The right economic response to the COVID-19 crisis

As was widely feared, the serious impact of the COVID-19 pandemic on the economy has become increasingly clear. The gross domestic product in the January-March period contracted an annualized 3.4 percent from the previous quarter. One out of four listed companies reportedly sustained losses in the three-month period to March.

But we have yet to see the worst of the recession. The full-blown impact of the pandemic will come in the April-June period, when, according to a Nikkei interview of four prominent economists, the nation’s economy is forecast to shrink by 20.2 percent.

The situation may even be worse in other countries. The U.S. Congressional Budget Office has said the GDP will decline by as much as 40 percent in the United States in the April-June period. Just as the office predicted, the unemployment rate surged to 14.7 percent in April.

In the face of such a crisis, extraordinary economic measures are called for. What’s needed are bold steps that are not bound by precedents. At the same time, there are a few principles that must be followed.

First, the measures must be taken promptly. Regrettably, the Japanese government’s response has had much to be desired. The negative effects of the new coronavirus on the economy were predicted from early on this year. However, the government, waiting for Diet deliberation on its fiscal 2020 budget, said that it would consider steps to address the pandemic only after the budget has been approved.

Consequently, it was only on April 7 that the government’s economic package was unveiled, and an extra budget to finance the measures cleared the Diet as late as April 30. In the U.S., an economic package worth some ¥220 trillion was agreed on as of March 25.

The Bank of Japan was similarly late in taking monetary steps to cope with the crisis. Whereas the U.S. Federal Reserve Board announced measures worth ¥250 trillion, it was only on April 27 that the BOJ said it would do all it can to fight the pandemic.

Second, the government needs to make sure that its measures are consistent with the macroeconomic forecasts and, therefore, make the future course of the economy highly predictable for the public. It is essential to make clear what the government thinks will happen to the economy going forward and what steps it will take to cope with the situation.

As of April 2, the U.S. Congressional Budget Office predicted the U.S. economy will suffer a 28 percent fall in the second quarter of the year. On April 24, the office said the economy will plunge further to minus 40 percent growth. It is indeed technically difficult to accurately make such forecasts, which are also shocking to hear. However, they make it possible for people to foresee to an extent what is going to happen.

A second supplementary budget has been approved by the Cabinet, but the government does not appear to be engaging in any discussion on the economy’s prospects in the coming months. It’s mostly the ruling coalition parties that are making policy demands in bits and pieces for supporting individuals and businesses hit hard by the pandemic. The relations between the macro-economy and fiscal policy are nowhere in sight.

One proposal is to move up the mid-year revision to the economic forecasts, normally undertaken in the summer by the Cabinet Office, so as to clarify the link between the macroeconomic forecast and the extra budget. Otherwise, the government will face one spending request after another in an unprincipled manner, possibly resulting in an enormously ballooning fiscal pressure on state coffers.

The third point that must be followed in compiling the economy policy is to make its basic objectives clear. As the economy goes downhill, calls for government support will mount without limits. But the basic objectives of the measures should be to support the livelihood of individuals in need and to support business financing to prevent the collapse of companies due to a funding shortage.

Consumption and investment demands quickly evaporated as the request to stay home significantly curbed people’s movements. The request deprived a sharply increasing number of people of significant portion of their income, threatening their day-to-day livelihood. To address such an extraordinary situation, there’s no way other than to provide direct cash payments from the government to individuals, as has been done in many other countries.

The uniform ¥100,000 payment to every individual has already begun. But such a measure will not have much of an impact if it ends in a one-off payout. It needs to be part of a system of sustained support, which will keep providing a certain amount of payments over a certain period.

At the same time, the system should be so crafted that high-income earners who don’t need the support in the first place should be made to return the payout in year-end tax adjustments. By linking the step with the My Number personal identification system, the measure can pave the way for new digital services in the post-pandemic e-government. That can also lead to a basic income policy in the future.

The fourth point in the economic measure to address the pandemic crisis is make the short-term measures consistent with medium to long-term policy goals. The government needs to come up with a clear medium to longer-term vision of the economy and compile large-scale policies to achieve that. What must be avoided is to repeat short-term, small packages in response to individual requests amid the confusion of the pandemic, consequently adopting inefficient economic measures.

Heizo Takenaka, a professor emeritus at Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.

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