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Part I The COVID-19 Crisis and the Global Economy

Chapter 1 The Coronavirus Pandemic Triggers a Global Economic Crisis

In 2019, the first case of novel coronavirus disease (COVID-19) infections was confirmed in China, and since then, the global economy rapidly deteriorated. The infections quickly spread from China, which became the first epicenter of COVID-19 infections, to the rest of the world, and the human and goods mobility changed as seen in travel restrictions and shelter-in-place restrictions for the purpose of curbing infections in many countries. Restrictions were imposed not only on the cross-border human and goods mobility but also on the domestic human and goods mobility. As a result, the global economy rapidly slowed down and the economic crisis occurred at a level that the International Monetary Fund (IMF) expressed as the “Great Lockdown.”

This economic crisis derived from the spread of COVID-19, namely the COVID-19 crisis, was essentially caused by restrictions on face-to-face communication. COVID-19 infections spread from people to people, and this led to restrictions on face-to-face communication for the purpose of curbing expansion of the infections. As a result, as the world restricts the human and goods mobility as well as economic activities, the global economy is facing historic slumps.

The COVID-19 crisis caused, first of all, supply shocks. Restrictions on people-to-people communication and the halted human mobility caused, as a result, the stagnation of production activities and movement of goods as well as a shortage of goods. Now that cross-border supply chains have been developed through international division of labor, supply chain disruptions occurred along with restrictions on human mobility and a shortage of goods. As the COVID-19 infections spread worldwide, the supply chain disruptions have become a global phenomenon and production activities have stagnated worldwide in parallel with the slowdown of demand. On the supply side, due to lockdowns of cities and voluntary restrictions on store operations, suspensions of non-essential entertainment and eat-in dining at restaurants are seen. As described above, measures for curbing infections led to supply constraints. As a result, even when demand exists, it is not met due to supply constraints, and the effects of the supply shocks are transmitting to the demand side.

The COVID-19 crisis also caused demand shocks. As a result of the introduction of shelter-in-place restrictions, voluntary restraint, and travel restrictions to curb the spread of infections, the demand for face-to-face services involving people-to-people contacts declined rapidly, and the demand in the tourism, accommodation and airline industries is shrinking at a scale never seen before. As for goods, the demand for durable goods rapidly declined and the decrease in such demand caused a steep decrease in exports and production, which leads to a negative cycle of weak demand and weak supply.

As seen above, the COVID-19 crisis causes both supply and demand shocks, and it is completely different in nature from past economic shocks, such as those caused by the Great East Japan Earthquake and other natural disasters and world financial crises.

Moreover, the effects of the COVID-19 crisis are transmitting to income and employment. As employment is significantly affected, mainly in the service industry involving face-to-face contacts, the unemployment rate in the United States reached a serious level for the first time since the Great

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Depression in the 1930s, far beyond the level during the global financial crisis. Uncertainty over the future of infections, the increase in the unemployment rate, and the weakness of income led to a decrease in demand and supply by discouraging consumption and investment and a chain of crisis events. Furthermore, the COVID-19 infections are spreading from China to Europe to emerging and developing countries to the rest of the world while becoming more and more serious, and this has been developing to an unprecedented economic crisis with economies stagnating all around the world in a slump.

Against this backdrop, the White Paper on International Economy and Trade 2020 will focus on the current COVID-19 crisis, analyze the global economy from the viewpoints of the movement of people, goods, funds and ideas (technology know-how and data) while taking into consideration the overview of globalization in the past, present and future, and show future directions at which Japan and the rest of the world should aim in light of the lessons from the ongoing crisis. 1. Great Lockdown of the global economy

First, the seriousness of the novel coronavirus crisis will be examined. While the COVID-19 crisis is becoming more and more serious, the situation of the global economic crisis will be examined from the viewpoints of the situation of infections and economic and financial market developments in some countries and regions. (1) COVID-19 pandemic

According to the World Health Organization (WHO), the cumulative global number of people infected with COVID-19 was larger than 5.7 million and the number of deaths due to the disease was larger than 350,000 as of May 29th, 2020.1 On a country-by-country basis, the United States had the largest number of infected people, 1.6 million, followed by Brazil and Russia.

At first, COVID-19 spread mainly in China. The Government of China locked down Hubei Province, prohibiting citizens from going out of the house except for special reasons. Thereafter, as infections spread worldwide, cities were locked down in the United States, Europe, Asia and other regions and restrictions on human mobility became widespread.

Amid the worldwide spread of infections, WHO Director General Tedros Adhanom Ghebreyesus stated that the COVID-19 outbreak may be regarded as a pandemic (worldwide outbreak). In Japan, too, Prime Minister Abe Shinzo declared a state of emergency on April 7th. (2) Great Lockdown of the global economy

Because of the COVID-19 pandemic, the global economy face an unprecedented economic crisis. However, until around February 2020, when COVID-19 infections were spreading mainly in China, the impact of COVID-19 infections on the global economy was expected to be not significant.

As for economic forecasts by major international organizations, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said at a press conference in February 2020 that the estimated growth rate of the global economy in 2020 was revised downward only by 0.1 percentage point. According to economic growth forecasts published by the Organization for Economic Cooperation and Development (OECD) on March 2nd, the estimated economic growth rate of the global

1 Coronavirus disease (COVID-2019) situation reports (WHO,

https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/).

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economy was revised downward by 0.5 percentage points under a base case scenario assuming that infections would remain limited mainly to China and was revised downward by 1.5 percentage points under a domino case scenario assuming a worldwide spread of infections.

Later, as infections spread to other regions around the world, the seriousness of the economic crisis was recognized. In a statement issued on March 23rd, IMF Managing Director Georgieva warned that the global economy would fall into a recession as bad as during the global financial crisis or worse. The IMF’s World Economic Outlook in April forecasted that the global economy would fall into the most serious recession since the Great Depression in the 1930s and revised estimates of economic growth rates sharply downward, to minus 3% for the world, minus 6.1% for developed countries, and minus 1.0% for emerging countries (Table I-1-1-1). These figures mean that the world will face the worst recession since the Great Depression, and the IMF named this crisis as the “Great Lockdown.” Table I-1-1-1 IMF World Economic Outlook (published in April 2020)

2019

Estimates (as of April 2020; %)

Change from the previous

outlook (as of January 2020; points)

2019

Estimates (as of April 2020; %)

Change from the previous

outlook (as of January 2020; points)

2020 2021 2020 2021 2020 2021 2020 2021

World 2.9 -3.0 5.8 -6.3 2.4 Emerging and developing countries

3.7 -1.0 6.6 -5.4 2.0

Developed country 1.7 -6.1 4.5 -7.7 2.9

China 6.1 1.2 9.2 -4.8 3.4

U.S. 2.3 -5.9 4.7 -7.9 3.0 India 4.2 1.9 7.4 -3.9 0.9

Euro area 1.2 -7.5 4.7 -8.8 3.3 ASEAN-5 4.8 -0.6 7.8 -5.4 2.7

Germany 0.6 -7.0 5.2 -8.1 3.8 Russia 1.3 -5.5 3.5 -7.4 1.5

France 1.3 -7.2 4.5 -8.5 3.2 Brazil 1.1 -5.3 2.9 -7.5 0.6

Italy 0.3 -9.1 4.8 -9.6 4.1 Mexico -0.1 -6.6 3.0 -7.6 1.4

Spain 2.0 -8.0 4.3 -9.6 2.7 Saudi Arabia 0.3 -2.3 2.9 -4.2 0.7

Japan 0.7 -5.2 3.0 -5.9 2.5 Nigeria 2.2 -3.4 2.4 -5.9 -0.1

U.K. 1.4 -6.5 4.0 -7.9 2.5 South Africa 0.2 -5.8 4.0 -6.6 3.0

Canada 1.6 -6.2 4.2 -8.0 2.4

Source: World Economic Outlook (IMF, as of April 2020).

Why was the estimated growth rate of the global economy revised downward gradually? The first reason is that COVID-19 infections spread worldwide gradually. At first, infections were limited mainly to China, but in the second half of February and thereafter, infections spread to Europe and the United States. In line with the gradual spread of infections, downward economic pressures spread worldwide gradually. As a result, the seriousness of the impact of COVID-19 was also factored into economic

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growth estimates gradually. The second reason is that the economic shock from restrictions on face-to-face interactions is generating both supply and demand shocks and are therefore different in nature from past economic shocks, such as those caused by natural disasters and financial crises. Natural disasters mainly cause supply shocks, such as damage to social capital, while financial crises mainly generate demand shocks. As the COVID-19 crisis is an economic crisis which has been caused by an infectious disease and is therefore different from past shocks, it is difficult to identify the depth of its impact. The third reason is that it is uncertain when the pandemic will be contained. If it becomes clear when the pandemic will be contained, it will become easier to forecast the ultimate economic impact, but at present, it remains uncertain when the pandemic will be contained. As infections continue to spread, the economic impact is also growing. The fourth reason is the nature of economic forecasting. When economic forecasts are made in the absence of sufficient real-time data, they tend to represent the smoothing of past economic data. Regarding unprecedented economic shocks for which data availability is limited, the impact of the crisis is underestimated (Figure I-1-1-2). Figure I-1-1-2 Economic outlook revised downward

Source: World Economic Outlook (IMF), Remarks by IMF Managing Director Georgieva. (3) Rapid shrinkage of global trade

The stagnation of the global economy and restrictions on human mobility and logistics have also affected trade. The World Trade Organization (WTO) published trade forecasts on April 8th. According to the forecasts, world merchandise trade will decline by 13% in 2020 compare with the previous year under a “relatively optimistic scenario” and by 32% under a “more pessimistic scenario.” In short, the WTO pointed out that the decline is likely to be steeper than the fall in trade at the time of the global financial crisis (2009, a decline of 12% compared with the previous year).2

2 “Relatively optimistic scenario”: trade volume will start to recover in the second half of 2020; “more

pessimistic scenario”: it will take longer for trade volume to recover, and the recovery will be incomplete.

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2015 2016 2017 2018 2019 2020As of January As of February As of April

(%)

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By country/region, trade volume is projected to decline by more than 10% in most countries/regions in 2020 compared with the previous year. The WTO forecast that exports from North America and Asia in particular will be seriously affected. On the other hand, the WTO pointed out that the impact on Africa, the Middle East, and “other regions” including the Commonwealth of Independent States (CIS) will be limited because these regions are highly dependent on exports of energy resources. By sector, the WTO pointed out that with respect to merchandise trade, sectors characterized by complex value chains, such as electronics and automotive products, will be particularly affected and that services sectors are likely to be more seriously affected due to restrictions on transportation and travel (Table I-1-1-3).

Table I-1-1-3 Outlook of global trade

2019 Optimistic scenario Pessimistic scenario

2020 2021 2020 2021 World -0.1 -12.9 21.3 -31.9 24.0

Export

North America 1.0 -17.1 23.7 -40.9 19.3 Central and South America -2.2 -12.9 18.6 -31.3 14.3 Europe 0.1 -12.2 20.5 -32.8 22.7 Asia 0.9 -13.5 24.9 -36.2 36.1 Other regions -2.9 -8.0 8.6 -8.0 9.3

Import

North America -0.4 -14.5 27.3 -33.8 29.5 Central and South America -2.1 -22.2 23.2 -43.8 19.5 Europe 0.5 -10.3 19.9 -28.9 24.5 Asia -0.6 -11.8 23.1 -31.5 25.1 Other regions 1.5 -10.0 13.6 -22.6 18.0

Source: Trade Statistics and Outlook: Trade set to plunge as COVID-19 pandemic upends global economy (WTO).

(4) Rapid shrinkage of global investment

Like trade, investment is expected to shrink significantly. On March 8th, the United Nations Conference on Trade and Development (UNCTAD) published a forecast projecting a drop of 5% to 15% in foreign direct investments (FDI) worldwide in 2020-2021 as a decrease in demand and supply chain disruptions in China and elsewhere due to the COVID-19 pandemic constrain companies’ investment activity. However, as infections spread worldwide, UNCTAD revised downward its investment forecast. On March 26th, it published a forecast projecting a decline of 30% to 40% in FDIs worldwide in 2020-2021, and it issued a similar forecast in the World Investment Report, which was published on June 16th. (5) Rapid slowdown of the Chinese economy

Next, the effects of economic shocks will be examined on a region-by-region basis. First, in China, which became the first epicenter of COVID-19 infections, the effects started to become serious at the beginning of 2020. In January-February 2020, economic activities such as retail sales, industrial production and fixed asset investment declined by more than 10% on a year-on-year basis. With respect

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to trade, in January-February 2020, exports fell by 17%, while imports dropped by 4% on a year-on-year basis, respectively. This indicates that exports were affected more than imports because of slowdowns in production activity and logistics in China. In other words, at first, the impact was more in the nature of a supply shock. In March, the decline in exports continued to be steeper than the fall in imports, with exports to Europe and the United States becoming particularly stagnant. This indicates that the weakness of global demand leads to the weakness of exports from China. In March, retail sales continued to be weak and declined by 15.8% on year-on-year basis. However, in line with the restart of production activity, the margin of year-on-year decline in industrial production became much smaller, 1.1%, in March, signaling a recovery in supply-side economic activity. Meanwhile, China’s GDP in the 1st quarter of 2020 recorded a year-on-year growth rate of minus 6.8%, marking the first negative growth since 1992, the earliest year for which quarterly GDP statistics are available (Figure I-1-1-4). Figure I-1-1-4 GDP annual growth rates in China (on a year-on-year basis)

Source: National Bureau of Statistics of China. (6) Europe

As Europe became the second epicenter of COVID-19 after China, infections spread rapidly starting from Italy to France, Spain, Germany, and the United Kingdom from late February 2020 onward. 5 of the global top 10 countries in terms of the number of the infected were European countries (as of May 29th). Economic activity became stagnant as various measures were taken to prevent infections, including restrictions on movement, lockdowns, stay-at-home instructions, travel bans, closures of stores, and de facto border closures. Restrictions on human mobility in and outside Europe have had serious effects on such industries as tourism, retail trade, and food service. European countries with high

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5

10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2015 2016 2017 2018 2019 2020

-6.8 GDP

Final consumption expenditure

Gross capital formationNet exports

(%)

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dependency on tourism are among the worst hit by the COVID-19 crisis. The real GDP growth rate in the euro area in the January-March quarter was announced on June

9th and was minus 13.6% quarter-on-quarter recording the worst-ever figure with France’s real GDP shrinking as much as 19.7%. A further deterioration is projected for the April-June quarter as the lockdowns measures likely hit the economies even more severely (Figure I-1-1-5). Figure I-1-1-5 Real GDP quarter-on-quarter annualized growth rates in Europe

Notes: The data in this figure are annualized rates of quarterly growth. Source: Eurostat. (7) United States

As it stands, the United States has the largest number of the infected in the world. In response to the outbreak, national emergency was declared on March 13th, and the number of the infected in the United States surpassed 85,000 on March 27th, overtaking the number in China and reaching the highest level in the world. Lockdowns were implemented in such major cities as California and New York later in March.

Under those circumstances, production and consumption activities have been severely constrained, and the effects on employment has also become serious. Following the outbreak, more than 40 million initial unemployment claims were recorded, and the unemployment rate rose to 14.7% in April. This was higher than the unemployment rate of 10% recorded at the time of the global financial crisis and represented the second worst employment situation after the Great Depression, when the unemployment rate surpassed 25%. The real GDP growth rate in the January-March quarter in 2020 was announced on May 28th, and was an annualized rate at minus 5.0% quarter-on-quarter. Moreover, the U.S.

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-7.7

-25

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-5

0

5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2018 2019 2020Euro area Germany Spain France Italy U.K.

(%)

8

Congressional Budget Office published a forecast projecting an annualized decline of 40% quarter-on-quarter in the April-June quarter (Figure I-1-1-6). Figure I-1-1-6 Real GDP quarter-on-quarter annualized growth rates in the United States

Source: U.S. Department of Commerce. (8) Asia

In Asia, COVID-19 outbreak was seen relatively early on as indicated by the confirmation of infection cases in January in several countries. In the meantime, as the response differed from country to country, some countries, such as the Republic of Korea (ROK) and Taiwan, succeeded in containing the infections, while others implemented lockdowns after the outbreak.

Asian countries are geographically close to China. In addition, there are many countries/regions dependent on tourism, including Macau with the share of tourism in GDP at 74%, Cambodia at 18% and Thailand at 13%, which are prone to be affected by travel restrictions. Furthermore, there are countries/regions highly dependent on remittance receipts from abroad, including the Philippines with the share of remittances against GDP at 10%, which are prone to be affected by changes in the global economic situation and other overseas developments.

In the January-March quarter of 2020, the real GDP growth rate (unadjusted, year-on-year) slowed down sharply to up 3.8% from up 7.0% in the previous quarter (the October-December quarter of 2019) in Viet Nam and turned negative in Thailand, where the growth rate was minus 1.8%, and in Singapore, where the growth rate was minus 0.7% (Figure I-1-1-7).

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4

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Q2

Q3

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Q2

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2015 2016 2017 2018 2019 2020

(%)

Government expenditureImportsResidential investmentPersonal consumptionBusiness investmentInventory investmentExports

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Figure I-1-1-7 GDP year-on-year growth rates in Asia

Source: Statistics bureau of each countries, CEIC Database. (9) Central and South America

In Central and South America, the first infection case was confirmed in Brazil on February 26th, and infections spread to other countries with the first cases confirmed in Mexico on February 27th and in neighboring countries later. The first infection cases in both Brazil and Mexico were those who returned from Italy.

The number of the infected in Central and South America increased rapidly in March onwards, and the number of the infected in Brazil was the second highest in the world as of May 29th.

In Brazil, restriction measures including a ban on entry of foreign nationals were implemented in late March, and the Ministry of Economy announced an emergency economic package worth 417.7 billion real (around 8,124.4 billion yen) in late May.3 In Mexico, the government declared a “national state of sanitary emergency caused by force majeure“ on March 30th, and the Ministry of Health issued a request for refraining from conducting business operations involving human mobility on March 24th.

In the first quarter of 2020, Mexico’s real GDP growth rate was an annualized rate at down 4.9%, marking the worst growth rate in 11 years. The central bank revised downward the estimated economic growth rate in 2020 from a range of 0.5% to 1.5% to a range of -4.4% to -8.8%. In addition, factory operation in manufacturing industries was suspended in Central and Latin American countries, and this resulted in steep declines in production, and imports and exports (Figure I-1-1-8).

3 https://www.gov.br/economia/pt-br/centrais-de-conteudo/apresentacoes/2020-05-22-transparencia-

covid19.pdf.

3.1

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3.8

1.4

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2

4

6

8

10

12

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2016 2017 2018 2019 2020

(%)

(Year, quarter)India Singapore Thailand Viet Nam ROK

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Figure I-1-1-8 GDP quarter-on-quarter annualized growth rates in Mexico

Notes: The data are seasonally adjusted and quarter-on-quarter annualized rates. Source: INEGI, CEIC Database. (10) Natural resources

The COVID-19 pandemic has also affected natural resource prices. The price of West Texas Intermediate (WTI) crude oil futures, which was at 61.18 dollars per barrel at the beginning of 2020, stood at -37.63 dollars on April 20th, marking the first negative price on record (Figure I-1-1-9). Among presumed factors behind the price drop were a decline in demand due to stagnant production activity and stay-at-home instructions and cautious stance for the cost of holding crude oil reserves due to concerns that the capacity of crude oil storage facilities was approaching their limits.

On the other hand, there are also moves toward adjusting the supply-demand balance of natural resources, such as the start of output reduction of 9.7 million barrels per day by the OPEC Plus countries on May 1st.

Resource-related developments will be analyzed in Chapter 2.

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Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20192020

(%)

(Year, quarter)

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Figure I-1-1-9 WTI crude oil future prices

Source: Refinitiv. (11) Financial markets

While the COVID-19 pandemic caused shocks to the real economy, financial markets were also significantly affected. Stock prices temporarily dropped sharply by as much as around 30% from the level at the beginning of 2020. Amid the financial market turmoil, stock prices registered the largest rises on record sometimes and the largest declined on record at other times (Table I-1-1-10). Table I-1-1-10 Record upside and downside changes in stock prices (Nikkei Stock Average; Dow Jones 30 Industrial Index; as of May 31st, 2020)

Nikkei stock average: Upside ranking Nikkei stock average: Downside ranking Date Rise

(Yen) Percentage

of rise Date Decline

(Yen) Percentage of decline

1 Oct. 2nd, 1990 2676.55 13.24% 1 Oct. 20th, 1987 -3836.48 -14.90% 2 Oct. 21st, 1987 2037.32 9.30% 2 Apr. 2nd, 1990 -1978.38 -6.60% 3 Jan. 31st, 1994 1471.24 7.84% 3 Feb. 26th, 1990 -1569.10 -4.50% 4 Mar. 26th, 1990 1468.33 4.83% 4 Aug. 23rd, 1990 -1473.28 -5.84% 5 Mar. 25th, 2020 1454.28 8.04% 5 Apr. 17th, 2000 -1426.04 -6.98% 6 Aug. 15th, 1990 1439.59 5.40% 6 Aug. 19th, 1991 -1357.61 -5.95% 7 Sep. 9th, 2015 1343.43 7.71% 7 Mar. 19th, 1990 -1353.20 -4.15% 8 Apr. 10th, 1992 1252.51 7.55% 8 Jun. 24th, 2016 -1286.33 -7.92% 9 Jan. 6th, 1988 1215.22 5.63% 9 Oct. 23rd, 1987 -1203.23 -4.93%

10 Mar. 24th, 2020 1204.57 7.13% 10 Feb. 21st, 1990 -1161.19 -3.15%

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Sep.

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Nov

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2019

Aug

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Dec

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Feb.

202

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. 202

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(Dollars/barrel)

12

Dow Jones Industrial Average: Upside ranking

Dow Jones: Downside ranking

Date Rise

(dollars) Percentage

of rise Date

Decline (dollars)

Percentage of rise

1 Mar. 24th, 2020 2112.98 11.37% 1 Mar. 16th, 2020 -2997.10 -12.93% 2 Mar. 13th, 2020 1985.00 9.36% 2 Mar. 12th, 2020 -2352.60 -9.99% 3 Apr. 6th, 2020 1627.46 7.73% 3 Mar. 9th, 2020 -2013.76 -7.79% 4 Mar. 26th, 2020 1351.62 6.38% 4 Mar. 11th, 2020 -1464.94 -5.86% 5 Mar. 2nd, 2020 1293.96 5.09% 5 Mar. 18th, 2020 -1338.46 -6.30% 6 Mar. 4th, 2020 1173.45 4.53% 6 Feb. 27th, 2020 -1190.95 -4.42% 7 Mar. 10th, 2020 1167.14 4.89% 7 Feb. 5th, 2018 -1175.21 -4.60% 8 Dec. 26th, 2018 1086.25 4.98% 8 Feb. 8th, 2018 -1032.89 -4.15% 9 Mar. 17th, 2020 1048.86 5.20% 9 Feb. 24th, 2020 -1031.61 -3.56%

10 Oct. 13th, 2008 936.42 11.08% 10 Apr. 1st, 2020 -973.65 -4.44% Source: Refinitiv.

One of the features observed amid the financial market turmoil due to the COVID-19 is increased demand for cash, particularly, dollar cash. In past economic crises, demand for safe assets, namely gold and government bonds, increased leading to price rises for those assets (bond yield declines for government bonds). However, in the course of the COVID-19 pandemic, drawdowns of savings in the form of financial asset sales to obtain dollar cash intensified resulting in price declines for so-called safe assets while the dollar appreciated. In order to meet increased demand for dollars, the U.S. Federal Reserve Board (FRB) then cooperated with other central banks to expand the supply of dollars.4 As shown in Figure I-1-1-11, the basis swap rate which represents the spread over the reference rate that is applied to currency conversion into dollars rapidly fell deeper below zero (the negative spread widened due to increased demand for dollars) because of a dollar shortage.

4 On March 15th, the FRB cooperated with five other central banks to enhance the supply of dollar funds

into the market through swap line arrangements. Later, on March 19th, the swap line arrangements were joined by 9 additional central banks. On March 31st, the FRB announced the establishment of a repo facility for foreign central banks and authorities, which uses U.S. government bonds as collateral.

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Figure I-1-1-11 Cross currency basis swap: conversion into dollars (one year)

Notes: The data in this figure show the differentials of Libor rates of each countries’ currencies from the

dollar in receiving the dollar Libor rate and paying own country’s Libor rate for one year. If the gap shows a negative value, they receive less interests in dollar than the dollar Libor and thus wider differentials mean higher costs for procuring dollar. This situation tends to happen when demand for dollar is strong.

Source: Refinitiv.

There have been rising concerns for emerging countries’ sovereign risk as indicated by a rise in credit default swap rates. This is considered to be a situation where economies dependent on natural resources and tourism are exposed to risks. Standard & Poor’s, a credit rating agency, downgraded the sovereign rating of Mexico by one notch to “BBB” on March 26th. On March 27th, Moody’s downgraded the sovereign rating of South Africa from “Baa3” to “Ba1,” a junk rating. Afterwards, the sovereign ratings of several other countries were also downgraded. On May 22nd, Argentina fell into a technical default as it failed to pay interest on the government bonds. The COVID-19 pandemic was a factor behind these developments. Figure I-1-1-12 shows major financial indicators.

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Euro Japanese Yen British Pound Swiss Franc

(BP)

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Figure I-1-1-12 Indicators of financial markets (stock prices; interest rates)

Source: Refinitiv.

As described above, a rapid economic slowdown occurred all around the world, generating significant effects on the real economy and financial markets.

The COVID-19 crisis is essentially a crisis of face-to-face communication. Unlike past natural disasters and financial crises that affected particular regions or countries, the COVID-19 crisis is characteristic in that it generates considerable effects on both supply and demand through restrictions on face-to-face communication, causing shocks to income and employment and leading to a chain of economic crisis (Figure I-1-1-13). Below, the COVID-19 crisis will be examined from the viewpoints of supply- and demand-side shocks and income and employment shocks. Figure I-1-1-13 Overview of the COVID-19 crisis

Nikkei 225U.S. Dow Jones

Average

Euro Stoxx 50

MSCI Emerging Markets Index

SSE Composite Index

60

70

80

90

100

110

2020/1/1 2020/2/1 2020/3/1 2020/4/1 2020/5/1

(Index: Jan. 1st, 2020 = 100)Each countries’ benchmark stock prices

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2020/1/1 2020/2/1 2020/3/1 2020/4/1 2020/5/1

(%)

U.S.

Japan

Germany

Italy

Long-term bond yields in advanced countries

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2020/1/1 2020/2/1 2020/3/1 2020/4/1 2020/5/1

(Index: Jan. 1st, 2020 = 100)

WTI crude oil

Gold

Copper

Commodity price indices

Brazil

Turkey

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Income and employment shocks

- Supply chain disruptions- Suspension of the

provision of services

- Rapid decline in demand for face-to-face services

- Evaporation of demand for durable goods

Rapid decline in income and employment, leading to a vicious spiral of economic deterioration

Supply-side shocks

Demand-side shocks

Limitation of human mobility by border closures, stay-at-home restrictions, etc.

15

2. Supply-side shocks The COVID-19 crisis was essentially caused by restrictions on face-to-face communication. In

order to prevent infections, restrictions were imposed on face-to-face communication, human mobility and the movement of goods, resulting in supply constraints. Here, the COVID-19 crisis will be examined from the viewpoint of supply-side shocks. (1) Supply chain disruptions

On the supply side, restrictions imposed on the movement and exchange of people and goods in order to stop the spread of infections prevented workers from engaging in production activity and made it difficult to move across national borders. Production activities were also affected, as governments requested the suspension of non-essential economic activities. In addition, regarding transportation, the time required for border inspection increased.

Under these circumstances, supply chain disruptions occurred worldwide. Now that cross-border supply chains have been developed through international division of labor, the suspension of production activity in even a single country made it difficult to procure goods in other countries, leading to the suspension of production activity there.

Regarding Japan’s trade in February 2020, imports from China decreased 47.1% year-on-year. This means that the suspension of production in China, where COVID-19 infections were spreading, contributed significantly to a steep decline in Japan’s imports. As a result, because of the effects transmitted across national borders through supply chains, companies in Japan found it difficult to procure necessary parts and materials from China and had to suspend production activity in some cases. According to trade data classified by type of goods, imports of auto parts from China in February 2020 declined by 46.8% year-on-year. The halt of the supply of parts from China affected automobile production in Japan as well (Figure I-1-1-14). Figure I-1-1-14 Japan’s imports from China (year-on-year change)

Source: Trade Statistics of Japan (Ministry of Finance (MOF)).

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When the supply chain is labor-intensive and production is conducted under a complex network, slowdown in human mobility and a shortage of goods tend to impede production activity. Amid the interactions between supply-side and demand-side factors, some Japanese companies’ local affiliates in Europe and the United States shut down factories in mid-March and thereafter due to supply chain disruptions, which represent a supply-side factor, and weak demand due to COVID-19, a demand-side factor (Table I-1-1-15). In Europe, as supply chains were disrupted within the EU because of restrictions on the cross-border movement of goods, production was suspended in the automobile industry, in which cross-border production systems have been developed within the region.

Table I-1-1-15 Trends in overseas production by Japanese companies in and after mid-February

Automobiles

China Suspension of wire harnesses factories in Wuhan, causing impacts on production of automobiles at home and abroad (from February to March)

Southeast Asia Suspension of factory operation in accordance with the local expansion of the COVID-19 and the global stagnancy of demand (in and after late March)

U.S. Suspension of factory operation in accordance with the local expansion of the COVID-19 and the global stagnancy of demand (in and after late March)

Europe Suspension of factory operation in accordance with the local expansion of the COVID-19 and the global stagnancy of demand (in and after late March)

Electronic machinery

China

Decrease in the supply volume of parts and materials in China, causing impacts, such as the suspension of factory operation and the delays in shipping in the fields of game machines, cameras and copy machines in Japan.

Southeast Asia Decrease in the operation of microcomputer factories (in and after April)

U.S. Suspension of the operation of battery factories (from March to April)

Europe Decrease in the operation of air conditioner factories (from March to April)

Machinery

China Decrease in the operation of construction-machinery factories (from February to March)

Europe Suspension of the operation of railway and construction-machinery factories (from March to April) and machine-tool factories (April)

17

Others China

Suspension of the operation of sanitary ware factories (toilet, bath or kitchen ware) and air-conditioner machinery factories (from February to March); resumption of regular operation in April

U.S. Suspension of the operation of carbon fiber factories for a U.S. aircraft manufacturer (from March to April)

Source: Economy Watchers Survey (Cabinet Office), companies’ press release, etc.

As described above, while the development of cross-border production and sales networks improves the efficiency of production and sales in normal times, those networks may bring vulnerability in the form of disruption of cross-border supply chains during a crisis that causes global economic shocks. (2) Restrictions on the movement of goods

One factor that triggers supply chain disruptions is the introduction of restrictions on the movement of goods. Because of border closures and the suspension of passenger flights, the movement of goods became stagnant and it became difficult to obtain essential goods. As a result, supply chain disruptions occurred.

Export restrictions and regulations regarding goods were also introduced. According to a report compiled by the WTO, 80 countries and customs territories had export restrictions and regulations in place as of April 22nd in response to the COVID-19 pandemic.5 While different countries imposed restrictions and regulations on different product items, test kits, protective gowns, thermometers, and artificial respirators were among items that were generally subjected to the restrictions and regulations. In addition, some countries suspended food exports (Table I-1-1-16). Table I-1-1-16 Examples of restrictions on movement of goods

Country/region Date of introduction Description

EU Mar. 15th Introduction of an approval system for exports of medical protective equipment, e.g., face masks, to the outside of the EU region

Turkey Mar. 4th

Stipulation of requirements for exporters of medical masks, protective garments, aprons, goggles, groves and other goods to receive an approval from the Ministry of Trade

India Mar. 3rd Restrict the export of 26 items of active pharmaceutical ingredients

Kazakhstan Mar. 22nd Setting of export quotas for flour and carrots Source: Daily “Business Tanshin” (JETRO), Japan International Research Center for Agricultural

Science, WAGAKUNI NI OKERU KOKUMOTSU TOU NO YUNYUU NO GENJOU (Ministry of Agriculture, Forestry and Fisheries).

In response to those restrictions on the movement of goods, some internationally coordinated

5 “EXPORT PROHIBITIONS AND RESTRICTIONS, INFORMATION NOTE” (WTO, April 23rd,

2020).

18

actions have been taken. At the meetings of the G20 trade and investment ministers held on March 30th and May 15th, it was reaffirmed that the G20 countries will strengthen their cooperation on the trade front in order to secure free movement of goods and services and maintain economic activities. (3) Slowdown in human mobility

COVID-19 infections spread through people-to-people contacts. Therefore, in order to prevent thespread of infections, shelter-in-place restrictions, restrictions on movement, and restrictions on international travel were introduced in various regions (Table I-1-1-17).

Table I-1-1-17 Actions to human mobility by country U.S. Jan. 31st, 2020 Immigration control for people from China, starting on Feb. 2nd

Mar. 11th, 2020 Immigration control for people from Europe, except the U.K., starting on Mar. 13th

Mar. 13th, 2020 Issuance of a shelter-in-place recommendation by municipality in response to the declaration of the state of emergency; starting of school closures

Mar. 16th, 2020 Issuance of a request for the public to restrict themselves from holding gatherings or eating at restaurants of a group with 10 or more people

Mar. 16th, 2020 Immigration control for people from the U.K., starting on Mar. 17th

Mar. 18th, 2020 Closure of the border with Canada Mar. 19th, 2020 Shelter-in-place restrictions in the State of California Mar. 22nd, 2020 Shelter-in-place restrictions in the State of New York

EU Mar. 18th, 2020 Agreement concluded to prohibit arrivals from the outside of the EU region for 30 days , excluding the U.K.

Germany Mar. 14th, 2020 Shelter-in-place restrictions; school closures Mar. 15th, 2020 Border inspection between five countries: France, Switzerland,

Austria, Luxembourg and Denmark Mar. 16th, 2020 Issuance of recommendations for reduction of restaurants’

opening hours and prohibiting operation of bars and theaters France Mar. 15th, 2020 Closures of national facilities which are not essential for

people’s daily lives, cafes and movie theaters Mar. 15th, 2020 Border inspection between Germany, Switzerland and

Luxembourg Mar. 17th, 2020 Shelter-in-place restrictions

Spain Mar. 14th, 2020 Suspension of services by stores providing non-essential goods; shelter-in-place restrictions for the public

Italy Mar. 8th, 2020 Restrictions on movement in the northern area Mar. 10th, 2020 Restrictions on movement in all areas of the country

19

Mar. 11th, 2020 Closures of all stores, excluding supermarkets and drug stores Mar. 12th, 2020 Restrictions on the operation of domestic airports

Austria Mar. 10th, 2020 Closures of the border with Italy Apr. 14th, 2020 Partial mitigation of prohibition of providing services

Australia Feb. 20th, 2020 Immigration control for foreign nationals who have a record of having visited China

Mar. 1st, 2020 Immigration control for foreign nationals who have a record of having visited Iran

Mar. 7th, 2020 Immigration control for foreign nationals who have a record of having visited the ROK

Mar. 11th, 2020 Immigration control for foreign nationals who have a record of having visited Italy

Mar. 15th, 2020 Measures for requiring self-isolation of foreign visitors to Australia for 14 days; rejection of cruise ships’ entries to domestic ports

Mar. 16th, 2020 Declaration of the state of emergency concerning public hygiene, not requiring immediate closures of schools but recommending to suspend or postpone sports festivals, concerts, school festivals, field trips, etc.

Mar. 18th, 2020 Prohibition of indoor gatherings with a group of over 100, which are not essential

Mar. 20th, 2020 Prohibition on entry of people, excluding Australian citizens, residents and their direct family members; transit at domestic airports, not allowing any transiting Australia in principle

Mar. 22nd, 2020 Requirement for people to cancel non-essential domestic travels Mar. 23rd, 2020 Closures of non-essential activities and commercial facilities;

closures of public schools from Mar. 24th Mar. 25th, 2020 Prohibition on Australians and Australian permanent residents

from traveling overseas Mar. 24th, 2020 Closures of state borders by the State of Western Australia Mar. 25th, 2020 Prohibition on Australians and Australian permanent residents

from traveling overseas Indonesia Mar. 20th, 2020 Prohibition on entry of visitors and travelers who have stayed in

Iran, Italy, Vatican, Spain, France, Germany, Switzerland or the UK for 14 days in the past; suspension of services in the entertainment industry in Jakarta

Apr. 2nd, 2020 Prohibition on entry of visitors from any overseas countries Apr. 10th, 2020 Large-scale implementation of social restrictions in the Special

Capital Region of Jakarta (closures of schools, parks, gathering

20

spaces, children’s halls, gymnasiums, museums, etc.; prohibition of holding wedding parties; prohibition of outdoor gatherings of a group with over five people; and restrictions on the number of passengers and operation hours for all public transportation systems in the Special Capital Region of Jakarta); implementation of social restrictions similar to those mentioned above in the State of Banten and the State of West Java

Apr. 24th, 2020 Prohibition on migrant workers’ going back to their home town from Jakarta and other city areas during the period of Ramadan and Lebaran until May 31st

Thailand Mar. 22nd, 2020 Closures of gathering facilities in Bangkok Mar. 23rd, 2020 Closures of all inland borders at 18 points in 17 provinces across

Thailand in principle Mar. 26th, 2020 Declaration of the state of emergency (prohibition on entry of

visitors from overseas countries, except special cases) Apr. 2nd, 2020 Issuance of a nationwide shelter-in-place order during night Apr. 9th, 2020 Closure of the Special Governed City of Pattaya Apr. 10th, 2020 Prohibition of operation of Phuket International Airport May 3rd, 2020 Partial resumption of economic activities

Malaysia Mar. 18th, 2020 Conditional Movement Control Orders (prohibition on Malaysians from leaving the country; prohibition on entry of tourists and foreign visitors; closures of educational institutes; and closures of all governmental and private facilities, excluding those in the fields of important services); issuing allowance for some industries satisfying the predetermined requirements to continue production of specific items, e.g., pharmaceuticals and food

May 4th, 2020 Conditionally issuing allowance for most economic and social activities; prohibition of: operating movie theaters, karaoke facilities, entertainment facilities, reflexology facilities and theme parks, holding Ramadan bazaars, exhibitions and group praying, and moving across state borders; continuation of school closures

Philippines Feb. 3rd, 2020 Prohibition on entry from Mainland China and its special districts

Feb. 10th, 2020 Prohibition on visit to China, Hong Kong, Macau and Taiwan Feb. 14th, 2020 Lifting of the measures for prohibiting entry from and visit to

Taiwan

21

Feb. 26th, 2020 Control on entry from and visit to the Daegu Metropolitan City and Cheongdo County of North Gyeongsang Province, the ROK

Mar. 13th, 2020 Closures of all schools at all levels in Manila; prohibition of holding events of many people; suspension of services of inland transportation, domestic coastal ships and domestic flights of aircraft (on and after March 15); immigration control for visitors from any countries facing the COVID-19 epidemic, including Japan

Mar. 14th, 2020 Immigration control for entry to the Cebu region Mar. 16th, 2020 Suspension of stock markets; prohibition on entry from overseas

countries Mar. 18th, 2020 Enhancement of the community-based isolation measures

(shelter-in-place restrictions in the Luzon region; the same restrictions imposed on other regions as needed and as subsequent measures)

Mar. 22nd, 2020 Suspension of visa issuance at all overseas embassies May 3rd, 2020 Restrictions on the operation of all international airports in the

country Singapore Mar. 23rd, 2020 Prohibition of entry and transit of all short-stay visitors

(continuation of the immigration control for entry from China and other countries facing COVID-19, which had already been introduced)

Apr. 7th, 2020 Circuit Breaker Measure, in which schools are required to provide home-schooling and all offices are required to close, except those providing essential services and those in the economic sectors essential to local and global supply chains, which was taken until May 4th, and extended until June 1st

Apr. 9th, 2020 Immigration control for entry of Singapore nationals, permanent residents and long-stay visitors (14 day-isolation)

Apr. 21st, 2020 Enhancement of the Circuit Breaker Measure May 2nd, 2020 Step-by-step mitigation of the enhanced Circuit Breaker Measure

India Mar. 22nd, 2020 Prohibition on international flights landing; nationwide shelter-in-place order for 14 hours

Mar. 25th, 2020 Nationwide lockdown until April 14th, which was extended until May 3rd and May 17th

Apr. 20th, 2020 Partial resumption of limited activities under the predetermined conditions, e.g., securing social distance, while continuing the lockdown

China Jan. 23rd, 2020 Lockdown of Wuhan

22

Jan. 28th, 2020 Announcement of postponing the resumption of business operation and the start of new school terms in major provinces and cities

Feb. 10th, 2020 Step-by-step issuance of approval for resuming business operation in major provinces and cities, except Hubei Province, Wuhan and other areas

Mar. 3rd, 2020 Imposition of 14-day isolation in Beijing on visitors from Japan, the ROK, Italy or Iran to Beijing regardless of their nationality

Mar. 10th, 2020 Lifting of mobility restrictions in the areas in the Hubei Province, except Wuhan

Mar. 19th, 2020 Implementation of a 14-day quarantine measure targeting visitors from European countries to all areas across the country (stand-by request)

Mar. 25th, 2020 Lifting of mobility restrictions between the areas in Hubei Province, except Wuhan, and other provinces

Apr. 8th, 2020 Lifting of the lockdown of Wuhan Mexico Mar. 20th, 2020 Restrictions on non-essential mutual visit between Mexico and

the United States or Canada for 30 days from Mar. 21st Mar. 30th, 2020 Suspension of businesses, except essential ones, which was

extended twice until April 30th and until May 31st Brazil Mar. 19th, 2020 Prohibition of entry of foreign visitors via land

Mar. 26th, 2020 Prohibition of entry of foreign visitors via sea Mar. 30th, 2020 Prohibition of entry of foreign visitors via air

Source: Websites of Japanese embassies in overseas countries as for the data on Australia, Indonesia, Thailand, Malaysia, the Philippines, Singapore and India; Daily “Business Tanshin” (JETRO) as for the data on Mexico and Brazil.

23

In China, as migrant workers who had returned to their home towns during the Chinese New Year season were unable to go back to their workplaces, production activity at factories and the movement of goods continued to be affected even after the reopening of production lines. In Europe, the shrinkage of the labor force due to a decrease in seasonal workers has raised concerns over a labor shortage regarding agricultural work. France, which is a major exporter of agricultural products, relies on foreign nationals for 80% of the supply of agricultural workers, has had difficulty securing workers because of the EU’s introduction of travel restrictions, which in principle prohibit travel from outside the EU region into the region. (4) Suspension of the provision of face-to-face services

In addition, some economic activities were suspended in order to prevent the spread of infections. Lockdowns of cities and voluntary restrictions on store operations intended to prevent infections led to supply constraints, including the suspension of the provision of non-essential services, including entertainment, and eat-in dining at restaurants. As a result, even when demand existed, it was not met. In Japan as well, the activity index concerning the entertainment industry, including amusement and theme parks, and fitness clubs, deteriorated rapidly in March 2020 and thereafter.

Past natural disasters, such as the Great East Japan Earthquake, caused supply shocks by damaging production facilities and social capital. During the COVID-19 crisis, although production facilities and social capital remained intact, restrictions on people-to-people contacts led to the suspension of production, restrictions on human mobility and the movement of goods, and the suspension of the provision of services, as described above. Those constraints are holding down the supply side of the economy worldwide. In this respect, the supply-side shocks caused by the COVID-19 crisis are different in nature compared with the shocks caused by past crises.

24

Figure I-1-1-18 Changes in Japan’s activity indicators concerning the entertainment industry

Notes: The values in this figure are seasonally adjusted. Source: Indices of Tertiary Industry Activity (Ministry of Economy, Trade and Industry) 3. Demand-side shocks

The constraint on face-to-face communication, which is essentially the cause of the COVID-19 crisis, is also affecting the demand side of the economy. Because of the spread of infections, demand has changed. Regarding activities requiring face-to-face communication, demand has subsided. On the other hand, activities not requiring direct communication between people, such as electronic commerce (EC), have become brisk.

Traditionally, services industries have been characterized by the simultaneity of production and consumption. In manufacturing industries, goods are transported and inventories are built up so that they can be provided at locations and timings different from the place and timing of production. On the other hand, in services industries, the place and timing of production have traditionally been the same as the place and timing of consumption. Therefore, because of the constraint imposed on communication between people amid the spread of infections, the COVID-19 crisis has had significant effects on demand in services industries in particular. On the other hand, services that overcome the simultaneity of production and consumption are growing.

The trend in demand for services will be examined based on the classification of services into three categories. The first category comprises services that provide daily necessities, such as food and pharmaceuticals. Even though infection risk exists as a result of the simultaneity of production and consumption, there continues to be demand, and as a result, the provision of services continues as an essential business even while people-to-people communication is restricted. The second category comprises services for which demand shrinks if people-to-people communication is restricted, with

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tourism, accommodations and food services as typical examples. As a result of the introduction of shelter-in-place restrictions, voluntary restraint, and travel restrictions, demand for face-to-face services involving people-to-people contacts declined rapidly. The third category comprises services that substitute for the first and second categories of services. In this category, services involving online communication, rather than face-to-face communication, grow. This category of services overcomes the simultaneity of production and consumption regarding services. Since the onset of the COVID-19 pandemic, demand has expanded for services that do not necessarily require face-to-face activities, including EC and online distribution of videos.

As described above, the effects of the constraint on face-to-face communication differ from service to service depending on the nature of the service. However, the effects of the COVID-19 pandemic have not been limited to services industries but affected the consumption of durable goods, too. (1) Services that provide daily necessities

Services that provide daily necessities, including food, continued to be provided even where lockdowns were implemented or where the provision of non-essential services was suspended.

According to the Family Income and Expenditure Survey in April in Japan, consumption expenditure on amusement park attendance, package tours and railway fares fell, while consumption expenditure on game consoles, instant noodles and micro ovens increased (Figure I-1-1-19).

Figure I-1-1-19 Japan’s trends in consumption (Family Income and Expenditure Survey in April 2020; major items, etc.)

Source: Family Income and Expenditure Survey (Ministry of Internal Affairs and Communications).

-100 -50 0 50 100 150

Admission fees for amusement parksPackage toursAirplane faresRailway fares

Men’s suits

Taxi faresMeals

Women’s slacks

GasolineInternet connection charges

Microwave ovens“Chu-hi,” liquor with soda and fruit, and cocktail

Instant noodlesGame consoles

PastaConsumables for healthcare

(%; year-on-year change; real consumption)

26

(2) Services involving people-to-people communication On the other hand, demand for services involving people-to-people communication declined

steeply. In order to prevent people-to-people contacts as a way of preventing infections, requests for the cancellation of events and voluntary restraint were issued. Abroad, as lockdowns restricted people from going out, communication between people decreased.

Google publishes COVID-19 Community Mobility Reports, which describe the status of human mobility based on Google Map. The reports chart people’s movement trends across the categories “retail & creation,” “grocery & pharmacy,” “parks,” “transit stations,” “workplaces,” and “residential.” According to the reports, human mobility declined in various countries and regions. In the U.S. state of New York, where a lockdown started on March 22nd, the mobility related to “transit stations,” which is an indicator of people going out, decreased by 65% as of April 11th, while the mobility related to “residential,” which is an indicator of people staying at home, increased by 18% (Figure I-1-1-20). Figure I-1-1-20 Human mobility in State of New York

Source: COVID-19 Community Mobility Report (Google).

As various countries introduced restrictions on overseas travel or recommended the cancellation of travel in addition to imposing shelter-in-place restrictions, cross-border human mobility also became stagnant. The demand-side effects of those restrictions have been conspicuous in the tourism and accommodation industries. Since the beginning of 2020, the number of tourists has fallen steeply in various regions. In April 2020, the number of foreign visitors to Japan fell by 99.9% on a year-on-year basis.

In January 2020, the United Nations World Tourism Organization (UNWTO) forecast an increase

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Retail and recreation Grocery and pharmacy ParksTransit stations Workplaces Residential

Comparison of data with those during the period of five weeks from January 3rd to February 6th, 2020 (%)

27

ranging from 3% to 4% in global tourism in 2020, but on March 5th, it revised the forecast downward to a decline ranging from 1% to 3%. On March 26th, the UNWTO revised its forecast once again, sharply down to a decline ranging from 20% to 30%, and on May 7th, the forecast was further revised downward to a decline ranging from 58% to 78% (Figure I-1-1-21). The decline is steeper than the drop in 2003 (down 0.4%) that was due to the impact of the severe acute respiratory syndrome (SARS) and the drop in 2009 (down 4%) that was due to the impact of the global financial crisis. Figure I-1-1-21 Forecast of number of tourists (UN World Tourism Organization (UNWTO))

Notes: The values in 2020 are the estimates by UNWTO as of May 7th. The date on the year-on-year

change in 2020 were aggregated based on: Scenario 1 (decrease by 58%) in which step-by-step reopening of borders and mitigation of travel restrictions may start from early July, Scenario 2 (decrease by 70%) in which step-by-step reopening of borders and mitigation of travel restrictions may start from early September, and Scenario 3 (decrease by 78%) in which step-by-step reopening of borders and mitigation of travel restrictions may start early December for the first time.

Source: UNWTO.

Global tourism revenues in 2018 amounted to 1,649.3 billion dollars, accounting for 1.9% of global GDP. In Japan, the share of in-bound tourism revenues in GDP in 2018 was 0.9%, which was lower than the global average but which represented a three-fold increase from the share of 0.3% in 2010 (Figure I-1-1-22). The share of in-bound tourism revenues in GDP was 21.4% in the Pacific island countries, 9.9% in Greece, and 5.7% in Spain. Countries highly dependent on in-bound tourism revenues have been significantly affected by the global slump in tourism demand (Figure I-1-1-23).

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Figure I-1-1-22 Shares of in-bound tourism revenues in GDP (world and Japan)

Source: World Bank. Figure I-1-1-23 Shares of in-bound tourism revenues in GDP (2010 and 2018)

Source: World Bank.

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The global number of commercial flights fell by 4.4% on a year-on-year basis in February and dropped 7.2% on a year-on-year basis in the first half of March.6 The global number of flights in the first half of April decreased by 60% compared with the end of February (Figure I-1-1-24). The International Air Transport Association (IATA) announced on March 5th that air passenger revenues may decline by 20% in 2020 compared with the previous year, but on March 24th, it indicated the possibility that air passenger revenues may drop by 44% in 2020 compared with the previous year.

Not only the number of flights but also the number of air passengers decreased. In China, while the number of flights operated by the three major airlines fell by 60% on a year-on-year basis in February, the number of air passengers dropped more steeply by 80% on a year-on-year basis.7

Figure I-1-1-24 Global number of commercial flights (international flights and domestic flights)

Source: Flightradar24.

The share of tourism in general, including not only in-bound tourism and air transportation but also other relevant activities, in GDP was 11.8% in Spain and 7.4% in France in 2017. As many countries depend on tourism, the shrinkage of demand for tourism has become a factor generating downward economic pressure (Figure I-1-1-25).

6 Commercial air traffic down 7.2% in March 2020 (https://www.flightradar24.com/blog/commercial-air-traffic-now-down-7-2-in-march/).

7 Chinese Airlines Report Passenger Slump for February (https://www.marketscreener.com/CHINA-EASTERN-AIRLINES-CO-6496810/news/Chinese-Airlines-Report-Passenger-Slump-for-February-30186617/).

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Figure I-1-1-25 Shares of tourism industry in GDP

Source: OECD.

Like tourism, the food service industry has also been significantly affected. In various countries, demand for eat-in dining at restaurants has been replaced by demand for take-out. In the United States, restaurant reservations continued to decrease by 100% year-on-year from March 21st onwards (Figure I-1-1-26). In Germany and the United Kingdom, restaurant reservations continued to record double-digit on a year-on-year basis drops from March 9th onwards and decreased by 100% on a year-on-year basis in the second half of March. Figure I-1-1-26 Number of restaurant reservations in major countries

Source: OpenTable (State of the Restaurant Industry).

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31

The share of the food services and accommodation industries in production is large in Cypress (6.5%) and Spain (5.8%) and other countries for which tourism is important (Figure I-1-1-27). Figure I-1-1-27 Share of food services and accommodation industries in production by country (2014)

Source: World Input-Output Table. (3) Growth of services that substitute for people-to-people contact

The COVID-19 pandemic has clarified changing trends in demand. Economic digitalization in recent years has created services that substitute for people-to-people contact, including services whereby orders can be placed online and physical contact can be limited only to the receipt of goods. There are also services whereby all processes can be completed online. Video streaming service, for example, is rapidly growing as an alternative to cinemas and video rentals. As these services, which overcome physical and temporal simultaneity reduce people-to-people contact, namely the risk of infection, demand due to so-called stay-at-home consumption is growing as a result of the COVID-19 pandemic. The use of video conferencing systems that substitute for offline activities also increase. One video conferencing service recorded a 20-fold growth over a three-month period.

Amid the trend of securing social distancing, those online services substitute for face-to-face activities. It should be kept in mind that those online services could bring irreversible changes to both online and offline activities. It is important for Japan to take advantage of opportunities brought by the services. This point will also be analyzed in Part II, Chapter 1, Section 6, Chapter 2, Section 5, and Chapter 3, Section2.

6.5%

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(4) Demand for durable goods Significant change is occurring with respect to not only the consumption of face-to-face services

but also demand for durable goods. In China, automobile sales fell by 79% on a year-on-year basis in February and declined by 43% in March. In Japan, new vehicle sales declined by 9.3% year-on-year in March. Likewise, automobile sales dropped sharply in Europe, the United States and Asia in March. As automobile demand evaporated worldwide in this way, automobile exports and production declined steeply in various countries. In addition, demand for semi-durable goods, such as clothing products, dropped rapidly due to shelter-in-place restrictions and voluntary restraint.

When demand slumps, supply slumps, as was the case with automobiles. In other words, there is a negative cycle of weak demand and weak supply. 4. Shocks to employment and income

At a time when both supply and demand have been struck by shocks as described above, the employment and income environments are also deteriorating rapidly. In the United States, the unemployment rage rose to 14.7% in April, while the cumulative number of new applications for unemployment benefits since the week when the first shelter-in-place order in the United States was issued (March 19th, the state of California) has surpassed 40 million. In China, the unemployment rate temporarily rose above 6%. In India, the unemployment rate came to 23.5% in April, according to a think tank estimate.

The effects on employment and income have been particularly conspicuous in the abovementioned sectors where supply and demand have been affected. There concerns that the deterioration of the employment and income environments may also affect consumption and capital investment. Uncertainty over the future, the increase in the unemployment rate, and the weakness of income are expected to increase the propensity to save by discouraging consumption and investment (Figure I-1-1-28).

Figure I-1-1-28 Forecast of saving rates of households in Europe

Source: “European Economic Forecast Spring 2020” (European Commission).

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33

5. Mechanism of economic shocks caused by the COVID-19 crisis As COVID-19 infections has spread worldwide, economic effects have extended to various

countries/regions and industries. Various social and economic activities have become stagnant. For example, human mobility and the movement of goods slowed down, supply chains were disrupted, face-to-face services, including tourism and food services shrank in terms of both demand and supply, and economic activities were suspended due to lockdowns and shelter-in-place restrictions.

One characteristic of the current crisis compared with past economic shock events can be summarized as below (Table I-1-1-29). Table I-1-1-29 Types of economic crises

Types Consequences Demand shock or

supply shock Key to recovery

Natural disaster Destruction of the infrastructure / production facilities

Supply shock Reconstruction

Financial crisis Destruction of financial system

Demand shock Stabilizing financial system

Pandemic Avoiding human interaction

Both supply and demand shocks

Containing the virus

Natural disasters that cause supply shocks will be examined as examples of past economic crisis

events. In the case of natural disasters such as earthquakes and typhoons, activities in disaster-affected areas have to be suspended because the transportation of goods is halted due to the destruction of production facilities and damage caused to social capital, such as roads and railways. Even if demand exists, short-term economic shocks arise because of supply constraints. Afterwards, the economy recovers due to post-disaster reconstruction and restoration of production facilities. After the Great East Japan Earthquake in 2011, production activity temporarily became stagnant due to the destruction of social capital and production facilities and the disruption of transportation networks. 8 Economic activities were suspended not only in disaster-affected areas but also other regions due to the transmission of the impact through supply chains. Electricity supply was constrained, and individuals’ consumption activity also declined. Individuals curbed consumption regarding expenditure items of low necessity, such as leisure expenditure, and the effects of rolling blackouts, such as the reduction of opening hours of retail shops and restaurants, were observed in regions other than disaster-affected areas. Although the effects of this earthquake were observed on the demand side as well, the impact of natural disasters is transmitted mainly through supply-side shocks.

During a financial crisis, credit risk for companies increases, making it difficult to procure funds, because liquidity dries up due to the malfunction of the financial system. Moreover, the revaluation of

8 According to Economic Research Bureau, Cabinet Office (2011), the direct damage caused to social

capital, houses, and private-sector corporate equipment was worth 16 trillion to 25 trillion yen.

34

asset prices requires the disposal of non-performing loans and leads to balance sheet adjustments, including the behavior of building up savings while holding down expenditure. As a result, the financial crisis takes the form of a demand-side shock involving declines in private-sector expenditure, namely household consumption and corporate capital investment. At the time of the global financial crisis, demand for durable goods in particular became sluggish, mainly because of the weakening of consumer sentiment, rather than a fall in disposable income.9 In this way, the crisis created a negative cycle of shrinking demand leading to the deterioration of corporate earnings and a decline in household income, which further reduced supply and demand.

The economic crisis caused by COVID-19 is different from the abovementioned natural disasters and financial and economic crises. First, physical assets such as social capital and production facilities have not been directly damaged. Nor has the financial system been directed affected. As a result of the introduction of restrictions on people-to-people contact, a supply-side shock took place in the form of slowdown in the movement of goods and production. On the other hand, a demand-side shock also occurred in the form of a slump in the consumption of services to which people-to-people contact is essential. Moreover, in order to prevent the spread of infections, the provision of non-essential services was suspended due to lockdowns. The provision of services was also suspended for the purpose of securing social distancing. Demand for various services and goods has subsided as a result of shelter-in-place restrictions and voluntary restraint. In this way, shocks occurred on both of the supply and demand sides. Consequently, the unemployment rate rose rapidly and income declined in the United States and elsewhere, leading to a rapid shrinkage of consumption and investment amid uncertainties and creating a chain of crisis events. As a result, the world is facing an unprecedented economic crisis. (1) Covid-19 crisis analyzed from the supply side

Various views have been expressed on the mechanism of shocks caused by the COVID-19 crisis. There is a theory that focuses on the point that as was the case during the oil shocks in the 1970s, the slowdown in production has led to a supply-side shock. Professor Kenneth Rogoff 10 of Harvard University recognized a demand-side shock that occurred in the form of the risk of infection dealing a blow to airlines and global tourism demand and leading to an increase in precautionary savings. On the other hand, he paid greater attention to a supply-side shock caused by constraints on work due to lockdowns and fears about infection, supply chain disruptions, and the shrinkage of global trade. He pointed out that the supply-side recession poses challenges in the form of a steep decline in production and a widespread bottleneck and that general supply shortages could eventually push up inflation. (2) From supply to demand

Iván Werning of the Massachusetts Institute of Technology and others recognized a correlation between a slowdown in supply due to an infectious disease and a demand shortfall and focused on the point that at the time of an infectious disease, a supply shortfall causes a recession by triggering a demand shortfall.11 They showed that demand is not something exogenous but that a negative supply-

9 Macroeconomics (7th Edition) (Blanchard, O., 2016). 10 Rogoff, K., “That 1970s Feeling” (Project Syndicate, March 2nd, 2020). 11 Guerrieri, V., Lorenzoni, G, Straub, L., and Werning, I., “Macroeconomic Implications of COVID-19:

Can Negative Supply Shocks Cause Demand Shortages?” (NBER Working Paper, 2020).

35

side shock triggers a rapid shrinkage of demand. Usually, supply and demand are independent of each other. However, if asymmetric shocks affect different business sectors because of the presence of financially constrained households, households in affected sectors lose the capacity to consume. As a result, demand rapidly shrinks in the entire economy, including unaffected sectors. Firm exits and job destruction amplify the negative effects. Figure I-1-1-30 describes the concept of this process.

Figure I-1-1-30 shows the effects of a shock received by Sector 1 on Sectors 1 and 2. When the shock can be dispersed, workers in Sectors 1 and 2 can continue expenditure by pooling incomes. However, the figure shows that in an incomplete market in (c), as workers in Sector 1 reduces expenditure in Sector 2, Sector 2 is also negatively affected. In other words, the supply shock caused to Sector 1 leads to a demand shortfall in Sector 2, and this negative impact is amplified by the incomplete market.

Indeed, in the course of the COVID-19 crisis, supply chain disruptions and major supply-side shocks that hit particular industries significantly reduced overall demand in the entire economy. In addition, voluntary restrictions on business operations in leisure-related industries and the suspension of eat-in dining at restaurants impeded consumption even if there was demand from consumers and companies. Therefore, supply-side shocks triggered by the suspension of activities intended to prevent infections generated significant effects. During lockdowns, although demand for services that substitute for face-to-face activities may be particularly strong, supply shocks reduce jobs and incomes and cause demand shortfalls in the entire economy if the strength of substitute services fails to fully make up for the reduction of demand for face-to-face services.

Figure I-1-1-30 Mechanism of economic shocks caused by COVID-19

Source: Guerrieri et al. (2020).

(a) Before the shocks (b) Case where a shockcan be dispersed

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to household financial constraints, etc.)

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(3) Externality Looking at the shocks caused by the COVID-19 crisis from another viewpoint—the presence of

two externalities—helps understand their mechanism.12 The first externality of COVID-19 infections is that the disease not only puts infected people themselves at risk but also creates the risk to people around them by spreading infections. The presence of the first externality means that preventing oneself from being infected alone is socially insufficient, in other words, socially not optimal. Therefore, given the presence of cases of infection being spread through asymptomatic infected people, the socially optimal infection containment measure is stricter than the optimal containment measure for individuals.

The second externality is the externality of demand. The externality of demand refers to a situation in which a decline in incomes at some households leads to a decline in incomes at other households, as shown in (c) in Figure I-1-1-30. In this case, substitute demand also arises, as exemplified by a shift of demand from face-to-face services to online services such as EC. As a result, face-to-face services are facing a rapid shrinkage of demand. Furthermore, just as demand for durable consumer goods, such as automobiles, was put off at the time of past economic crises, demand for those goods has declined steeply during the COVID-19 crisis.

In other words, regarding the mechanism of shocks caused by the COVID-19 crisis, it is necessary to pay attention to both supply shocks, such as supply chain disruptions and the suspension of activities in particular sectors due to the slowdown in human mobility and logistics, and demand shocks, including those attributable to the externality of demand, and steep declines in demand for face-to-face services and durable consumer goods. These supply- and demand shocks are characterized by the transmission of their effects from supply and demand to employment and income and the worldwide spread of those effects. In the past, natural disasters affected only particular countries and regions, while the global financial crisis mainly affected Europe and the United States. However, in the COVID-19 crisis, the whole world is facing the threat from infections and an unprecedented economic crisis has occurred, with economies all around the world in a slump. This is the COVID-19 crisis. 6. Future outlook on the COVID-19 pandemic

Therapeutic drugs and vaccines play an important role in containing infectious diseases. However, according to an estimate by the WHO, the development of a vaccine for COVID-19 will take more than 12 months. In the past, it is said that during the Spanish flu epidemic, the death toll from the disease continued to increase for more than three years (Table I-1-1-31).

It should also be kept in mind that the timing and impact of an outbreak differ from region to region. Ian Bremmer of Eurasia Group issued forecasts regarding the containment and impact of COVID-19 by country/region.

In China, the trajectory of the outbreak peaked out in three months after an explosive increase in the numbers of infection cases and deaths, forming a mountain-shaped curve.

In contrast, as lockdowns in Europe and the United States were not completely successful, the trajectory of the outbreaks in those regions resembled a series of tsunami waves, rather than a mountain-

12 Nirei, M., "KORONAKA NO KEIZAI TAISAKU: SHAKAITEKI KAKURI, GAIBUSEI,

DEJITARUKA" (RIETI, 2020).

37

shaped curve. Suddenly, one big wave came, to be followed by several more waves over an extended period of time, which means that it will take a long time before the economy can be restarted.

In many developing countries, the number of infection cases has just started to rise. As there are significant disparities in terms of policy, healthcare capacity, and geography, population, weather and other factors, the trajectories are expected to be much more varied than in developed countries. The overall trajectory in developing countries looks like that of a missile, as difficulties in implementing lockdowns in these countries may cause a continuous increase of coronavirus cases. (Figure I-1-32).

If infections persist for an extended period of time, the need for social changes will become stronger. In countries around the world, governments are recommending that people should refrain from moving around for non-essential purposes and restrictions on companies’ and individuals’ activities are becoming more and more widespread, resulting in declines in railway and air travel. On the other hand, this situation has provided an opportunity for the diffusion of telework, online education, and EC, which do not involve the movement of people. If the long-term containment scenario comes true, those changes could pave the way for long-term social changes, so Japan should seize this opportunity.

In the meantime, as the world is witnessing selfish national policies and distrust of global agreements and institutions, global efforts to resolve the COVID-19 crisis could be stagnated. Since before the onset of the COVID-19 pandemic, this trend has obstructed international cooperation. International cooperation at the global and regional levels have been undermined by divisive forces, exemplified by the United States’ suspension of financial contributions to the WHO and the EU’s export restrictions. The present situation may change the global order geopolitically. In China, since the end of February 2020, the government and companies have strengthened medical assistance for foreign countries as part of an initiative to step up external assistance.

Table I-1-1-31 Death toll during the Spanish flu epidemic (unit: million people)

Unit: Million people 1918 1919 1920 Total

Estimates in 43 countries 23.5 8.4 2.8 34.6 World 26.4 9.4 3.1 39.0

Notes: Barro et al. (2020) are estimates on the basis of the data on 43 countries. Total population of these countries accounted for 89% of the world population in 1918, 1919 and 1920. The figures in the line “World” are proportionally calculated based on the estimates for these countries.

Source: Barro et al. (2020), Baldwin and di Mauro (2020).

38

Figure I-1-1-32 Forecast of spread and impacts of COVID-19 (Eurasia Group)

Source: Eurasia Group. 7. The status of economic measures taken by countries (1) Economic measures taken by countries

As the COVID-19 pandemic has had serious economic effects, countries around the world have taken economic measures. The United States has implemented the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides for an economic package worth 2.2 trillion dollars, larger than the economic package worth 700 billion dollars that was adopted at the time of the global financial crisis in 2008. Economic measures have been implemented on an unprecedented scale also in other countries, including Germany, where an economic package worth 800 billion euros has been implemented.

Among the economic measures implemented are income compensation measures, including the provision of unemployment benefits and cash. In the United Kingdom, the government announced an income compensation scheme to pay 80% of salaries of furloughed employees, capped at 2,500 pounds (around 320,000 yen) per month, on March 20th and implemented it later. In Hong Kong and the United States, cash benefits were provided.

Measures to support companies’ funding have also been implemented in various countries. While debt guarantee schemes have been adopted in many countries, unprecedented policy measures, such as equity investment, are also under consideration (Table I-1-1-33).

39

Table I-1-1-33 List of economic policy measures by country Country/region Major content of policy measure Financial policy measure Argentina - Continued provision of utility services;

provision of financial support to low-income people- Financial support for hard-hit sectors,including subsidized loans and grants;credit guarantees for bank lending tomicro-enterprises and SMEs- Further spending on public works- Improvements in virus diagnostics;increase in health spending

- Lower reserve requirements onbank loans to households andcompanies- Limitation of banks’ holdings ofcentral bank paper to secure loans forSMEs- Temporary easing of bank loanclassification rules

Australia - Income support to households;provision of free childcare; discountutility bills; cash payments to low-income people; subsidies for healthspending- Fund-raising support to businesses;wage subsidies; payroll tax relief- Strengthening of health systems

- Reduction of the policy interest rateby 50 basis points (bps) to 0.25percent (%)- Introduction of quantitative easing- U.S. dollar swap facility with theFRB (for securing U.S. dollarliquidity to financial institutes)- Deferral of small enterprises’ loanrepayments

Brazil - Rescue measures for the elderly andlow-income people- Measures for employment maintenancetargeting SMEs- Lower taxes on essential medicalsupplies; transfers from the federalgovernment to state governments tosupport higher health spending

- Reduction of the policy interest rateby 125 bps to 3%- Measures to increase liquidity infinancial systems- U.S. dollar swap facility with theFRB (for securing U.S. dollarliquidity to financial institutes)

Canada - Wage subsidies; income support forunemployed people, etc.; temporaryincrease in child care benefits; supportfor Indigenous communities; paymentdeferral of income and corporation taxes- Support for medical research, e.g.,antibody testing, and vaccinedevelopment

- Reduction of the policy interest rateby 150 bps to 0.25%- Liquidity support by expanding thecoverage of term repos- Provision of liquidity via the U.S.dollar liquidity swap lines with U.S.FRB, etc.- Provision of funds through thepurchase of government bonds, statebonds, corporate bonds, commercial

40

paper, etc. - Funding support for companies(including large companies, SMEs,farmers, etc.)

China - Accelerated disbursement ofunemployment insurance and extensionto migrant workers; grace period for loanrepayments- Relief and waiving of tax and socialsecurity burden; grace period for loanrepayment- Measures against the epidemic;production of medical equipment

- Provision of liquidity to financialinstitutes (3.33 trillion yuan in gross,equivalent to 51 trillion yen, beforeMay 7th; 34% of GDP)- Central bank’s re-lending and re-discounting at the level of 1.8 trillionyuan, equivalent to 27 trillion yen, tosupport SMEs, etc.; 1.8% of GDP- Reduction of medium-term lendingfacility (MLF) rate, etc.- Reduction of the reserverequirement ratio for financialinstitutes whose loan ratio for SMEsis high- Expansion of policy banks’ creditline to SMEs to the level of 350billion yuan; 0.4% of GDP

EU/Euro area - Provision of pandemic crisis support tothe fund raising for finance healthrelated spending- Provision of government guarantees tothe European Investment Bank (EIB) tosupport loans to companies, with a focuson SMEs- Creation of a temporary loan-basedinstrument to protect workers and jobs

- Addition of quantitative easingunder the pandemic emergencypurchase program- Provision of loans with interestrates that can go as low as 50 bpsbelow the longer-term refinancingoperations (TLTRO-III) depositfacility rate- Introduction a new liquidity facility(PELTRO)

France - Grace period for corporate tax andsocial security payments- Direct financial support for micro-enterprises and freelancers- Spending on health supplies

-

Germany - Expansion of childcare benefits forlow-income parents; expansion ofunemployment insurance; easier access

-

41

to basic income support for the self-employed - Expanded access to short-term workgrants; expanded duration ofunemployment insurance and parentalleave benefits; expanded creditguarantees and investment forcompanies- Spending on medical equipment,hospital facilities and R&D (vaccine)

India - Provision of support, including:provision of food, cooking gas and cashto low-income households; andmitigation of the criteria for providingunemployment benefits to low-wageworkers- Measures for micro-enterprises, SMEsand non-bank financial companies- Investments in medical infrastructures,e.g., inspection facilities, personalprotective equipment, isolation beds,ICU beds and artificial respirators

- Reduction of the policy interest rateby 115 bps to 4%- Provision of liquidity to financialinstitutes

Indonesia - Cash provision and food aid for low-income people; electricity subsidies;expanded unemployment benefits,including for workers in the informalsector; tax reliefs for individuals with anincome ceiling- Reduction of corporate income taxes;reduction of taxes for the tourism sector- Support for the medical industry toenhance capacity for examination andtreatment

- Reduction of the policy interest rateby 50 bps to 4.5%- Reduction of the reserverequirement ratio- Purchase of governmental bonds

Italy - Tax deferrals and postponement ofutility bill payments; income support- Provision of liquidity to companies;SME support; grace period for taxpayments; support for laid-off workers

-

42

- Provision of additional funds tomedical systems

Japan - Enhancement of medical supplysystems; development of medicines andvaccines- Improvement of the subsidy programfor employment adjustment; fundingsupport by loans and guarantees; grantsto SMEs, small enterprises and otherentities; grants to all citizens acrossJapan- Support for businesses in the tourismand transportation, restaurant, event andentertainment and other industries- Measures for supply chains- Creation of new reserve funds

- Central bank’s cooperation toimprove the global provision of U.S.dollar liquidity- Enhancement of monetary easingbased on the impacts caused byexpansion of COVID-19, such asfinancial support for companies andproactive purchase of ETF or J-REIT- Enhancement of monetary easing,e.g., increase in purchases ofcommercial paper or corporate bondsand unlimited purchase ofgovernment bonds- Enhancement of funding by SMEs,etc.

ROK - Grants to households; postponement ofsocial security and electricity billpayments; financial support for childrearing due to closures of schools ornursery schools- Support for the tourism, film andcommunication industries- Spending on disease prevention andtreatment

- Reduction of the policy interest rateby 50 bps to 0.75%- Implementation of fund provisionoperations for financial institutes;historically first implementation of aquantitative easing program

Mexico - Enhancement of fiscal response, e.g.,front-loading payments of the old-ageand disability pensions; acceleration ofVAT refunds- Enhancement of bank and other loanprograms, e.g., SME loans- Provision of medical equipment andmaterials

- Reduction of the policy interest rateby 150 bps from March to May- Provision of liquidity to financialinstitutes- Provision of U.S. dollar funds bymaking use of swap lines with U.S.FRB

Russia - Increase in compensation for frontlinemedical staff- Tax reduction for the tourism and airtransportation industries; tax reductionfor SMEs, etc.

- Reduction of the policy interest rateby 50 bps to 5.5%- Introduction of temporaryregulatory easing for banks intendedto help corporate borrowers

43

- Zero import duties for pharmaceuticalsand medical supplies and equipment

Saudi Arabia - Temporary suspension of tax paymentsand other dues; support for SMEs andfarmers; subsidies for part of paymentsto employees- Increase in health spending

- Reduction of the policy interest ratetwice, lowering the reverse repo andrepo rates by a combined 1.25 pp to0.5% and 1 % respectively- Support for providing funding tobanks to allow them to deferpayments on existing loans andincrease lending to businesses

South Africa - Provision of subsidies to low-incomepeople; provision of livelihood aid tounemployed people, e.g., food- Establishment of funds to assist SMEsin the tourism and other sectors andsmall-scale business operators in theprimary industry; grace period forSMEs’ tax payments- Additional funds to address COVID-19

- Reduction of the policy interest rateby 250 bps to 3.75%- Announcement of temporary reliefon bank capital requirements andreduction of the liquidity coverageratio from 100% to 80%

Turkey - Increase in payments to pensioners andfamilies receiving livelihood subsidies;protection of employment by mitigatingregulations for short-term workers; taxbreak or wage guarantee for people aged65 or older or people suffering from achronic disease- Tax break for affected industries, e.g.,tourism industry; direct support for somecompanies, e.g., Turkish Airlines- Additional employment of medicalstaff

- Reduction of the policy interest rateby 200 bps to 8.25%- Reduction of the reserverequirement ratio for foreigncurrency deposits by 500 bps- Increase in the LTV limit onmortgages from 80% to 90%

U.K. -Payment of 80% of the earnings toemployees for companies suspendedbusinesses; Support for low-incomepeople, etc.- Compensation for sick pay leave; creditguarantees for loan amounts; graceperiod for VAT payments and incometax payments; provision of grants or

- Reduction of the policy interest rateto 0.75%, to 0.25% and to 0.1%- Quantitative easing- Incentives for loans to SMEs- Provision of liquidity to short-termfinancial markets as needed

44

funds to companies driving innovation - Provision of additional funds for theNHS

U.S. - Grants of cash; enhancement ofunemployment benefits- Funding, lending and debt guaranteesfor companies; subsidies for SMEs- Investment in virus testing andhealthcare

- Reduction of the policy interest rateby 150 bps to 0% to 0.25%- Unlimited purchase of governmentbonds and government agencysecurities- Reduction of interest rates of U.S.dollar swap lines with major centralbanks; broadening of U.S. dollarswap lines to more countries- Provision of funds through thepurchase of local bonds andcorporate bonds- Main Street Lending Program forSMEs

Source: Policy Tracker (IMF, accessed on May 23rd), Overview of the First Supplementary Budget for FY2020, Overview of the Second Supplementary Budget for FY2020.

(2) Internationally coordinated economic measuresAt the time of the global financial crisis, the first G20 Summit was held in November 2008 in

Washington and an agreement was reached among participating nations on jointly adopting monetary policy support measures and fiscal measures in order to quickly boost their domestic demands. In addition, at the G20 Summit held in London in April 2009, the G20 leaders indicated their stance of creating jobs by raising the global growth rate by 4 percentage points by the end of 2010 through coordinated fiscal measures worth 5 trillion dollars and of zero tolerance on protectionism.

In response to the COVID-19 pandemic, the G7 leaders held a video conference on March 16th in 2020, and issued a statement that “we are mobilizing the full range of instruments, including monetary and fiscal measures, as well as targeted actions, to support immediately and as much as necessary the workers, companies and sectors most affected.” An agreement was also reached on the points that international trade and investment should be supported and that the G7 countries should take coordinated actions to slowdown the spread of COVID-19, including implementation of appropriate border controls.

In addition, the G20 leaders held a video conference on March 26th. In the statement, the G20 leaders noted that “we commit to do whatever it takes and to use all available policy tools to minimize the economic and social damage from the pandemic, restore global growth, maintain market stability, and strengthen resilience” and emphasized that more than 5 trillion dollars were injected into the global economy.

45

Column 1 History of globalization and infectious diseases

The history of exchange of people and expansion of trade is also a history of infectious diseases. By the beginning of the Roman era, trade routes across the world linked Europe and Asia. It is said that when smallpox reached Rome through troops who returned from an expedition to the East in the 2nd century, millions of Romans died amid a smallpox epidemic known as the Antonine Plague.13 In the 6th century, a plague epidemic known as the Plague of Justinian struck Europe as the disease reached Constantinople by sea via Alexandria in Egypt (from A.D. 542 to 543).14 It is said that smallpox was brought to Europe in the 12th century through a crusade expedition.

The origin of the plague in the 14th century was an animal endemic in Central Asia. It was said to be transmitted to Europe through troops and a trade network of Genoese merchants15, and is also said to have killed around one third to two thirds of the overall population in Europe, generating a significant impact on social changes. In other words, the huge death toll among serfs due to the epidemic is said to have caused labor shortages, thereby contributing to the collapse of the feudal society.

Since the end of the Middle Age, the world has also experienced some cases of cross continental epidemics. After North and South America were “discovered,” the new continents were struck by epidemics. Although Europe had already experienced a smallpox pandemic, the disease caused a huge number of death toll in North and South America as it was unfamiliar. Smallpox is said to be one of the factors behind the collapse of the Aztec and Inca empires.16

Later, as the movement of people became more and more active because of the Industrial Revolution and the Transportation Revolution, infectious diseases spread through trade in some cases. In the 19th century, a cholera epidemic occurred in Bengal, India, and spread to other parts of the world, including various places in Asia and Europe through trade and the movement of troops. The Spanish flu in the 20th century is said to have developed into a pandemic as it crossed the Atlantic during the World War I and spread through the American continents, Europe and other regions, although there are various theories as to the origin of the epidemic.17

Past major epidemics of infectious diseases can be summarized as below (Column Table I-1).

13 Murphy, V., “Past pandemics that ravaged Europe” (BBC News, 2005). 14 Maugh II, T.H., “An Empire's Epidemic Scientists Use DNA in Search for Answers to 6th Century

Plague” (Los Angeles Times, May 6th, 2002). 15 JINRUI TO YAMAI (Takuma, K.) (Chuko Shinsho, 2020). 16 EKIBYOU TO SEKAISHI (McNeill, W.H., trans. Sasaki, A.) (Chuko Bunko, 2007). 17 Kawana, A., "SUPEIN INFURUENZA" (Information Forum for Novel Influenza, etc., Cabinet Office,

2018).

46

Column Table I-1 Infectious diseases and globalization Year Route Impact on population

Plague (Black Death)

1348-1420 To Europe via the Silk Road

The death toll is estimated to be from one-third to two-thirds of the total European population.18

Smallpox (American continents)

From the 16th century to the 17th century

Route via the Atlantic Ocean

The native population decreased from 26 million to 1 million, including the decrease caused by the conquest.19

Cholera Several times from the 19th century

From India to various areas

Unknown

Spanish flu 1918-1919

There are various theories as to the origin, such as the U.S. or China. The epidemic is considered to have crossed the Atlantic during World War I.

Death toll of over 30 million

Asian flu 1956-1957 From China to the world Death toll of 1 million or more

SARS 2002-2003 From China to Hong Kong, Taiwan and Canada

Death toll of 774

MERS After 2012 From the Middle East to the ROK

Death toll of 858

1. Past infectious diseases and economic indicators

In 1348, a plague pandemic resulted in a steep decline in the European population within a few years. Although England is distant from the Mediterranean Sea, which was the epicenter of infections, the population declined from 4.81 million people in 1348 to 2.6 million people in 1351, representing a drop of 36% in the space of just three years. Later, the population dropped to 1.9 million people in 1450. It was in 1622 that the population recovered to the level before the plague pandemic (Column Figure I-2).

18 A Pest in the Land: New World Epidemics in a Global Perspective (Suzanne Austin Alchon) (University

of New Mexico Press, 2003). 19 MONOGATARI MEKISHIKO NO REKISHI — TAIYOU NO KUNI NO EIKETSU TACHI (Ogaki, K.)

(Chuko Shinsho).

47

Column Figure I-2 England’s population (logarithmic expression)

Source: Federal Reserve Bank of St. Louis.

Amid the rapid population decline, the king of England is said to have set wages at fixed levels as a way of dealing with the labor shortage, but real wages actually rose. Between 1348 and 1350, real wages rose by as much as 91% (Column Figure I-3). Meanwhile, as a shift from labor-intensive crop cultivation to less laborious sheep grazing was promoted at that time, farmers’ status rose through the transition from serfdom to tenant farming. Column Figure I-3 England’s population and real wage around the plague pandemic

Source: Federal Reserve Bank of St. Louis

1,000

10,000

100,00011

0011

3011

6011

9012

2012

5012

8013

1013

4013

7014

0014

3014

6014

9015

2015

5015

8016

1016

4016

7017

0017

3017

6017

9018

2018

5018

8019

1019

4019

7020

00

1348: 4.81 million people

1361: 2.56 million people 1450: 1.9 million people

1,000 people

1622: 4.83 million people

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0

1,000

2,000

3,000

4,000

5,000

6,000

1332

1337

1342

1347

1352

1357

1362

Population (left axis) Per-capita real wage (right axis)

1,000 people 2015 = 100

48

England’s real GDP declined by 12% between 1348 and 1352, but per-capita real GDP increased by 24% during the same period as the rate of decline in real GDP was less severe than that of population (Column Figure I-4). Productivity improved in cultivation and a rise in the capital equipment ratio contributed to the improvement. Thereafter, per-capita real GDP trended up until around 1390, increasing by 60% between 1348 and 1392. In 1563, real GDP recovered to the level before the plague. This was 50 years earlier than the recovery of the population (Column Figure I-5). Column Figure I-4 England’s population and real GDP around the plague pandemic

Source: Federal Reserve Bank of St. Louis, University of Groningen.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

1,000

2,000

3,000

4,000

5,000

6,000

1250

1260

1270

1280

1290

1300

1310

1320

1330

1340

1350

1360

1370

1380

1390

1400

1410

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1560

1570

1580

1590

1600

Population (left axis) Real GDP (right axis)

1,000 people 1 million dollars

49

Column Figure I-5 England’s population, real GDP and per-capita GDP around the plague pandemic

Source: Federal Reserve Bank of St. Louis, University of Groningen.

In Italy, where a plague pandemic was severe in 1348, wages and prices rose (Column Figure I-6). The ruling class in Italian cities employed plague doctors in order to secure the public health. In the 16th century, the Roman pope permitted autopsy and that accelerated the development of modern medicine.

On the other hand, when a plague pandemic was severe in the 17th century, skilled workers were especially short in Italy’s textile and construction industries. However, real wages did not rise due to already intensifying international competition.20

20 Alfani, G. (2013).

0

20

40

60

80

100

120

140

160

180

1348

1353

1358

1363

1368

1373

1378

1383

1388

1393

1398

1403

1408

1413

1418

1423

1428

1433

1438

1443

1448

1453

1458

1463

1468

1473

1478

1483

1488

1493

1498

1503

1508

1513

1518

1523

1528

1533

1538

1543

1548

1553

1558

1563

1568

1573

1578

1583

1588

1593

1598

Population Per-capita real GDP Real GDP

1348 = 100

50

Column Figure I-6 Northern and central Italy’s wage and price around the plague pandemic

Source: Malanima (2012).

Between August 1918 and March 1919, a period roughly coinciding with the spread of the Spanish flu epidemic from the United States, the U.S. economy was in a recession phase. In 1918-1919, global and U.S. real GDP remained flat, and it was not until 1922 that an earnest economic recovery started (Column Figure I-7). On the other hand, global trade volume (export volume) dropped by 8.6% year-on-year in 1918 but recovered in 1919, increasing by 9.5% year-on-year. As the periods of the Spanish flu epidemic and World War I overlap, it is difficult to measure the impact of the epidemic on trade and economy. It has been confirmed that not only in the United States but also in other countries, both the number of deaths related to World War I and the number of deaths attributable to the Spanish flu had a negative correlation with real GDP, particularly real consumption. However, the negative impact of deaths related to World War I was stronger.21

21 Barro et al. (2020).

0

20

40

60

80

100

120

140

160

180

1310 1320 1330 1340 1350 1360 1370 1380 1390 1400

Wage (daily) Price

1348 = 100

51

Column Figure I-7 Global trade activities and real GDP around spread of Spanish flu (calendar year data)

Source: UN, University of Groningen.

In August 1957, which roughly corresponds to the timing of the Asian flu epidemic, the U.S. economy entered a recession phase, which lasted until April 1958 (Column Figure I-8). While labor input declined during the recession, labor productivity remained flat. Real exports fell by 12%, but real imports remained on an uptrend. Column Figure I-8 U.S. real GDP, labor productivity and real import and export around spread of Asian flu (quarterly data)

Source: U.S. Department of Commerce.

40

60

80

100

120

140

160

180

1900

1901

1902

1903

1904

1905

1906

1907

1908

1909

1910

1911

1912

1913

1914

1915

1916

1917

1918

1919

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

Global export value Global real GDP U.S. real GDP

1918 = 100

8486889092949698

100102104106108110112114116118120122

1956

1957

1958

1959

1960

U.S. real GDPU.S. labor productivityU.S. labor input

Jul. to Sep. 1957 = 100

8486889092949698

100102104106108110112114116118120122

1956

1957

1958

1959

1960

U.S. real export U.S. real import

Jul. to Sep. 1957 = 100

52

At the time of the Honk Kong flu epidemic in the United States in the autumn of 1968 and thereafter, both real imports and exports fell by more than 10% in the January-March quarter of 1969 on a quarter-to-quarter basis (Column Figure I-9). However, the U.S. economy did not enter a recession, with real GDP continuing to expand. While labor input increased in the autumn of 1968 and thereafter, labor productivity did not rise. A recession phase started in December 1969. Column Figure I-9 U.S. real GDP, labor productivity and real import and export around spread of Honk Kong flu (quarterly data)

Source: U.S. Department of Commerce. 2. Lessons from past infectious disease epidemics

Infectious disease epidemics transformed social structures. Epidemics caused significant population declines and changes in the exchange of people, resulting in changes in the ways that the economy and society work. Below, past infectious disease epidemics and social changes brought by them will be examined. (1) Policy response

Isolation, closure of public facilities, and health and medical care policy measures were implemented in Italy in the 14th century. It is said that in Italy, plague doctors received salaries from cities and provided treatment equally to both the rich and poor. However, the main policy response was isolation, as indicated by the observation that the medical practice of plague doctors, whose main task was keeping track of death tolls, was ineffective. The Republic of Ragusa started to quarantine people at high risk of plague infection on an isolated island in 1377. Following the example of Ragusa, Venice built quarantine and isolation facilities on the island of Santa Maria di Nazareth. Although Venice’s population was halved after the plague epidemic, the city maintained its presence as a trade and financial center.

At the time of the Spanish flu epidemic in 1918-1919, an outbreak originating at a U.S. military camp spread infections to neighboring regions and Europe. In the United States, the mortality rate

828486889092949698

100102104106108110112114116118120122

1967

1968

1969

1970

1971

U.S. real GDPU.S. labor productivityU.S. labor input

Oct. to Dec. 1968 = 100

828486889092949698

100102104106108110112114116118120122

1967

1968

1969

1970

1971

U.S. real import U.S. real export

Oct. to Dec. 1968 = 100

53

differed widely between regions where school closures and other containment measures were implemented and regions where no such action was taken. It is said that the Spanish flu epidemic spread to Europe because the war was carried on although there was awareness about the epidemic. The spread of Spanish flu inspections in Europe was one factor that led to the end of World War I.

At the time of the Asian flu epidemic in 1957, investigation by the U.S. Centers for Disease Control and Prevention (CDC), which monitors infectious diseases, was strengthened in July. (2) Productivity

As described earlier, it is said that because of the plague epidemic in the 14th century, the European population declined to one third or two thirds of the previous level. As a result, per-capita GDP increased in England and workers’ bargaining power grew, leading to the collapse of the feudal economy. On the other hand, a visible rise in productivity was not observed following the plague epidemics in Italy in the 14th and 17th centuries.

Following the Spanish flu epidemic in 1918-1919, rapid economic growth was observed in U.S. states that were significantly affected by the epidemic. When controlled for economic and demographic factors, the average annual growth rate of per-capita real income in the following years tended to be higher in regions where the rate of population decline was higher.22 A rise in the capital equipment ratio is presumed to be one factor behind this tendency.

It is unclear whether productivity increases at the macro-economic level as a result of an infectious disease epidemic. If productivity in the United States is used as an evaluation indicator, although labor productivity did not decline at the time of the Asian flu epidemic in 1957, labor input fell. On the other hand, at the time of the Hong Kong flu epidemic in 1968-1969, labor productivity declined but labor input expanded.

Therefore, it should be kept in mind that even if per-capita productivity or income rises, gross production and gross income may decrease. (3) Trade

While the trade networks mediated the spread of infectious disease epidemics in many cases, trade activity also became stagnant as a result of a decrease in human mobility and the movement of goods caused by the epidemics.

At the time of the Plague of Cyprian in the third century, it is said that the death toll in Rome reached 5,000 people per day at the peak, and economic activity as measured by the number of shipwrecks (a proxy indicator of trade volume) and the level of lead pollution (a proxy indicator of mining activity) declined steeply on a permanent basis.23

At the time of the plague epidemic in the 14th century, the mortality rate tended to be higher in areas closer to major trade routes in regions near ports and along navigable rivers. In Europe after the plague epidemic, merchants were forced to change their business model because opportunities to earn profits through trade activity decreased due to the population decline.

Siena, a city which prospered as an important place along Via Cassia, a road connecting Rome with

22 Brainerd, E. and M. Siegler, “The Economic Effects of the 1918 Influenza. Epidemic,” (CEPR

Discussion Paper No. 3791, 2003). 23 “Throughout history, pandemics have had profound economic effects” (The Economist, 2020).

54

the Alpine region, and which served as a European trade and financial center in the 13th to 14th centuries, declined following the plague epidemic. On the other hand, although half of Venice’s population perished, the city acquired hegemony over the Adriatic and Mediterranean Seas and monopolized oriental trade following the conclusion of the Peace of Turin in 1381.

The correlation between trade and the Spanish flu epidemic is unclear because the period of this epidemic overlapped with the late stage of World War I. At the time of the Asian and Hong flu epidemics, U.S. real imports and exports declined in the short term but expanded thereafter, although the correlation with the epidemics cannot be determined for sure.

At the time of the SARS epidemic in 2003, although trade activity slumped temporarily, it recovered within a short period of time. Thereafter, China’s share in global trade continued to grow. (4) Regional disparities, and distribution of wealth

The effects of an infectious disease epidemic differ from region to region. At the time of the plague epidemic in the 14th century, productivity increased in England, as described earlier. On the other hand, in Italy, Siena, which was a trade center, declined.

The plague epidemic in the 17th century had a greater impact in southern Europe than in northern Europe. The damage was particularly extensive in Italy. While the population was increasing rapidly in England, the Netherlands and France, a serious population crisis occurred in Italy, causing a systemic shock. Northern Europe continued to enjoy the benefits of growth and urbanization despite the pandemic. In addition to straining state finances in the Duchy of Naples and elsewhere, the pandemic contributed to delays in the development of skills in the textile industry in northern Italy. As a result, regional inequality arose between northern and southern Europe.24

At the time of the Spanish flu epidemic in 1918-1919, there were regional disparities in the income growth rate in the United States, with the per-capita income level rising at a higher rate in states where the population decline was steeper in the following years, as shown earlier.

Infectious disease epidemics also contributed to the reduction of regional inequality as well.25 In an agricultural society, a pandemic changed the balance between two production factors—land and labor force—by lowering the value of the former as represented by land prices, rents, and agricultural product prices while increasing the value of the latter by increasing real wages and reducing farming rents. Consequently, the income of landowners and employers declined while more wealth was distributed to workers than before, resulting in the reduction of inequality between those classes. At the time of the plague epidemic in the 14th century, many serfs became tenant farmers in England, and this led to the collapse of the feudal class system, as shown earlier. On the other hand, in Italy, farmers’ income did not increase while a small group of wealthy people in cities became wealthier. In Florence, as well as in Siena, more than half of the population perished because of the plague epidemic and urban functions declined. However, later, the Medici family rose and prospered in Florence, and the family’s prosperity ushered in the Renaissance in the 15th and 16th centuries. Meanwhile, in 1378, the Revolt of the Ciompi,

24 Alfani, G, “Plague in Seventeenth Century Europe and the Decline of Italy: An Epidemiological

Hypothesis” 25 The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First

Century (Scheidel, W) (Princeton University Press, 2017).

55

which is said to be the first rebellion by urban workers, occurred. The rebellion, which involved laborers and craftsmen, was triggered by discontent with the ruling class of Florence at that time. As a result of the rebellion, a workers’ group temporarily seized power.

As to the question of what economic effects an infectious disease epidemic generates, demographic changes, as well as the factors examined above, affect the economy. The leveling of inequality tended not to last long, with demographic recovery eventually leading to the restoration of the former situation.