Japan and Covid-19:
A tale of policy firepower

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June 29, 2020

Policymakers have pulled out all the stops in response to the Covid-19 pandemic with a monetary and fiscal stimulus package that recalls the early days of Abenomics, says fund manager Miyuki Kashima.

Of all the countries to face Covid-19, Japan appears to have emerged with some credit. With a comparatively low death rate, a successful voluntary lockdown1 and the first signs of consumer spending already beginning to return to high streets, Japan appears to be well on track to put the worst of the crisis behind it.

For Miyuki Kashima, head of Japanese Equity Investment at BNY Mellon Asset Management Limited, one of the key factors in smoothing this transition to normality has been intervention on a massive scale by both the Bank of Japan (BoJ) and the government of Prime Minister Shinzo Abe.

On the monetary front, she notes, the BoJ has said it will increase its existing holdings of commercial paper and corporate bonds from around Japanese Yen (JPY) 5T2 to as much as JPY 20T. At the same time, the central bank has abandoned its JPY 80T cap on annual Japan Government Bond purchases.

On the fiscal front, measures introduced have been more impressive still – including interestfree loans and subsidies to companies to maintain their workforce and avoid lay-offs as well as compensation to companies that cooperated with the lockdown and experienced a decline in sales or revenue as a result. Individuals have also either received or are set to receive a one-off JPY 100,000-per person payment which they can use however they want.

“It’s not a return to the type of stimulus employed in Japan in the 1990s and early 2000s which focused on physical infrastructure and assets,” observes Kashima. “The impact of that kind of stimulus takes too long to feed into the economy. Instead, the focus is on direct financial support for companies and individuals most affected by lockdown.”

Taken together, the combination of fiscal and monetary policy intervention recalls the early days of Abenomics, says Kashima. “It’s a high octane version of that set of policies but far more punchy. The sums being made available for the fiscal side of the equation are huge: it’s stimulus on steroids.”

Nonetheless, in its efforts to compensate companies, the government does face an interesting dilemma, she says. “Going into the crisis, Japanese companies had inflated cash balances in any case. It’s been one of the defining features of corporate Japan for years – and for years the government has tried to find creative solutions to encourage companies to use their cash to either raise wages or invest. By providing these cash subsidies you could question whether some of that work might be undone.”

Winners and losers

So how have investors responded to the crisis? Have any sectors outperformed – and which sectors have suffered the most?

Kashima highlights some unexpected outcomes. Sales of indoor trampolines, for instance, have soared, she says – testament to the absence of sizable gardens or outdoor space in most households. Elsewhere, she says, there are some obvious winners and losers.

Online retail, for example, has performed well, as has anything to do with home office working (including internet security), along with pharmacies and pharmaceuticals. Conversely, travelrelated stocks and retail companies unable to adapt to an online world have been the obvious casualties.

According to Kashima, some investors have started to switch out of stocks that did well through the worst of the crisis and into companies which, she too believes, have been oversold and are now due a rebound.

“Some stocks have gone down by a third of their value,” she notes. “We’re definitely not saying these companies will return to 2019 levels – and we also don’t rule out the possibility of a second wave of Coronavirus infection but we do think there’s scope for these companies to come back – particularly with the huge levels of government stimulus available at the moment and the pent-up demand we’re seeing.”

1 Japan’s lockdown was a ‘soft’ lockdown in the sense that it was never backed up by legislation but relied on the goodwill and cooperation of people and companies.

2 T = Trillion


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