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Covid-19 Just Erased 8 Years Of Japanese Efforts To Beat China

Though the legacy of the Tokyo Olympics is impossible to predict, at least this is clear: neither Japanese Prime Minister Yoshihide Suga nor his party struck the political gold they’d envisioned.

The athletes sure did. Japan garnered its biggest ever gold medal tally. But that triumph has already receded from view amid record Covid-19 infections. A drip, drip, drip of news about cost overruns and imperialistic behavior by International Olympic Committee bigwigs is fanning public disillusionment.

Things have gotten so iffy for the ruling Liberal Democratic Party that there is talk of delaying an election that’s supposed to be held by October. With Prime Minister Yoshihide Suga’s approval ratings in the low 30s, at best, the LDP seems more afraid of an electoral thumping than the pandemic.

Yet for all the attention of the last eight months or so of Suga’s team struggling to make the Olympics happen, it’s time to talk about how Japan’s political establishment squandered the last eight years.

Make that eight-plus years. It was Suga’s predecessor Shinzo Abe who secured the Games for Tokyo back in 2013, about 10 months after Abe was named prime minister. It was an exciting moment for Asia’s second-biggest economy. At the time, Abe was rolling up his sleeves to disrupt a rigid and aging economy losing competitiveness to China.

Or so we gullible masses thought. Abe talked such a great game of loosening labor markets, cutting red tape, catalyzing a startup boom, empowering women and internationalizing corporate governance that the Nikkei Stock Average soared 57% in 2013 alone. 

The excitement waned over time. It wasn’t until Covid-19 arrived in early 2020 when the stragglers seemed to realize they’d been fooled. All those years Japan’s ruling party should’ve been raising Japan’s economic game—and just didn’t.

Abe’s party, after all, had three things no Japanese government ever had before: majorities in both houses of parliament; a prime minister with years of high popularity numbers; and plenty of time to implement upgrades. And what did the LDP, Abe and now Suga give us? An Olympics.

Currently, there is a view that Japan is recovering from Covid. And, indeed, the 1.3% growth Japan achieved the second quarter year-on-year is nothing to sniff at. But it is a mirage, one afforded by recoveries in the U.S. and Chinese economies. As the delta variant does its worst, growth in the U.S., China and, it follows, Japanese gross domestic product will return to earth.

Then what? Déjà vu is all over this question, one that economists were asking back in late 2012 when Abe’s LDP returned to power. We’re now asking it with far less ammunition for Tokyo to fire at slowing growth, weak consumer prices and businesses watching the world gravitate closer and closer to China.

In 2020, remember, Abe’s government threw more than $2 trillion at a pandemic-plagued economy, or 40% of GDP. The Bank of Japan, meantime, had already long since cornered bond and stock markets. By 2018, the BOJ’s balance sheet topped the size of the nation’s entire $5 trillion economy.

Yes, Tokyo could pump more fiscal stimulus into the economy. The BOJ could expand its asset purchases to support vulnerable sectors. But the lesson of the last eight years is clear. Japan doesn’t need more public money—it needs uses for them. That means giving consumers and businesses confidence that the next eight years will be better than the last eight.

The post-Olympics Covid surge is now upending even the best-case scenario for the next eight weeks, never mind years.

“The demand side will remain constrained…given the challenging near-term outlook for the economy,” says Stefan Angrick at Moodys Analytics. “A record number of new Covid-19 infections prompted the government to expand emergency restrictions this past week, so labor markets and spending will remain weak in the near term. Further out, disappointing wage developments will add to the subdued inflation outlook, so we expect monetary policy to remain on hold.”

In other words, as central banks from Washington to Seoul talk about “tapering” from crisis-era rescue efforts, officials in Tokyo are trapped in perma-stimulus mode. And now, without the Olympics boost that politicians had banked in advance. Japan really does deserve a gold medal for lost opportunities.

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