Japan: Even more stimulus, yet not enough

8 June 2020 14:04 RaboResearch

Japan’s government has increased its stimulus package to a whopping 43% of GDP. This, together with increased central bank stimulus, will prevent bankruptcies and unemployment from rising sharply. However, Japan’s economy is already suffering and we still think it will shrink by 4.8% this year.

Aerial view of Tokyo cityscape with Fuji mountain in Japan.

Abe and BoJ announce more stimulus

Prime Minister Abe announced another set of stimulus measures on 27 May as he vowed to protect businesses and employment “by any means”. The new stimulus package (the second supplementary budget) is estimated to be worth about JPY 117 trillion (USD 1.1bn). Given that the first stimulus package (announced in April) was worth about JPY 113 trillion, the total fiscal stimulus to mitigate the economic fallout caused by COVID-19 is now about JPY 230 trillion (USD 2.1bn), a whopping 43% of GDP. The focus of the new package is mostly on preventing a sharp increase in unemployment and bankruptcies by stimulating credit access for struggling firms and providing wage subsidies. The new package will be fully funded by issuing JGBs, a substantial part of which will likely be absorbed by the BoJ.

After an unscheduled meeting on 22 May, the BoJ also announced further support, consisting (amongst others) of a new facility that will lend up to JPY 30 trillion to Japanese banks at zero interest. This brings BoJ’s ‘Special Program’ to fight the COVID-19 crisis to a total of JPY 75 trillion. In addition, BoJ announced an increase in its purchase of corporate bonds and commercial paper (by a total of JPY 15 trillion). BoJ did not adjust its short-term policy rate (-0.1%) or its target yield for 10Y JGBs (0%), and we do not expect that to change anytime soon.

The total size of all these measures clearly signals that the government and central bank have taken off the gloves in fighting the economic effects of COVID-19, and we expect it to succeed in keeping unemployment and bankruptcies from rising sharply. However, we still expect that Japan will not be able to escape a deep recession this year (Table 1). Bank lending will not increase enough to save all struggling firms, and more importantly, consumers (which represent 56% of the economy) will be reluctant to spend against a backdrop of high uncertainty.

The real economy is clearly suffering

Recent data shows that the real economy in Japan is clearly suffering. Retail sales in April have dropped by 14% y-o-y (Figure 1), while consumer confidence is even lower than during the Great Financial Crisis (Figure 2). Weak sentiment combined with an economy that cannot operate at full capacity due to social distancing and weak foreign demand (Japan’s exports in April fell 22% y-o-y) will keep the economy from bouncing back a lot in the second half of the year. Recent data (from TomTom’s traffic index) corroborates this weakness. Traffic congestion in Tokyo and Osaka, for example, was about 63% of its 2019 average in the last week of May. This indicates that economic activity has clearly has not returned to normal, even though the government has now lifted the state of emergency announced in April for all prefectures.

Figure 1: Retails sales have plummeted in April…

Source: Macrobond

Figure 2: …and so has consumer confidence

Source: Macrobond

Higher unemployment

Unemployment is still modest in Japan, although it is steadily rising (from 2.4% in January to 2.6% in April). Moreover, the jobs-to-applicants ratio has dropped from 1.49 in January to 1.32 in April. This ratio has historically been correlated with unemployment (Figure 3) and we think its rise foreshadows a further rise in unemployment.

Figure 3: Households face rising unemployment

Source: Macrobond

Figure 4: While firms face higher debt

Source: Institute of International Finance (IIF)

More corporate debt

One of the problems the Japanese economy might face after this crisis is a sharp increase in corporate debt. Corporate debt has already been rising in Japan over the past five years (Figure 4) and given that the recent stimulus package of the government and central bank mainly consists of credit support, this debt will likely rise substantially. Repaying this debt in the future will eat up a larger part of corporate cash flows for years to come. That means less money to invest in growth and Research & Development (R&D) and less headroom to face another crisis. The latter is not uncommon for Japan given its history of natural disasters.


Another problem is that loose credit now could lead to a further rise of zombie firms (loosely speaking, old and unprofitable firms) down the road. This problem has already plagued the Japanese economy since the 90s. A recent study (Goto and Wilbur, 2019), finds that the share of zombie firms among Japanese SMEs is still large. Averaging across firm size and definitions, the share of zombie firms among SMEs in Japan is about 21%.[1] This is large even compared to other countries where zombification is a problem. To give an example, in a recent Special we estimated that the share of zombies among listed firms in the US is 15%.

Zombification leads to less innovation and lower productivity. Research by the Bank of International Settlements shows that a 1% rise in the share of zombie firms in a country reduces productivity growth by 0.3%. The implication here for Japan is that zombification could lower productivity and thereby also lower wage growth, which will keep a lid on inflation for years to come.

[1] Goto and Willbur calculate the shares of zombie firms for three definitions, and within each definition for three firm sizes (small, medium and large). The estimate of 21% is the average of all three definitions for small and medium enterprises.

Table 1: Economic forecasts Japan

Source: Macrobond (2019), Rabobank (2020 and 2021)