Policy responses to Covid-19 and RAF

Policy responses to Covid-19 and RAF

Policy responses to Covid-19 and RAF

Promontory Financial Japan

Tsuyoshi Oyama

In this article, I would like to show my view on our country’s response to Covid-19 from the viewpoints of RAF.

A new wave of Covid-19, which has been unstoppable in Europe and the United States, has finally reached Japan. In our Covid-19 Report (See https://covid19.promontoryfinancial.jp/ for details.), the increase in the number of reproduction to well over one, which we have alarmed periodically since September, has spread from Hokkaido and Osaka to Tokyo in the beginning of November. In the report published in the middle of November, we warned that as long as the current movement of people continues, “Italianization” (overshoot of number of cases and deaths) is inevitable in Japan.

With this timing, it is a little noteworthy that the government had made a “hearing” in response to Google’s recently published estimate of the number of cases and deaths in a coming 28 days by prefecture. In Hokkaido in particular, the shocking observation that in the next 28 days, nearly 120 people will die could have bothered the government, which is pursuing a policy of stimulating travel and dining-out. Google’s latest estimates were made with the help of Harvard University and analyzed using AI, so they might carry that much weight to the concerns of the government.

However, my understanding is that these results are quite common sense figures that can be obtained by simply inputting recent figures into a standard epidemic model without using AI. Based on the model used in the aforementioned our Covid-19 analysis report, the number of deaths caused by Covid-19 over the next month in Hokkaido, for example, is estimated to be over 100 (As of November 14). So I just wonder if it is really these numbers that surprised the government, or rather the fact that those numbers are exposed to the public by a “body of authority” like Google + AI + Harvard University.

Generally speaking, the government’s tolerance for the risks associated with Covid-19 (Risk Appetite for Covid-19 risk) can be broadly divided into 4 patterns. Specifically, (1) China (zero tolerance), (2) Japan and South Korea (low tolerance), (3) Europe and North America (relatively high tolerance), and (4) Brazil and other countries (Allowed). The debate over which of these is right could be nonsense since at least in democratic countries, these policies reflect the greatest common denominator expectations of the general public, or the largest stakeholder to the government.

What is interesting is that even in the same democratic country, the tolerance level is quite different between Japan and the West. In fact, it is surprising that in the United States and Europe, even if new cases or deaths per population occur on a daily basis about 50 — 100 times more than in Japan, normal social functions (without causing social disruption not limited to medical disruption) are maintained. These differences in tolerance for Covid-19 risk are also reflected in the degree of impact on economic activity. Looking at the GDP growth rates of major countries in Europe, the United States, and Japan, all three regions’ GDP dropped sharply in the second quarter of this year, but recovered a considerable portion in the third quarter. However, the speed of recovery in Japan was the slowest among three. In the end, Japan, which was the most conservative in taking on Covid-19 risk, took the greatest risk in macroeconomic terms.

The government was wary of Google’s figures for the number of future deaths (which is also very similar to our model estimates), probably because they indicated that if the current policy were to be continued, the degree of Covid-19 damage Japan would face would far exceed the “upper limit” of the conventional risk appetite of the Japanese government. However, one of the reasons why the government’s go-to-travel/eat policies cannot be reversed easily is that its appetite for macroeconomic risks, which has been taken with the very passive manner in order to control Covid-19 risks, is gradually approaching its upper limit, too.

In that sense, the Japanese government may have to make a big choice sooner or later. A big question is whether the government should sacrifice the economy by maintaining the conventional conservative attitude toward Covid-19 risk, or should contain economic damage by raising the tolerance for Covid-19 risk to the level of Europe and the United States. As the Covid-19 disaster continues and both the economy and finances become impoverished, it seems that the day is coming when the government will have to tell the people an inconvenient truth, i.e. the rebalancing of its risk appetite.