoppages and event cancellations associated with lockdowns and emergency declarations. As Professor Asahi Noguchi of Senshu University points out, this "compensation for absence from work" is important in order to be proactive in taking time off work, etc.
 In any case, within the economy of a declared state of emergency, there is a "fundamental uncertainty" (in the words of French economist Robert Boyee) that we do not know where the spread of infectious diseases will go. In an economy of fundamental uncertainty, the perception of the current economic crisis needs to be renewed many times over. If policy interventions are not enough, the attitude of doing more and more will be important.

HIdetomi Tanaka (Professor, Jobu University)