The economic impacts of the new coronavirus pandemic have become serious. As the infection has spread from China to Europe and the United States, the movement of people has stopped due to immigration restrictions and curfews. Stock markets around the world have been falling in a panicky manner amid concerns over how long the pandemic might continue.
In Japan, the falling number of foreign tourists, restraints on events and outings, and supply chain disruptions have shocked both supply and demand sectors of the economy. In response, Japan has begun to consider an urgent economic stimulus package.
Specific measures under consideration include cash benefits, voucher distributions, a consumption tax cut, and the enhancement of a point return system for cashless settlements.
What measures should be selected? Objectives must be clear when policy measures are chosen. The presence of mixed objectives could confuse the discussion.
Cash for Livelihood Support, Vouchers for Business Sector Relief
There are two serious problems, which must be addressed urgently. First, freelancers and sole proprietors face livelihood difficulties due to their sudden loss of business. Second, the tourism, food service, and events-related sectors have nearly completely lost their customer base.
As for the first problem, the recent emergency economic stimulus package called for providing freelancers and sole proprietors with interest-free loans. This measure, though appreciated, would leave those suffering with the new plague of loan repayment obligations. Bold cash benefits (e.g., ￥100,000 JPY per person) may be required to help make up for their income losses.
Regarding the second problem, the government must address the sudden demand loss in the affected sectors. The distribution of travel coupons and meal vouchers would be effective in ordinary times. Under the current voluntary restraints, however, consumers will not use them. Therefore, the government should announce that those coupons and vouchers are available to be used as soon as the call for restraint on movement is lifted.
At the same time, the distribution of premium vouchers through local governments, as was done in the past, would impose enormous costs and burdens on those governments. Internet and other private business operators may be better suited for the distribution of electronic vouchers.
These measures have specific targets and objectives. The option of cash benefits or vouchers should be selected in line with those targets and objectives.
Consumption Tax Reduction Would be Problematic
After taking these bold short-term measures, the government will have to stimulate the economy to address a global recession. Stimulus would not be effective, however, unless the containment of the new coronavirus pandemic comes into sight, with market players’ anxieties placated. This is clear, given that the recent monetary actions failed to produce any effect.
The government will also have to address the global credit insecurity caused by the plunge in oil prices.
A consumption tax cut could be considered in this context. Problems with this measure include the massive time required for preparations and the provisions for the tax to be raised again at some time in the future to cover social security.
Political decisions have to be made considering a mountain of problems. These include preparations required by retailers, such as cash register modifications and hesitant buying before the tax cut on the one hand, and the move’s potential effectiveness at changing consumers’ mind on the other hand.
It is important to boldly focus on measures that have specific targets and objectives for this crisis, rather than fall back on conventional pork-barrel spending measures.
Author: Masahiko Hosokawa
Masahiko Hosokawa is a special professor at Chubu University and a former director-general of the Trade Control Department at Japan’s Ministry of Economy, Trade and Industry. He is also a planning committee member at the Japan Institute for National Fundamentals.