COVER STORY • Japanese Economy After the Olympic & Paralympic Games Tokyo 2020 • 4

JRoundtable with Nobuyasu Atago, Kyohei Morita & Naoki Murakami

apanese Economic Outlook for the Year of
the Olympic & Paralympic Games Tokyo
2020 – Searching for Stable Growth Beyond

By Japan SPOTLIGHT
Volatility and uncertainty are keywords in describing the world economy today. Tensions from the
US-China tech cold war as well as geopolitical risks among emerging economies are starting toovershadow global economic growth. The International Monetary Fund (IMF) revised its forecast for world
economic growth for 2019 downward to 3.0% in October from April’s forecast of 3.3% and also to 3.4% for2020 from the forecast of 3.6%.
Against the background of a slowing world economy, what could happen to the Japanese economy in2020 and beyond? How will the Tokyo Olympics and Paralympics in 2020 affect it? Will the Japanese
economy also slow down significantly after these sports events due to a possibly large decline indomestic demand that has increased in response to investment in the Games?
We set up a roundtable discussion on this subject with three distinguished economists in Japan:
Nobuyasu Atago, chief economist for Global Monetary Research at Okasan Securities Co., Ltd.; Kyohei
Morita, managing director and chief economist Japan of Crédit Agricole Securities Asia B.V., Tokyo
Branch; and Naoki Murakami, senior economist of the Invest Division, Research Group at AssetManagement One Co., Ltd.
(Roundtable on Oct. 23, 2019)
Participants

Nobuyasu Atago

Kyohei Morita

Forecasts for the Japanese Economy 2020
Atago: On the question of the impact of the 2% consumption tax
hike on Oct. 1, 2019, thanks to the government’s preparatory
measures to mitigate its negative impact, last-minute demand in
2019 has not been so strong as in 2014, the last time the tax was
raised. So I think stagnation of consumption will not be caused by adecline in real income due to this tax hike. According to the latest
data, the daily sales amount of non-durable goods decreased in thefirst half of October 2019, which is certainly a reactionary decrease
after the tax hike, but total sales until Oct. 21 were almost the same
16 Japan SPOTLIGHT • January / February 2020

Naoki Murakami

as during the same period in 2018.
We need to see the data yet to be released on durable goods suchas automobiles or home electric equipment to find out whether wehave a reactionary decline in consumption or not. But last-minutedemand for durable goods was also seen as smaller than before, so I
guess a reactionary decline in consumption of these goods would besmaller. In this light, I think we will not see a recession in 2020 due
to the consumption tax hike in 2019. In 2020, I think employment
and income will be stable and the baseline of consumption will besteady.
The next question is if the economy will see a reactionary decline
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COVER STORY 4

of demand after the Tokyo Olympics and Paralympics and how greata decline we should assume. I think the biggest possible decline
would be a reactionary one in inbound tourists. As we learned fromthe Rugby World Cup 2019 in Japan, we can expect a significant
increase of tourists from abroad, in particular from Asia, for the
Tokyo Olympics and Paralympics. Consumption by these tourists willreach almost 8 trillion yen in 2020. With this positive impact
considered as exports, Japanese GDP growth in 2020 would beenhanced. However, after the Olympics and Paralympics end in
August 2020, a reactionary decline in such inbound tourists’consumption will be inevitable, at least temporarily. I think this will
not be so significant and overall the Japanese economy could
maintain its growth potential in 2020, at around a little lower than0.5%.
JS: How about the impact of declining exports due to

growing protectionism in the world?

Atago: Certainly, there will be a negative impact, as global trade
growth has been slowing since 2018. But it will be necessary to
discover whether this is caused by trade friction or the global
economic slowdown. Looking at the latest situation, Japan’s realexports during the July-September term in 2019 increased and also
Chinese manufacturing exports have started to increase at thismoment. In this light, I believe the global economy’s slowdown will
have the critical impact on trade rather than the US-China tradeconfrontation. I assume the global economy will be in the trend of
cyclical recovery in 2020, though it may be rather slow and weak due
to the US-China conflict. Generally, the baseline case for theJapanese economy will be a stable recovery as well.
JS: So neither monetary nor fiscal policies will be

expected to play a positive role in 2020?

Atago: Monetary policy in Japan would have very little room to work.
We are skeptical about its net impact in terms of its costs andbenefits. I think in accordance with the global trend, the weight ofmacro policy will inevitably move from monetary policy to fiscal
policy. As we have no option but depending on fiscal policy, thefocus of monetary policy must be how to maintain the low interest
rate to avoid a significant increase in interest payments by thegovernment.
Murakami: I think towards 2020 the Japanese economy will be inrecession. There will be a negative impact from the consumption tax
hike. The increased tax burden for households is assumed to amountto 2-3 trillion yen, which would drag on consumption growth andthus overall Japanese economic growth in 2020 will be nearly zero.
We are not so pessimistic about the global economy and we will not

see the US economy slow down. However, we assume US economic
growth to be 1.4% and Chinese economic growth to be 5.7%,
neither of which is high. The cyclical slowdown of the global
economy started at the beginning of 2018 will continue in 2020 andwill not pick up. With this risk of a stagnant global economy and thenegative impact of the consumption tax hike, we assume theJapanese economy will be on a zero growth track.
On the question of the economic impact of the Tokyo Olympics
and Paralympics, its direct enhancement impact would be around
1-2 trillion yen, mainly consisting of infrastructure investment, which
is very small. There would be indirect effects and effects pushing up
real estate prices as well as asset prices in the long run. Assumingthat the direct impact is this small, the reactionary decline after the
Olympics and Paralympics would also be very limited, at most 0.1%
in terms of the GDP growth rate.
On the US economy, there will be a positive impact from lower
interest rates finally, and with fiscal stimulus as well a recession can
be avoided. However, the structural adjustment of the manufacturingindustry will most likely affect the labor market and nonmanufacturing sector. Decoupling of manufacturing and nonmanufacturing in terms of business performance will lead to a
slowdown in the overall US economy, with the non-manufacturingsector’s worsening performance. So I think there will be little
possibility of tariff hikes being avoided. The tariff protection policy in
the US to contain China will continue in 2020. So the manufacturingsector’s structural adjustment will continue, triggered by the tradewar, and its negative impact will gradually affect US domestic
demand.
Private investment in Japan is even now restrictive and slowing
down, and in particular investment by global companies in Japan will
peak and possibly start declining. There will be much room for fiscal
and monetary policies to support economic growth. But Japanese
fiscal policy has already turned to tightening with the consumption
tax hike, so it will be rather difficult to change the policy direction.
Japan is the only country in the world practicing a fiscal tightening
policy, which investors view with severely critical eyes. For as longas the Ministry of Finance continues this tightening policy, businesswill continue to be stagnant in our view.
This will probably start to change in 2020 when most likely theJapanese economy will fall into recession and the government willfind it wrong to continue with its tightening fiscal policy.
JS: With the limited scope and effects of fiscal andmonetary policies today, if the economy enters into a
recession it will be a serious one.

Murakami: No, I do not think so. There will be much room foreffective and decisive fiscal and monetary policies, like the“helicopter money” policy in Japan.
Japan SPOTLIGHT • January / February 202017

COVER STORY 4

Morita: The GDP growth rate of the Japanese economy was 0.8% in
real terms in 2018 and we estimated the growth in 2019 to be 1.1%
and in 2020 to be 0.9%. We do not see a recession in 2020 but aslight decline in the growth rate. I think 0.9% would be close to theJapanese economy’s growth potential. I believe, however, thatbusiness concerns will shift from external demand to domestic
demand. On the question of the consumption tax hike’s impact on
the economy, front-loading of demand in consumption of nondurable goods was observed, but front-loading of spending on
durable goods will be much more important in terms of the impact
on the business cycles. In our observation, such front-loading of
demand for durable goods was smaller than in the last consumption
tax hike in 2014. So I believe that consumption growth will not be
strongly affected by a reactionary consumption decline after the tax
hike but affected by the possible decline of real income due to the
upward shift of the CPI arising from the tax hike. In this regard, weneed to note that wage growth is now slowing. In real terms, it
actually shows negative growth over the previous year, warranting
more attention to real income rather than just a post-VAT hikereactionary decline in demand. I think there is a downward risk ofconsumption growth in this light.
In June 2020, the scheme of rewarding purchasers at small andmedium-sized shops with points up to the maximum of 5% of theamounts paid to mitigate the negative impact of the consumption tax
hike will finish. I think there will be a reactionary decline in
consumption growth in response to this. In this sense, consumption
will be more of a concern than exports in looking at the Japanese
economy in 2020.
Concerning the Olympics and Paralympics’ positive impact on
growth of the economy, it seems to have been exhausted already in2016 when it pushed up investment in construction of the facilities
18 Japan SPOTLIGHT • January / February 2020

for the Games and their related infrastructure. Thus in 2020, whether
there will be a further negative effect on growth of the economy will
depend highly on inbound tourists’ consumption and domestic
consumption in the post-Olympic period. I believe inbound tourists’consumption will continue to grow.
On the question of the US-China trade war and its possible impact
on Japan’s exports, there must be both a cyclical aspect and astructural aspect. On the cyclical aspect, I think the worst will beover in the next six months. We are interested in the Taiwanesemanufacturing PMI (Purchasing Managers’ Index) which serves as aleading indicator for global semiconductors shipments. Given themost recent bottoming out of the Taiwanese manufacturing PMI, we
believe the worst in Japanese exports from the cyclical perspective
will be over in the near future while the structural impact of the
US-China trade war will remain, as their hegemonic confrontation
will continue in the long term no matter which party, Republicans or
Democrats, gains power in the US presidential election.
However, with a possible decline in domestic consumption
growth, the Japanese economy will not surpass potential growth ofaround 1% in 2020. As a policy response to this situation, I think
additional easing of monetary policy still remains technically possible
in the form of a further deepening of the negative policy rate and anincrease in purchases of ETFs (Exchange Traded Funds). Obviously,
however, its impact on the economy will be quite limited. Fiscal
policy, on the other hand, would have a greater impact in Japan. At
this moment, since there is a labor shortage in the Japanese market,
the government should spend money on labor-saving areas such associal welfare and other public services rather than public
infrastructure investment. Such spending on public services would
raise GDP growth to some extent, but not so significantly. So I think
the macro policies will not change the baseline economic outlook for
2020.
JS: With rising uncertainty due to all kinds ofgeopolitical risks, will private firms curb theirinvestment in production equipment and facilities?

Morita: Yes, that is possible. Business firms in Japan are becoming
prudent in capital expenditure, according to the BOJ’s latest Tankan
survey and machinery orders statistics. Domestic demand will
deserve closer attention in this regard in 2020.

Additional Q&A on Short-Term Forecasts
for Japanese Economy in 2020
Atago: I think there will be negative growth in private investment
against the background of rising uncertainty. My predicted Japanese
economic growth in 2020 is slightly lower than 0.8%, similar to Dr.
Morita’s prediction. Fiscal policy will certainly have a positive effectCOVER STORY 4

and there must be necessary infrastructure investment over the longterm, including for disaster recovery. Japanese growth potential will
be a little lower than 0.5% and economic forecasts for 2020 would
be around that trend, more or less.
Murakami: Stimulating fiscal policy in the framework of current
monetary policy would inevitably lead to increasing the issuance ofnational bonds to be purchased by the BOJ and thus the policy musthave a positive effect on the economy. This would be the best
opportunity for the government to procure money at the cheapest
cost for public expenditure. It is true that the construction sector has
a limited labor force and public investment would have only a limited
effect in this regard. Tax cuts would be another option to beconsidered. The government should change its policy direction to a
stimulatory one as quickly as possible. It may not have much timeleft, as the global economy will slow down soon.
Morita: I think the policy pillar should and will shift to fiscal policy.
An expansionary fiscal policy can go together with the current easy
monetary policy to stimulate economic growth in Japan. It is amatter of politics whether to do it or not. We assume in our forecast
that fiscal policy for around 1% of annual GDP will be implemented.
JS: Is the current economic situation in Japanconsistent with what Modern Monetary Policy (MMT)
assumes to justify a fiscal stimulus?

Morita: We do not have to refer to MMT to justify a certain degree ofthe policy mix of stimulatory fiscal policy and monetary policy in thesame direction. It is a typical Keynesian policy.
JS: Do you think competitive exchange rate

devaluation as a beggar-thy-neighbor policy will
happen, as President Donald Trump has criticized
Chinese exchange rate policy as well? What is yourestimate of exchange rates?

Atago: The dollar-yen rate has been very stable since President
Trump’s administration began in 2017. No matter what policy
President Trump may take, the US-Japan interest rate differential
largely determines the dollar-yen rate. As long as it continues, theyen will not be overvalued against the dollar for the next couple ofyears, though long-term US interest rates will be lowered as part of
the global economic trend. In the long run, thus, the dollar-yen rate
will have a different story.
Murakami: The US economy is not moving into recession but willslow down in 2020. The Federal Reserve Board’s policy of keeping
interest rates low will continue until the middle of 2020. I think theyen will appreciate in reflecting this. But most likely, we can avoid ayen-dollar rate of less than 100 yen. I think the exchange rate, having
been so stable these three years, will not fluctuate as much as
before, unless there is any political factor influencing it. In my view,
until 2012 the BOJ had maintained a monetary policy accepting
deflation, and then with strong deflationary expectations building in
the economy, the yen tended to appreciate. After the administrationof Prime Minister Shinzo Abe started in 2012, the BOJ finallyadopted the global standard monetary policy which would not accept
deflation. With this basic policy stance, even though the US Fed may
lower its interest rates, the BOJ will keep or even strengthen its loose
monetary policy. With such expectations of recent BOJ policy, asignificant yen appreciation can be avoided. This could, of course,change with a change in BOJ policy – which could happen due toreplacement of BOJ policy board members.
Morita: We assume the dollar-yen rate will remain unchanged
towards the end of 2019. We assume it will be around 100 yen
toward the end of 2020, an appreciation of the yen. But as the BOJ
cannot lower interest rates as much as the Fed given that interest
rates in Japan are around or below zero, the remaining rate
differential between the two even if both do lower interest rates
competitively will be noted by the market and this would overvalue
the yen to a certain extent. Looking at current capital inflows andoutflows, short-term capital comes to Japan from overseas andlong-term money goes overseas from Japan. There will not be a highpossibility that capital inflows and outflows will change the value ofthe yen drastically, in my view. The volatility of the yen will stay small.

Outlook for the Japanese Economy
post-Olympics & Beyond 2020
Morita: The key issue for the stable growth of the Japanese economy
beyond 2020 will be how the legacy effects of the Tokyo Olympics
and Paralympics work and whether they exceed the reactionary
decline in demand. The legacy effects will concentrate on personal
consumption and inbound tourism, i.e. exports of services. Since we
do not have a significantly massive infrastructure invested for the
purpose of the Games, a reactionary decline in demand will not belarge, as long as the increasing trend of inbound tourism ismaintained. Data suggest the levels of investment for construction of
Olympic-related infrastructure have already peaked in 2016 or 2017.
I think there has been a gradual reactionary decline in demand forinvestment in infrastructure construction since then. So I do notthink we will additionally face any significant reactionary decline indemand after 2020.
We have a concern about stagnant consumption by young people.
Their propensity to consume has declined over the past years. On
the other hand, consumption of services on the whole has been
Japan SPOTLIGHT • January / February 2020

19COVER STORY 4

increasing, as aged retired people are increasing and spend moretime in consuming services. But young people’s consumption ofdurable goods remains low. This is our major concern about the
future growth of the Japanese economy.
As consumption growth will be service-oriented, private
investment for machinery and related facilities will not grow much in
the long run. AI will play a key role in production in thosecircumstances. To encourage firms to use AI in production activity,
we will need to raise the minimum wage. Doing so would force
Japanese firms suffering from the labor shortage to give up
depending on human labor and replace it with AI. I believe this is aneffective policy to resolve, at least partially, the labor shortage
question and also encourage Japanese business firms to utilize more
AI and promote R&D for labor saving technology. Digital software
including AI must be the key to success for the Japanese economy in
the long term. R&D investment will play a more pivotal role in raisinga firm’s competitiveness.
Murakami: I agree with Dr. Morita in saying that Olympic-related
investment demand has already peaked out and any further
reactionary decline in demand beyond 2020 will be very small. Whatis more crucial for the Japanese economy after 2020 is whether thegovernment can implement a robust macroeconomic stabilization
policy or not. This policy could offset a possible secondary
deflationary impact from a reactionary decline in demand, such as aland price decline.
The Abe administration’s tightening of fiscal policy led by aconsumption tax hike encourages a deflationary mindset among
young people in Japan on low incomes, in particular as theconsumption tax is of a regressive nature. With only loose monetary
policy, we will not be able to offset its deflationary impact. I believethat with a continuous anti-deflationary monetary policy andexpansionary fiscal policy to raise the wages of low-income workers,
consumption will grow steadily. It is only Japan that hesitates to use
an expansionary fiscal policy among the major nations in the world,even though the utility and need for expansionary fiscal policies is a
global consensus. Without it, we cannot achieve sustainable growthover the long term. The Abe administration should change its fiscal
policy from tightening to expansionary, while maintaining a loose
monetary policy. The fiscal deficit must be reduced by higheconomic growth, since Japan’s budgetary balance has been
governed by tax revenues. Deflation and low growth must be theprimary causes of the fiscal deficit. By reversing the policy oftightening, Japanese public finances will be stabilized and well
prepared for social welfare expansion for the interest of the aging
society.
Atago: I agree with Dr. Morita and Mr. Murakami about a possible
reactionary decline in demand after the Olympics and Paralympics. I
20 Japan SPOTLIGHT • January / February 2020

think the key to stopping such a decline, even if it is a very minor
one, is to minimize any decline in inbound tourism. It will benecessary for Japan to keep attracting tourists from all over theworld to repeatedly visit Japan, just as China has been successful inattracting tourists after the Beijing Olympics and Paralympics. It
would be a good idea to allocate more fiscal expenditure andinvestment for infrastructure in the post-Olympic period to equalize
the total demand between before and after the Games.
Wage increases could trigger business expansion, but the rate ofwage increases in Japan has been much lower than in any otherdeveloped country. Raising the minimum wage in Japan may be apolitical challenge, since the ruling Liberal Democratic Party has
been supported by so many SMEs that are reluctant to do so. Under
those circumstances, I guess consumption growth may not besignificantly enhanced, though it continues to be steady.
As for the role of fiscal policy, to stabilize overall demand wewould need to take advantage of fiscal and monetary policy as
efficiently as possible. I think the fiscal limit in Japan is rather higher
than in any other country, so there must be some room for fiscal
expansion. There needs to be public investment in infrastructure fordisaster recovery or in increasing inbound tourism. The government
will need to pursue efficient use of fiscal policy over the long term.
For example, it would be better to encourage consumption by fiscal
stimulus, including income tax cuts, rather than constructing
infrastructure with low productivity.

Additional Q&A on Outlook for the Japanese
Economy Beyond 2020
JS: Raising the minimum wage is a good policy tool

for reducing income inequality, but it could increase
unemployment among young males.

Morita: The minimum wage should be set by a nation’s own labormarket regulations reflecting each nation’s economic background.
Therefore, simple direct international comparisons of minimum
wages are meaningless. It is often said that the Japanese minimum
wage is low among developed nations, but it does not make muchsense, considering the implied “price” of job protection offered to
employees in Japan. However, it is true that the Japanese labormarket is rather exclusive of “outsiders” seeking to enter it. Raising
the minimum wage could continue to benefit only “insiders” who are
already working in this labor market and exclude young people trying
to enter it. In this light, it will be necessary to lessen the distinction
between “insiders” and “outsiders” by raising labor mobility. As I
have said, raising the minimum wage in Japan should mainly
encourage Japanese companies to reduce labor dependence andpromote R&D expenditure, whose growth is much smaller in Japan
than in the United States. I believe this would help mitigate the labor

COVER STORY 4

shortage, and if this ultimately leads to a rise in labor productivity,
then wage increases would be more likely.
Murakami: We are now emerging from deflation and employees’salaries are also increasing. With a steady increase of nominal GDP
or nominal employees’ income, the minimum wage must naturally
increase as well. In this regard, with an appropriate stimulating
macro policy, the minimum wage will increase naturally. Directgovernment intervention in the labor market to raise the minimum
wage could reduce employment. I do not think that is a good option.
I think an increase in employment or a rise in the wages of lowskilled labor leading to a reduction in the income gap, and a rise in
the minimum wage achieved by a consistent macroeconomic
stabilization policy, should be highlighted politically.
Atago: Raising the minimum wage and raising labor mobility are notmuch welcomed politically. It is true that the best scenario would bea natural increase in wages achieved by continuous sustainableeconomic growth and a resulting tighter labor market. My
impression is that wages in Japan will not increase rapidly as its
growth potential will not increase much either. We need to look atwages from a long-term perspective. Wage increases or inflation
rates can be fixed only in the global context, as we are in an open
economy and international discussions among central banks andothers will influence them. Japanese growth potential today is at
maximum 1%, so it is important for us to do our best within thislimit to promote structural economic reform.
JS: Inclusive growth is now an important policy goalfor many nations. In Japan today, the number ofpeople suffering from extreme poverty is increasing.
In implementing a stimulatory fiscal policy, we would
need to think about its effectiveness. Would raising
the income of these extremely poor people be aneffective fiscal policy in this regard?

Morita: Yes, it is a big issue. Income inequality creates political
populists and destabilizes politics and society and thus our attention
should not be limited to economic issues but include political andsocial issues. However, I think the income gap itself is inevitable toan extent in an aged society. Even if there are no significant income
differences among people at the starting point in life, as time goesby, such differences expand significantly. I think we need to correct
the inter-generational gap. We need a system to identify correctly thereal weaknesses in the economy, rather than automatically assumingthat the aged are the weak ones. The government should make betteruse of AI or big data to perceive who is really weak in the economy.
Another way to correct the inter-generational gap is to change theelectoral system. A generational constituency is needed in addition toregional constituencies. This is how we can make it possible thatsome politicians would represent a certain generation’s interest. We
need politicians motivated to equalize the inter-generational gap.
Murakami: I think longtime continuing deflation is a big issue intalking about the increasing income gap or poverty. There must be
an increasing income gap between wealthy aged people who earned
a lot of money during the bubble economy and the poor young who
started working at the beginning of the period of deflation. In orderto mitigate this, we should raise the inflation rate and transfer the
cash saved by the elderly rich to younger people.
The tax system would need to be reformed as well. The
introduction of negative income tax would work for efficient income
redistribution for the extremely poor. Basic income support to ensure
the minimum standard of living across the whole nation would bemuch better than the existing welfare system of providing care andsupport arbitrarily among the extremely poor. A fair electronic tax
collection system should also be introduced to address people’scomplaints about the unfairness of taxation.
Atago: Yes, I agree with Mr. Murakami about the tax system. In
discussions about income inequality, being wealthy tends to beconsidered a negative. But I think this is wrong. The income gap
between the wealthy and the poor is a mother of innovation. We
should approve a certain extent of income gap to raise laborproductivity. We should start discussing issues like a safety net for
the extremely poor or tax system reform after approving the positive
aspect of income inequality.
Murakami: Lastly, I would like to add one more remark on MMT. A
stimulatory fiscal policy is necessary not because the current
Japanese economic situation is similar to the one referred to by
MMT. MMT is far from an objective economic theory, and wrong inJapan and the US as well. It is a political argument used by leftwing
populists. New Keynesian economists all support the fiscal stimulus
today in advanced nations. My argument is consistent with those
New Keynesians and not MMT.

Written with the assistance of TapeRewrite Corporation.

Japan SPOTLIGHT • January / February 202021