Covid-19 and the Japanese
Economy 2021
Ryoichi Imai
December 15, 2021

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I. Public Health2

Daily new
confirmed
COVID-19
cases

Daily newconfirmed
COVID19 deaths
https://www3.nhk.or.jp/news/special/coronavirus/entire/

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The Third Wave
• By November 2021, a state of emergency was declared three times due to the
spread of Covid-19 infection.
• With the arrival of the third wave, a state of emergency was declared in Tokyoand three prefectures (Tokyo, Kanagawa, Saitama, and Chiba) on January 7,
2021.
• The state of emergency was extended to 11 prefectures on January 13, 2021.
• The arrival of the third wave came as a shock to both the public and theJapanese government.
• From the summer of 2020, the government recognized that the spread of coronavirus
infection could be prevented through the preventive actions of the people, and rolled
out a policy of consumption subsidies named GoTo Travel, GoTo Eat, etc.
• Even though there was a boom in travel and eating until November, the number of
infected people did not increase that much, which made people to lift off the guard.

• The emergency declaration was effective and was lifted nationwide on March
21.
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The Fourth Wave 1• The next emergency declaration was issued to four
prefectures on April 25, and was extended to 10 prefectures
on May 23. This time, a sharp increase in the number of
newly infected people in Osaka Prefecture preceded thedeclaration.
• With the Tokyo Olympics scheduled to be held in July, theJapanese government took a particularly nervous approach,requesting that restaurants and bars close and shorten
business hours.

5The Fourth Wave 2• Facilities managed by the government (like New National Theatre
and Tokyo Bunka Kaikan) abruptly cancelled the scheduled
events just before the actual date, even though tickets had
already been sold.
• Large-scale commercial facilities such as department stores andshopping malls were also asked to close their doors, but this was
met with great protest.
• Commercial facilities and show business strongly protested
against the government, because there had been few reports ofcluster outbreaks at events or commercial facilities.
• Those industries argued that each facility had already taken
sufficient measures such as disinfection and ventilation.
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The Fifth Wave 1• The third declaration of a state of emergency was lifted on June
20, with the exception of Okinawa Prefecture.
• It did not take long for the fourth emergency declaration to beissued.
• The fifth wave of corona was caused by the delta strain, but the
speed of spread was much faster than the government andresearchers had predicted.
• Unfortunately, the greatest peak of corona infection came during
the Tokyo Olympics and Paralympics.
• The peak of the 7-day moving average was on August 19, when
the number of newly infected people was 4923.
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The Fifth Wave 2• Since coronavirus infection is considered to occur 10 days to
2 weeks before the definitive diagnosis, the peak infections
occurred during the Olympics.
• However, according to infectious disease experts andresearchers, the effect of holding the Tokyo Olympics on the
spread of infection was limited in terms of quantity.
• What was a blow to the Suga administration at the time wasthat it had failed to predict that the number of infected
people would not increase much, once the vaccination of theelderly was almost completed at the end of July.
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The Crisis is over
• Most experts believed that the number of new infections
would not decrease easily, given the infectious power of thedelta strain, but the number of new infections decreased
rapidly in September, and the state of emergency was liftednationwide on September 30.
• According to the NHK report, the fifth wave was by far thelargest among the past five waves in terms of the number of
infected people, and people receiving treatment (hospitalized
people plus people receiving treatment at home).

9Why has the infection subsided?
• However, in terms of the number of deaths, the peak in
September was lower than the peaks in February and May,
which is thought to be the effect of vaccination among theelderly and middle-aged who are at higher risk of serious
illness.
• However, the decrease in the number of new infections
cannot be explained without considering factors other than adecrease in human flow or vaccination progress.

10Covid-19 pandemic not so serious in Japan

https://ourworldindata.org/covid-cases

11Mutant strains• The fifth wave was caused by the so-called delta strain, which
originated in India, and is said to have been more infectious than the
fourth wave.
• The mutant strains of the Covid-19 virus that affected Japan were theso-called alpha and delta strains.
• Initially, these strains were called the British and Indian strains, but
under WHO guidelines, the world decided to avoid naming the virus
after specific countries.
• It was reported that the alpha and delta strains are 1.3 and 1.7 times
more infectious, respectively, than the conventional strains.
• In Japan, the British strain caused the fourth wave in April and the deltastrain caused the fifth wave in July.
• As of December 2021, the Omicron strain, which was first reported inSouth America, is considered more infectious than the delta strain.
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Medical Capacity• Why is it that in Japan, despite the fact that the number of
infected people is much lower than in Europe and theUnited States, a state of emergency is often declared andaction is repeatedly taken to curb the spread of infectious
diseases, resulting in huge economic losses?
• Was Japan's health care crunch in August more severe
than the health care crunch in the West so far?

13• The percentage of people who
are unable to be hospitalizedeven if they wanted to be has
been indexed for Japan by a teamof experts from the Ministry of
Health, Labor and Welfare.
• However, the same statistics are
not available for Europe and theUnited States.
• If we look at the ratio of new
deaths to new infections (casefatality rate), there is no
significant difference between
Japan and Europe.

https://ourworldindata.org/covid-cases14• The excess mortality rate isa measure of the number ofdeaths in a given year
compared to a normal year
in the past, expressed as apercentage.
• Japan's excess mortality
rate is much lower andmore stable than that of the
U.K. and U.S.
• There is an upward trend in
2021 compared to 2020, but
it is not a significant
change.
https://ourworldindata.org/covid-cases
15https://ourworldindata.org/covid-cases• As is well known, the number oftests in Japan is low amongdeveloped countries. Therefore,
there is a persistent argumentthat positive cases are being
overlooked.
• However, Japan's positivity rate
was higher than that ofdeveloped countries only during
the fifth wave in August, and thenumber of tests during otherperiods seems to have been
sufficient.
• Currently, the positive rate inJapan is extremely low.
• Looking at the excess mortality
rate, it seems unlikely that
positive cases are dying at
home without being tested andwithout receiving medical care.
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Education• In March 2020, the government requested all elementary and secondary
schools to close due to the spread of corona infection. The closure ofschools was succeeded by the declaration of a state of emergency inApril and continued until the end of May.
• Most of the university classes were also put online and continued
almost until the summer vacation.
• In response, the Ministry of Education, Culture, Sports, Science andTechnology (MEXT) urged universities to return to face-to-face classes,
but the rapid increase in the number of coronary infections and thedeclaration of a state of emergency led to the continuation of online
classes.

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Return to Campus Life
• In April 2021, universities nationwide fully returned to faceto-face classes, but the fourth wave of infection hit soonafter, and many universities had to return to online classes.
• Many university students seem to be satisfied with thecontent of online classes, but it is hard to stay at home andface the PC all day long.
• In addition, there seems to be a great deal of dissatisfaction
with the loss of campus life, as they are no longer able toenjoy friendships and club activities on campus.

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Sports and Entertainment• With the end of the second corona wave in August 2020, the government offeredsubsidy programs to the travel and food and beverage industries, named GoTo
Travel and GoTo Eat. This brought many travel and restaurant businesses back tolife, but the boom was interrupted by the spread of Corona in November.
• In January 2021, when the government declared a state of emergency in responseto the third wave of coronas, it asked for shortened hours almost exclusively forrestaurants.
• On the other hand, so-called general entertainment, such as sports, concerts andplays, were allowed to continue with restrictions on the number of people. As aresult, most of the entertainment events were able to be held with customers,
which supported economic activities.

19II. Economic Impacts

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Economic Loss
• Until recently, the number of coronary infections and deaths inJapan was negligible compared to Europe and the United States,
and was not a significant epidemic.
• However, the government has declared a state of emergency fourtimes to curb the flow of people.
• Service industries that involve human contact, such as food andbeverage, travel, and entertainment, have all been asked to close.
• The economic loss due to coronary infections in 2020 isequivalent to about 5% of GDP.

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Economic Loss

• The quarterly qrowthrate was:-8% for Apr-Jun 2020
+5% for Jul-Sep 2020
+3% for Oct-Dec 2020
-1% for Jan-Mar 2021

• The annual growthrate of Japan for 2020
was -4.6%.
• The -2% growth for
Oct-Dec 2019 was theeffect of a rise in the
consumption tax ratefrom 8% to 10%.
https://asia.nikkei.com/Economy/Japan-GDP-shrinks-annualized-5.1-in-Q1

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Bubbles walk with Corona• Oddly enough, the stock market is strong despite theeconomic losses from the Corona disaster.
• The economic loss in terms of GDP is greater than the
Lehman crisis, yet the asset market is overheating andcreating a bubble.
• Government benefits are being used to pay off the debts ofthe service sector, which was closed during the Coronadisaster.
• Creditors are being enriched to invest in stocks and realestate.
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Stock Market is in boom

• The stock market has
been strong over the
past year, despite thenegative growth of thereal economy inCorona Disaster.
• Many people believethat this is a bubble
that will eventually
burst.
• The boom in the stock
market is common tomost of the reading
economies.
https://www.nikkei.com/ma
rkets/marketdata/chart/nk2
25/?type=year
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Uniform Benefits Create Economic
Bubbles• In 2019, the Japanese government used a budget of just over
13 trillion yen as an economic stimulus in the Corona disasterto provide a flat benefit of 100,000 yen each to all citizens.
• However, the uniform benefit caused an asset price bubble.
• The uniform benefit is a huge financial burden and most of
the benefits are given to people who are not in need, which
results in a bubble.
• There are two channels through which economic measures in
the Corona disaster can cause bubbles.
25Government Transfer Creates Bubbles• First, government benefits increase the deposits of those who receive them,giving purchasing power to industries that have suffered economic losses.
• People with no business income use the benefits to pay rent, pay off debts,
and spend. As a result, their deposits will decrease and those with lesseconomic loss will increase their deposits.
• Those who have not suffered much economic loss due to the Corona disasterwill not use their deposits to spend even if their deposits increase. This isbecause they cannot spend their increased deposits in the three industries
that were closed due to the Corona disaster: food and beverage, tourism, andentertainment.
• In normal times, the deposits that would have flowed back to the threeindustries do not, and are used to acquire assets.
• The increased deposits will be used to buy real estate, stocks, and virtual
currencies, which will then flow into the deposit accounts of the owners of
those assets.
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Credit Creation by Private Banks• Another channel through which economic policy can cause
bubbles is by encouraging private credit creation.
• In other words, in the Corona disaster, the government
became an implicit guarantor of unsecured lending by privatebanks.
• Private bank lending is not the act of lending out deposits,
but the act of creating deposits equal to the amount oflending created by credit creation.
• Of course, not all deposits are lent, and the total amount oflending is controlled by the monetary authorities bymonitoring the loan-to-deposit ratio.
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The loan-to-deposit ratio• The loan-to-deposit ratio is one of the indicators of a bank's
business performance, and is the ratio of outstanding loans tooutstanding deposits.
• If the loan-to-deposit ratio is too high, the financial authorities
will judge that the bank is lending too much and engaging in
speculative management.
• The loan-to-deposit ratio in March 2021 was 62.1%, the lowest
since the survey began in FY03/08. Loans and bills discounted
grew to 573.563 trillion yen (+3.3% YoY) due to aggressive
funding support in response to the spread of the new coronavirus.
• On the other hand, deposits grew more than loans to 922,229
billion yen (+10.0% YoY), lowering the loan-to-deposit ratio.
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The loan-to deposit ratio did not increase
but decreases!
• The loan-to-deposit ratio is loans
divided by deposits. If banks
increased their lending due to theCorona disaster, and thedenominator of the numerator
increased by the same amount due
to credit creation, then the loan-todeposit ratio should increase.
• However, the fact that it went
down indicates that the various
benefits provided by fiscal policy
were that large.

https://www.tsr-net.co.jp/news/analysis/20210603_01.html

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Stagnant Consumption does not Increase
Deposits• It is said that the corona disaster caused a decline in service
consumption and an increase in corona deposits, but thisshould not have increased the deposits of private banks as awhole. This is because the money that companies originallypaid to their employees either increased corporate deposits
through consumption or remained unused as household
deposits.
• However, the TCCI loan/deposit ratio survey is conducted
twice a year, in March and September, and the results of the
March survey were reported in July.
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Government Benefits that Cause Economic
Bubbles• In any case, the effect of bank credit creation in creating bubbles
is not that great, and it seems that government benefits are themain cause of asset price bubbles.
• At the same time, this discussion provides a clue to the chickenand-egg debate: Is it consumption or investment that is stagnant?
• Even if consumption increases, deposits in the private sector will
only move from right to left, and total private deposits will notincrease.
• However, if investment increases, lending should increase and theloan-to-deposit ratio should rise. If the loan-to-deposit ratio does
not rise, then it is investment that is stagnant.
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Money Stock

齋藤潤の経済バーズアイ （第106回）コロナ下のマネーサプライ
https://www.jcer.or.jp/j-column/column-saito/2021021-2.html• The above argument
can be confirmed by
the Bank of Japan's"money stock"
statistics.
• The monetary base
surged in 2013 andgrowth has beenslowing since then.
This reflects thetransition of
Abenomics (interdimensional easing).
• In contrast, thegrowth of the broadmoney supply, which
includes private
deposits, was stable
until 2019, but rose
sharply in 2020.
Needless to say, thisis the effect of thecorona measures.
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Hanami Sake Economy• The rakugo story "Hanami Sake" is a case in which the owner of an entertainment
restaurant goes out to drink with other restaurants in the same business.
• https://www2.kumagaku.ac.jp/teacher/~sasayama/macroecon/mailmagahanami.html• In the rakugo story "Hanami-Sake" (cherry-blossom viewing party), two men,
Hatsuan (A) and Kumasan (B), who wanted to make money by selling sake at acherry-blossom viewing party, paid each other to drink sake, but the money neverincreased and only the sake ran out.
• The criticism by Shintaro Ryu (1962) that "Japan's economic prosperity is nothing
more than a cherry-blossom viewing party" is that "Japan's economy is a service
economy in which people pay each other for services and exchange services, but theeconomy is not growing.
• This was criticized by Ryutaro Komiya, and I think the point is that the service
economy is not a cherry-picked drink.
• The service economy, however, is vulnerable to infection, similar to the fact thatcherry blossom viewing in real life is no longer possible due to corona.

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Rising Money Stock may create the Bubble• In fact, there was no linkage between rising stock prices and M3
until spring 2020. The problem is after that.
• (Nihon Keizai Shimbun, October 13, 2020,
https://www.nikkei.com/article/DGXLASFL13HA4_T11C20A0000000/)• The stock price bubble is said to be a "Hanami sake economy",but even if Mr. A and Mr. B buy and sell stocks to each other, thestock price will not rise by itself. This is because their total
deposits do not increase.
• The asset price bubble at the end of the 1980s was probably
caused solely by the expansion of private credit (increase indeposits).
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Why total deposits increased?
• In normal times, when there is no increase in lending or
government benefits, the total amount of deposits does notincrease because restaurants take money from ordinary
consumers to pay rent to landlords.
• In a corona disaster, however, restaurant owners will pay rentwith benefits and loans created by the banks.
• Consumers' deposits have not been transferred to therestaurants, so total deposits have increased. This is whatcauses stock prices to rise.

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Counter Corona Measures Created
Bubbles• The last Nikkei article on the relationship between money supply andstock prices is the one dated October 13 above.
• There has been a great rise in stock prices since the end of the year,
when it was called "the three weeks of victory," but there has been no
article on the relationship between M3 and stock prices during thisperiod.
• The Nikkei article above says that the linkage between stock prices andmoney supply is fake or temporary, but the asset price bubble in thelate 1980s was solely due to excessive lending by private banks.
• Based on the above considerations, it would be better to stop benefits
and unsecured loans, and normalize economic activities even though
the number of infected people will increase, in order to suppress the
bubble.
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What are the Investors afraid of?
• As Mr. Karakama, an economist, said, "What the market fears
most is the end of the corona infection." I wonder if hemeans that the bubble will burst when the corona disasterends because it is the corona countermeasure that supports
the recent asset price bubble.
• The optimal strategy might be to achieve zero corona with avery strong lockdown of, say, two months, and then let theeconomy operate normally without benefits or unsecuredloans. Continuing with-corona while providing benefits as we
do now may be the worst, as the corona disaster willcontinue and bubbles will occur.
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Why The Quantity Theory Fails• It may be that the economic policies against Corona
ultimately increased the assets of the wealthy while helping
the restaurant and tourism industries.
• The quantity of money theory: MV=PY expired because theincrease in M was no longer reflected in PY due to thedecline in V. However, if we consider PY as the total market
value of assets, it may still be valid.

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The mystery is solved!
• Last year's "Three Weeks of Victory" was right around thetime the third wave of Corona began, and it was a mystery
why stock prices soared even though the economy was
supposed to deteriorate.
• However, the mystery can be solved if we interpret it as themarket reading that fiscal and monetary policies would be
implemented. Since economic activity itself would stagnateeven if fiscal and monetary policies were implemented, therise in stock prices was considered a mystery.

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