AOYAMA VIEW 09.02.2020
09.02.2020
JAPAN IN VIRUS SCARE
We‘re already into second month of 2020, Reiwa 2 or Year of Rat, which ever you prefer. Devil and bad luck was run out by traditional “oni soto” bean throwing last week, but bright signs early in the year look pretty dark now with new virus scare. There‘s health scare around the world, nationwide panic in China and rising worry in Japan. The seemingly unstoppable spread of the virus is posing an yet unfathomable risk for global business and economy, too.
The official name “2019-nCoV” does not fit into media bites like SARS, MERS, swine flu, bird flu or Ebola, so it‘s been called instead just “corona virus”, the generic name it shares with those that preceded it. It seems to share its origin with them, too: virus carrying animals, whether pigs, birds, bats or snakes, mixing with humans, most cases in China. “Wuhan virus” was an early name there, but now it‘s all over the country and even elsewhere. Japan stands out as next risk with close to almost two million tourists from China visiting here during their New Year holiday.
SLACK CONTROL MEASURES IN JAPAN?
Chinese tourist spending has become big business and remarkable booster for the entire economy, so official Japan has bent almost backwards not to disturb the inflow of tourists and their money. In contrast to many other countries, no restriction has been put on Chinese passport holders to enter the country except those from Wuhan and all airlines continue to fly between the two countries. The only block for the annual travel flow has come from China side with government ban on all group tours to overseas, something that led to 400,000 cancellations at Japanese hotels and 15-20% sales fall at department stores, especially of cosmetics. Shiseido has already downgraded its business outlook for the whole year and Japanese hotels around the country now offer their empty rooms at fire sale prices.
to stay aboard for almost two weeks. (Ka23 13 [CC BY-SA (https://creativecommons.org/licenses/by-sa/4.0)])
Whether government’s choice to put emphasis on protecting travel business and possibly not enough on health care – and not to ruffle any political feathers just before the long sought for Xi visit to Japan – has been correct, remains to be seen. The next 2-3 weeks will show how the infection rate turns out. So far, most cases here – 70 counted as I‘m writing this – are among those who have returned from China, many evacuated by government organized flights from Wuhan, and among passengers on the American cruise ship that is now quarantined at Yokohama port.
INFORMATION SLOW, UNRELIABLE?
To find the right level of control has been made difficult also by slow information from China how serious the situation really is there. The reported figures grow day by day and have now spread into new cities around the country as it took weeks before Beijing admitted the problem existed in Wuhan – an alleged improvement from SARS in 2003 when it took 3 months. By the time Wuhan was declared in quarantine half of the city’s 11 million population had already left to spend their holiday elsewhere. Despite the central government’s big show of strict control and effective health care effort since then, reports continue of lack of hospital beds, doctors and nurses, test kits and medicines. Moreover, there are doubts whether the figures China reports even now are true: a leak of allegedly true figures on a leading online news last week showed scores 10 times more for those infected and 100 times more for fatal casualties.
As always, there’s also endless flow of fake news and crazy conspiracy theories in social media around the world. Global stock prices can lose or gain billions in a day based on them as the other day when it was claimed that a vaccine against the virus had been already developed to kill the beast. My medical industry friend tells me it will take a year and one billion dollars to have a vaccine developed, tested and put into production – and if the virus had by then petered off, the entire investment would be lost. Countless speculations how quickly the virus would peter out on its own are said to be equally futile. “If you ever hear somebody say he knows that, it‘s not worth listening”, say medical experts.
BUSINESS IMPACT AROUND THE WORLD
With most of China industry standing idle on extended holiday and consumers confined to homes not able to splurge money on New Year sales, movies and restaurants, the economic loss there will be huge, much bigger than the general slow down and US tariff impact last quarter. Some economists say the impact could take 2% off from the national GDP for this quarter.
China makes today 16% of global GDP – four times more than in 2003 when it endured SARS – and 25% of the global industrial production. It is No.1 market for many global companies and production center for countless others. If sales and production in China and supplies from there to factories around the world cannot get soon back on track, the impact will expand around the world exponentially.
Cars and mobile phones seem to stand out as first victims. Analysts say that cars made in USA are 25% based on parts from China while the figure is 10-15% in Japan and Korea and 5-10% in Europe. Already last week Hyundai had to stop its production lines and Fiat warned it will have to close a factory this week if they cannot get crucial parts from China. Meanwhile, Apple’s wish to raise production volume of its new model that has proved a good seller was turned down by its suppliers as impossible in today’s situation.
JAPAN ECONOMIC OUTLOOK
only lately taken over by ICT. (Tvabutzku1234 [Public domain])
The potential negative business impact here will spread from travel and retail to big companies deeply involved in China, too. This could not happen at worse moment: business and economy slowed rapidly already last quarter. October 1 tax hike took the wind off consumer consumption that was weakened already by natural catastrophes in summer while exceptionally warm weather ruined the seasonal sales of heaters and winter clothes. Companies supplying crucial electronic parts to China, who took a hit when production there slowed down and were already rejoicing that business was getting back with US-China provisional trade peace, will take a renewed hit now.
The Oct-Dec GDP figure is not yet out, but is expected to show over 2% annualized decline. It was expected that government‘s big supplementary spending budget would bring this quarter back to even keel, but the outlook from China seems to destroy any hope for that.
Looking back at other economic elements last year, monthly salaries were raised again and hourly salaries for part-timers were rapidly rising reflecting lack of workers, yet the total salary amount paid declined again as the share of part-timers with low salaries kept going up. It’s now 31,5% of total work force and the average monthly earning for them is just JPY 100,000 in comparison to JPY 425,000 for full-time permanents. The government boasted with adding 800,000 new jobs, but most of them were for part-timers with low salary.
Exports continued to decline last year and Japan recorded another year with negative trade balance, yet the current account stayed on positive with good, steadily growing business in overseas. Japanese companies were No.1 in foreign M&A again and made several welcome investments in Finland, too.
Analysts forecast major companies‘ profits will be 10% down for the 2019 financial year that ends next month with manufacturing in general 16% down, automakers 31% and steel mills a whopping 70%. Unable to fight against low prices from China‘s overflowing capacity, Nippon Steel, a classic giant and still one of the biggest in the world, just announced it will close three of its mills in Japan.
Yes, the new year outlook is not very bright for Japan‘s business and economy even if we can manage to keep our health intact. Happily, there‘s many positive stories, too, to tell of Japan, but I save them for the next column.
Best wishes for the New Year to all readers.
Timo Varhama
Tokyo, February 9, 2020