Briefing: Japan emerges from its invisible lockdown | Features
- Japan has done remarkably well in reducing the health impact of the COVID-19 pandemic
- Nonetheless, the economy has been hit hard
- The pandemic has had a mixed impact on Japanese stocks
At first glance, this certainly seems to be confirmed compared to the Japanese experience with COVID-19. The country has many risk factors that would make it particularly vulnerable to the virus. Its population is one of the oldest in the world, many of whom are elderly men and longtime smokers, and multigenerational households are common. The population is also largely crammed into large, dense urban areas along the coastal plains of Japan.
Despite these seemingly unfavorable circumstances, the country has been remarkably successful in containing the pandemic. At the time of writing, he had suffered around 2,700 deaths from COVID in a population of 126 million. In comparison, Germany – far from being the worst performance in Europe – had suffered around 25,000 deaths out of a population of around 83 million.
To add to the conundrum, Japan was one of the few countries in the world that did not have a mandatory nationwide lockdown. So, despite a seemingly liberal approach to tackling the pandemic and all of its drawbacks, Japan’s performance is all the more remarkable.
There are several hypotheses as to why Japan has performed so well on COVID-19. The most popular revolve around cultural practices well known in Japan such as the strong concern for cleanliness, removing shoes when entering homes, and the relative unpopularity of handshaking and social kisses. “The Japanese tend to be socially left behind by nature,” says John Vail, chief global strategist at Nikko Asset Management in Tokyo. Wearing a mask was also already common, even before the pandemic.
However, there are other possible explanations. Some argue that the BCG inoculation routinely given to Japanese schoolchildren for decades has inadvertently provided protection against COVID-19. Others argue that the Japanese are immune to the virus because they have had to deal with a similar, albeit less harmful, infection in the past.
Whatever the real reason, the good performance in relation to the pandemic opens up another apparent paradox. Despite the relatively moderate impact of the disease and the lack of lockdown, the country’s economic performance has been average by global standards. In its Economic Outlook for December 2020, the OECD forecast an economic contraction of 5.3% last year. This is hardly less severe than the average contraction of 5.5% for OECD countries in 2020.
However, Japan’s GDP was already depressed in the last quarter of 2019 due to the consumption tax increase in September of that year (see figure). So the 2020 growth figure has already started from a lower base.
Certainly, part of the explanation lies in the export sector. Even though COVID has had no effect in Japan, the pandemic has hit its export markets hard. And, indeed, Japanese exports fell 5.3 percent in the first quarter and 17.1 percent in the second quarter, according to Cabinet Office figures.
However, it is striking that domestic consumption was also hit hard with an 8.3% drop in the second quarter. “The national economy has suffered a lot, especially small businesses,” says Nikko’s Vail. The substantial economic contraction in Japan last year therefore cannot be blamed solely on exports. This is even more the case today with some of Japan’s Asian trading partners, notably China, which are recovering relatively strongly from the pandemic.
Masayuki Kichikawa. Chief macro-strategy strategist at Sumitomo Mitsui DS Asset Management, explains the national economic blow despite the absence of a mandatory foreclosure at the national level. The Japanese people have taken it upon themselves to change their behavior to curb the impact of the pandemic. “It was an invisible and informal type of lockdown,” he says.
In other words, Japan was different, in that the economy suffered a partial shutdown due to voluntary action rather than a government decision. “The basic functions of the economy have never been closed,” says Richard Kaye, Japanese fund manager at Comgest. “In fact, the non-essential functions of the economy have never been shut down either. Japan has never closed restaurants, never closed bars, never closed stores. The only things it closed were sporting events and schools for about two months. The rest of the economy and the rest of life went on ”. At the same time, people started to work from home on a large scale for the very first time.
It is in this context that we must understand the evolution of Japanese equities. It would be a mistake to look at the casualty figures and assume that COVID-19 has had minimal impact on Japan. Rather, it was that stricter regulations largely took the particular form of an “invisible lockdown” rather than a legal requirement. Citizens could be trusted to follow government advice, rather than being coerced.
Official guidelines were relaxed to some extent in July with the advent of the government-sponsored Go To travel campaign for Japanese residents. The idea was to help strengthen the damaged economy by promoting domestic tourism. However, the campaign was put on hold as COVID infection rates began to rise.
In these conditions of informal lockdown, it is not surprising that sectors strongly linked to commuting and tourism – an increasingly important activity in Japan – have suffered. Not only did the Japanese commute less, but foreign visits to Japan fell – this in a year when the Tokyo Olympics were expected to boost the economy. Training companies and all companies related to office buildings have therefore suffered.
In contrast, the tech and automotive sectors performed well. The technology has benefited people working from home, while Nintendo in particular has enjoyed a boon, with people avidly playing computer games. It should also be remembered that many cell phones, even those without a Japanese brand name, often have many Japanese components.
Automobiles have benefited as more people drive rather than use public transportation. However, this is another example of an industry where Japan follows international trends in some ways but in a different way from others. More and more people are buying alternative energy vehicles, but the focus is on hydrogen fuel cell technology rather than electric cars.
An unexpected effect on equities has been growing interest from private investors. Mr. and Mrs. Watanabe – the quintessential Japanese small investors – have started to return to the market. “People had more time to spend at home, so it became a priority for individual investors,” said Tomonori Kaneko, fund manager at RBC Global Asset Management. Online trading platforms such as Rakuten have benefited from this renewed interest.
In this context, it should be remembered that private investors have long been wary of domestic stocks after the devastating market collapse in 1990. This renewed interest of private investors in the stock market is expected to be reinforced over the next decade. . As the older generation dies – with their huge household savings hoard – a lot more money may be invested in stocks.
At the same time, national institutions have become more interested in actions in recent years. There is still a foreign interest in the market, but it is less of a driving force than it once had been.
Equity investing also got a boost in September when legendary American investor Warren Buffett unexpectedly spent $ 6 billion (€ 5 billion) to buy minority stakes in five Japanese companies Sogo Shosha (general trading companies) – Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. These are very diverse companies that market a range of products.
While the short-term effects of COVID have been mixed, there is hope that it will bring long-term benefits. For example, the pandemic made working from home widely acceptable for the first time. “It was one of the few good things COVID-19 did,” says Kichikawa of Sumitomo Mitsui DS. This could help achieve one of the longed-for goals of boosting productivity growth in Japan.
By a happy coincidence, this corresponds to the priorities of Yoshide Suga, who became Prime Minister in September. There is not much ideological difference with his predecessor, Shinzo Abe, who retired due to illness. Indeed, for many years, Suga was Abe’s right-hand man. But the new prime minister is focusing more on what has been called the “third arrow” of Abenomics: structural reform to promote productivity growth.
A minor but symbolic change during the pandemic was the replacement of personalized stamps with electronic validation of official documents. In Japan, the convention was for officials to stamp documents rather than signing them to symbolize their approval. This meant that every important document had to be signed by many people. The procedure has become particularly cumbersome with so many people working from home.
Suga hopes his Liberal Democratic Party wins the next election, slated for October, so he can push his digitization and reform agenda further. Kaneko of RBC GAM explains why. “The aging of the population means that we have to compensate for the labor shortage,” he says.
In Japan, as elsewhere in the world, it is not clear exactly how the COVID saga will unfold. There are still many uncertainties about how long it will take to deploy the vaccines and the ability to contain the virus.
But there is little doubt about what Japan is hoping for. If the time is right, the containment of the virus is expected to coincide with the Olympic Games postponed this summer. Tourists will flock to Tokyo in what could become an even more symbolic occasion than it usually is. “What you would have then in July would be the world reopening in Japan,” says Kaye of Comgest.