Japan Sinks Into a Recession With Worst Yet to Come

May.18 — Izumi Devalier, head of Japan economics at Bank of America, discusses the prospects for the Japanese economy and policies amid the coronavirus outbreak. The economy sank last quarter into a recession that’s likely to deepen further as households limit spending to essentials and companies cut investment, production and hiring to stay afloat. Devalier speaks with Rishaad Salamt and Haslinda Amin on “Bloomberg Markets: Asia.”

Izumi if you could hear me what is the thinking i can’t this growth engine great but what’s the thinking behind things getting much much worse that where you are in japan well i mean i think to start with we have to you know confirm the fact that these gt numbers comfortable january march quarter right so this is data up to march which is a month and a half ago

Which is eternity and this would be coronavirus time so unfortunately since after march the government of japan issued a seat of state of emergency that led to further shop closures more people staying at home so i do think the worst and the year of activity is actually going to be april but the good news is actually that you know fast forward to today and some

Of the state of emergency declarations have been lifted you know we are starting to see a very gradual reopening process so ironically even the the april june gp probe actually may not capture their zach what’s going on on ground in terms of the reopening process is it me has the i think i’ve been done enough as a mr. kuroda also did enough to show things up and

If so what happens with regard to some of the transmission mechanisms which can be a problem we can let’s just have on the one hand japanese shoppers not spending and banks are awash with cash not lending yeah so i think i think there’s three phases to the policy response and the first phase was you know the fact that both the central bank and the government was

Just purely focused on backstopping the markets you know preventing the financial system from blowing up providing liquidity assistance so that companies don’t blow up and just trying to preserve things as it stands though so that things don’t get worse so i think with the economy starting to reopen and the work path that sort of emergency you know faith but

The question that and challenge that policymakers face now is that if we’re looking at a very sluggish recovery which is most likely to be the case then you’re gonna look you’re looking at firms that are going to be dealing with depressed income from many more months to come and that means that you know what we’re really in liquidity concerns may actually turn

Into solvency issues with more and more corporate facing the risk of bankruptcies and this isn’t just for small firms but the risk is also for big firms as well so i think the focus now should be on you know what kind of permanent capital injections the government’s willing to consider for some of these terms and whether you know some of the more lending based

Assistance that we provided earlier in the crisis will be turned into permanent subsidies and capital injections azumi how much support can japan get from china which is reopening and planning to spend on infrastructure and spend big can perhaps china soften the blow for japan yeah i think a little bit the fact that china especially the industrial sector you know

Tech demand is recovering quite nice for you it’s good for japan given its exposure to china’s tax needs and things like that but it’s not you know we’re still going to be dealing with less demand out of china because one of the big drivers of china you know external demand from china was that tourism story and i think that’s going to be pretty much down in the

Dumpster for a long time so it’s a mixed story there but it is you know encouraging to see that china’s manufacturing recovery is coming along nicely you talked about policy support kuroda has come out to say that perhaps negative rates is not an option at this point in time what do you make of the about-turn yeah i mean i think the pivot of the bank japan away

From negative rates policy was has been quite clear for for the past year but i think now it’s become much more explicit from the bank of japan i think the idea is that with interest rates you know very low already very low and bank facing challenges with their business models now is not the time to deliver further negative rates and put pressure on finance or

Meteors which really need to step up if we want to some recovery process it’s in place so the vegas man is focus more on chewie right now you know and some of the market interventions that it’s been doing so i think the risk of further rate cuts in japan is quite low but they’re gonna still have to you know focus on the corporate bond purchases commercial papers

And this new funding for lending program that they’re working on right now

Transcribed from video
Japan Sinks Into a Recession With Worst Yet to Come By Bloomberg Markets and Finance