Japan’s Economy is Feeling the Chills from CoronavirusAs the coronavirus drags on, Japan’s economy remains vulnerable. The tourist industry and automotive supply chains have already been badly affected by the outbreak.
As the coronavirus continues to preoccupy the financial markets, the ramifications of the outbreak are being felt worldwide. Those countries with extensive commercial links with China are facing the growing possibility that the virus will cause extensive damage to their economies. Pacific countries such as Australia and Japan are scrambling to deal with the outbreak, with no indications that Chinese authorities will be able to contain the virus anytime soon.
Japan’s economy has been lukewarm, and the coronavirus is putting a severe strain on some key sectors of the economy. The Japanese tourist industry relies heavily on Chinese tourists, which make up some 30 percent of all visitors to Japan. As a result of the virus, China has banned overseas group tours and Japan has barred entry to tourists from the two provinces most affected by the outbreak, Zhenjiang and Hubei.
These severe travel restrictions could not have occurred at a worse time, as the period of the Chinese Lunar New Year (between February and March) is a peak travel time. The loss of over a million Chinese tourists has taken a toll on Japan’s services sector, with restaurants, retail stores and other establishments reporting a sharp drop in business. The dramatic scenes of the Princess Diamond, a cruise ship which has been detained in Yokohama since many passengers have the virus, are likely to deter many potential tourists from visiting Japan. Analysts estimate that the economic toll on the tourist industry will reach $1.8 billion.
Coronavirus has also disrupted supply chains for major Japanese companies, particularly in the auto industry. Toyota, Honda and Mazda have all been forced to close down their Chinese plants due to the outbreak, with workers barred from reporting to work. The outbreak is expected to significantly lower China’s GDP in 2020 and this will have a chilling effect on Japan’s critical export sector.
The grim news coming out of China is also putting pressure on the Japanese yen. USD/JPY has dipped 1.3% in February and the yen is likely to weaken as the extent of the outbreak’s toll on Japan’s economy becomes clearer.