The COVID-19 Crisis: Policy Recommendations for Japan

Abstract

Japan economy is dominated by Small and Medium enterprises. It covers around 99.7% of all enterprises operated in Japan and employs around 70% of the working population and account for a large portion of economic output. But, like other SMEs in the world, they also the ones that have hardly hit by COVID-19 quarantine and business closures. Japanese government made emergency loans and credit guarantee to assist SMEs. However, moral hazard problems of banks and SMEs have to be remedied. In the capital market, many investors take risk-averse behavior to anticipate further measures. Infrastructure investments are most needed in Asian region yet finance for infrastructure investments would face with shortage of funds due to low rate of return and risks. Private financing by long term investors such as pension funds and insurance better be directed to support infrastructure investment. Spillover tax revenues could be partly directed to increase the rate of return. The Japanese economy faces with aging population which would widen fiscal deficits unless postponement of retirement age and productivity-based wage rate rather than seniority wage rate facing with this crisis. Therefore, Japan government need to look into innovative policies options for sustainable economic growth.