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Japanese Economy Update

The “New Normal” in the COVID-19 era: temporary or permanent?

  Senior Research Fellow


“New Normal” required to overcome COVID-19

Prime Minister Mr. Abe announced in May 14 that the state of emergency, which was extended nationwide in April 16, will be lifted for 39 prefectures, leaving only 8 that includes Tokyo and Osaka. The decision is based on the data showing a decline in newly infected and other progress in the fight against COVID-19.

However, whether the decision is eventually going to lead to the final victory in the fight or to a second wave of infection depends on whether we can maintain the effective reproduction number (Rn) of less than one. This, in turn, depends on whether we will be successful in achieving one or more of the following critical factors; development of vaccines, development of therapeutic drugs, and/or introduction of a new way of life that prevents infection, or “New Normal” as it is frequently called nowadays.

The Japanese version of the “New Normal” has been advocated by the government as a “new lifestyle”, one that should be adopted by the people and business if they are to stay healthy. The guideline published in May 4 includes suggestions such as keeping social distancing, wearing masks, and washing hands thoroughly, as well as shifting to remote work and to rotation staffing. A new lifestyle is already widespread and has changed drastically how we live, work, and learn.

What would be the “permanent New Normal”

It is interesting, at this point of time, to see how much of these “New Normal” will remain in the Japanese society and economy even after we have overcome COVID-19. Some will stay permanently but others will fade out after a temporary acceptance. The difference between permanent establishment and temporary acceptance should depend on whether it will emerge as a new equilibrium, an outcome of optimal decisions made by the agents concerned given the economic incentives they face, or not.

A shift towards more remote work-based workstyle

For instance, a shift to remote work could be an irreversible trend. Since the outbreak of COVID-19, many firms have introduced remote work: according to a survey made by Keidanren (Japanese Business Federation) in mid-April shows that 97.8 percent of its member firms has already introduced remote work, and 66 percent of their workers are working from home.

There has been discussion of introducing remote work well before COVD-19, but it never made a progress. The current crisis has speeded-up this process in an incredible manner. And people have found out that, while there is a number of difficulties to overcome, including such as trying to concentrate in work while small children is playing around them, there is a lot of merits for workers in saving the time consumed for long-commuting and the avoiding stress in taking over-congested public transportation. If combined with other streamlining measures, such as shortening meetings and introducing more efficient decision-making process, such as abolishing the need to get seals (“inkan”) from your boss, it should raise the productivity of the Japanese firms. It means that there is an incentive for both the firms and the workers in engaging in remote work, and it could also be an optimal outcome.

A shift towards more online classes

Another new development that may stay is online classes given at universities and schools. Because of the need to keep social distancing, schools have been closed. And, in order to provide opportunities for their students and pupils to learn, educational institutions have started to give online classes (including on-demand as well as real-time classes) while keeping their campuses closed. Similar to remote work, there had been, in the past, a lot of discussions in universities to expand online classes but they made little progress except for providing some open courses to the public. However, again, COVID-19 has accelerated the process: according to a survey made by the MEXT (the Ministry in charge of education) in mid-May, 96.6 percent of institutions engaged in tertiary education has either already introduced or is planning to introduce online education.

Online classes benefit both the universities and the students. By removing the need to physically commuting to the campus to give lectures, universities could attract lecturers from more geographically diversified places. Global recruitment of lecturers would raise the quality of the education provided. Students can also benefit from being able to attend lectures from home. It makes it possible for students to study at foreign university without actually moving residency. In addition, experience shows that Japanese students seems to find it much easier to ask question during lectures when they can use chat-function during online classes: otherwise they tend to keep silent, trying not to disturb ongoing lectures. These benefits could make it optimal for universities and schools to maintain online classes even after COVID-19.

Changes in academic year and recruitment system

With regards education system, a rapidly emerging topic is whether to shift the academic year that currently starts from April to one that starts from September. It started from the need to assure students and pupils enough time to cover the required education load. However, it is also consistent with a shift to a global standard. If the academic year is shifted, it makes it much easier for domestic students to study abroad, and for foreign students to study in Japan.

The shift of the academic year will affect the current recruitment style of Japanese firms. As is well known, one of the important elements of the Japanese employment system is lifetime employment with compulsory retirement age. Because of the that, firms recruit new graduates that finish education in March and receives them as freshmen in April. One of the concerns that are raised against the shift to academic years is the possibility of students facing difficulty in finding a job immediately after graduation.

However, it is important to note that the recruitment system itself is now under review. The firms are gradually shifting towards a year-round recruitment which should be beneficial in attracting the globally talented. If that is the case, the change in the academic year should not make a big problem. Rather, it may accelerate the move towards year-round recruitment further. The changes that would take place in both the education and employment system should contribute in enhancing human capital accumulation in Japan and would, in turn, raise the growth potential of the economy.

A “Big Push” towards a new equilibrium

The permanent structural changes that may result from COVID-19 is something that was seen as desirable in the past. However, these changes were difficult to introduce because the traditional system was also an equilibrium: may not be the only possible equilibrium but certainly an outcome of optimal choices made given the incentives they faced at the time. Usually, a shift from one equilibrium to another is very difficult unless there is a big shock pushing the economy towards that direction. Such “big push” took place towards the end of the Edo-era when Japan faced foreign powers after more than 200 years of country-closure, and when the second world-war took place. There is a possibility that the significance of COVID-19 may match these two previous shocks. If the Japanese economy is to come out from this tragedy with any positive note, it should be the accomplishment of these long-awaited structural changes.