CONFRONTING UNCERTAINTY FOR THE THIRD TIME

By Tatsuhiko Yoshizaki

In my 20-plus-year career as an economist, I felt helpless twice in making an economic forecast.

I first experienced such a feeling in the aftermath of the collapse of Lehman Brothers in September 2008. It was no exaggeration to say that the Lehman shock would cause a “once-in-a-century international financial crisis.” In Japan, all economic indicators became aggravated for the following six months. With such terrible indexes, it was sort of easy to come up with an economic outlook because it was obvious that the economy would be deteriorating. After all, a malfunctioning financial system causes a harsh blow to trade, production and consumption. Around March of the next year, we could finally confirm that those indicators had bottomed out. The New York stock market also hit bottom at that time.

Then, I felt helpless again after the unprecedented scale of earthquake and tsunami hit the northern part of Japan on March 11, 2011. This disaster, which claimed more than 15,000 lives, was called a “natural disaster that could happen only once in 1000 years.” What was most frightening was the fact that nobody knew when the earthquake and tsunami-triggered nuclear incident in Fukushima would come to an end. In terms of the Japanese economy, while recovery and reconstruction demand was high in the affected Tohoku region, the disrupted supply chains impeded domestic industrial production and the “self-discipline” mindset of the Japanese public led to a plunge in personal consumption. On top of it, there was a concern about power supply in summer. Nevertheless, the manufacturing industry had already bottomed out by June of the same year. We reaffirmed that Japanese companies were unexpectedly persistent and tough when they knew what to do.

The 2008 financial crisis and the 2011 natural disaster are likely to remain clearly in the memory of the Japanese people who lived through those hard times. In both cases, we faced complete “uncertainty” about our future. Unfortunately, corporate managers are destined to confront a problem of this sort once in several years. Now, we are fighting the rapid spread of the novel coronavirus and the chaotic situations it has brought about, which will probably be remembered as the third ordeal we faced in the past 20 years.

Let me reiterate how the economy is likely to be affected by the prevailing coronavirus disease 2019 (Covid-19).

1. Short-term impacts: Demand will decline as a result of a decrease in foreign tourists, many event cancellations and postponements, and an increase in consumers who wouldn’t go out. In particular, certain types of business that wait for customers to come, such as restaurants, bars, and hotels, are being hit most hard. If this goes on, there may be some business bankruptcies. The government must quickly develop fast-acting measures to boost the economy as well as to support smaller companies in financing.

2. Medium-term impacts: Japan’s exports to China will shrink. Currently, about 20% of Japan’s trade is with China and more than 50% to the rest of Asia. Reduced production activities in China due to Covid-19 will probably affect the Japanese manufacturing industry. Supply chain disruptions attributable to the delayed delivery of Chinese-made parts and components are also expected to happen. As Hubei Province, the epicenter of the coronavirus outbreak in China, is the manufacturing hub of IT products and automobile parts, negative impacts are likely to become visible in the coming months. That said, the virus cannot destroy production facilities. Production may recover faster than expected once Covid-19 has successfully been contained and the situations in the affected areas have become stable.

3. Long-term impacts: If the Chinese economy goes into stagnation, not only the Asian economy but the global one will slow down. In addition, China could become politically unstable. Furthermore, fear of a pandemic might result in a drastic decline in the transnational movement of people. To prevent such long-term risks from becoming reality, it may be fair to say that it is significantly important to hold the 2020 Olympic Games in Tokyo as scheduled.

We are in a situation we cannot foresee what will happen in the future. Famous economist Frank Knight named it “uncertainty” and distinguished it from “risks” that are calculable based on probability. Businesses are more used to responding to risks. Some supportive measures, such as property insurance and business continuity plans (BCP), are also available. In comparison, dealing with “uncertainty” is more difficult. Managers are often tempted to take an easy path and defer deciding.

Knight’s view of uncertainty is detached but enlightening as below.

- Uncertainty cannot be eliminated in perfect competition.

- Profit is the reward managers receive for dealing with uncertainty.

In short, we must muster up the courage to cope with uncertainty. This may have been said so many times, but I dare to repeat it: businesses must not avoid but control risks.

But how? Well, we may be able to learn a small lesson from our past two experiences of confronting uncertainty.

“There is no wild boar bigger than the mountain it lives” – I repeatedly said this Japanese proverb to myself at the time of the international financial crisis in 2008 and the natural catastrophe in 2011. Some may exaggerate the impacts of a crisis and create fear but try to be calm. It is a matter of course that the content cannot be bigger than the container. The spread of Covid-19 may cause damage across the world and disrupt the global economy, but we still must try not to overreact. When we face uncertainty, there is nothing to fear but fear itself.

(*) Tatsuhiko Yoshizaki is Chief Economist at Sojitz Research Institute

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