Japan’s state of emergency is seen having limited impact on the economy

SINGAPORE — Japan’s latest declaration of a state of emergency in parts of the country is unlikely to take a major toll on the economy, economists told CNBC.

“The economic impact of the announced measures will be smaller compared to the last episode,” Shigeto Nagai, head of Japan economics at research firm Oxford Economics, told CNBC in an email.

He was referring to Japan’s nationwide state of emergency declared in April 2020, in the earlier days of the coronavirus pandemic. The state of emergency at the time ended in late May.

This latest state of emergency in Tokyo, Saitama, Chiba and Kanagawa till Feb. 7 was announced by Japanese Prime Minister Yoshihide Suga last week, in a bid to combat the latest surge in coronavirus infections.

The state of emergency is set to be expanded to more areas, with local media reports that Suga will add seven more prefectures, including Osaka.

Japan has recorded more than 298,000 confirmed Covid-19 infections while at least 4,192 lives have been taken by the disease, according to data from public broadcaster NHK.

Oxford Economics’ Nagai cited several factors to explain the limited economic impact, including business restrictions that are mainly targeted only at restaurants and bars in the areas under the state of emergency.

Operating hours of dining and drinking establishments in those areas will be shortened, according to the announcement by Suga last week. People are also discouraged from outings after 8 p.m. for non-essential, non-urgent reasons.

The number of people traveling to their workplaces will also be reduced by 70% — through telecommuting. Schools and kindergartens, however, will not be closed this time.

Capital Economics Senior Japan Economist Marcel Thieliant told CNBC: “The restrictions are very mild and mostly affect dining out and entertainment, which together account for around 3% of GDP.”

“Given that the state of emergency will only last for one month, the expansion to the Kansai region won’t result in a drag of more than 0.1% of GDP,” Thieliant said, referring to the latest emergency measures that will reportedly be expanded to more areas.

“We still think that the state of emergency will be extended nationwide and made more draconian, with shops and restaurants asked to close altogether,” he said, adding that Capital Economics expects a 1.5% quarter-on-quarter drop in consumption in the first quarter if that happens.

The handling of the Covid-19 situation in Japan could affect the reelection chances of Suga, who took over as prime minister last year following the unexpected resignation of his predecessor Shinzo Abe over health concerns.

Oxford Economics’ Nagai warned that Suga — whose approval rating has “already declined sharply in recent weeks” — will be dealt a “serious blow” if the state of emergency is unsuccessful and needs to be extend beyond one month.

“In addition to a series of political scandals, (Suga’s) lack of leadership in dealing with Covid-19 has been heavily criticized,” Nagai said. “The only chance to hold a lower-house election is sometime in autumn after the Olympic games and the (Liberal Democratic Party) may start looking for another leader to win the election.”