By Keita Nakamura, KYODO NEWS - Mar 22, 2020 - 15:02 | All, Coronavirus, Japan, World

Hit hard by the coronavirus outbreak, Japan's economy faces its biggest challenge in more than a decade, with analysts warning of a technical recession and even the worse if this summer's Tokyo Olympics is cancelled.

The epidemic has also hurt the credibility of Abenomics, a policy mix adopted by Prime Minister Shinzo Abe after he took office in 2012, which the government says has helped, together with a robust stock market, expand the economy.

But as the Bank of Japan is widely seen as running short of policy tools to further boost the economy after years of massive monetary easing, Abe is now forced to turn to state coffers for budgetary stimulus as large as the one offered in the 2008-2009 global financial crisis, even though it could deteriorate the country's fiscal health.

"It's possible Japan will slip into its worst recession since the 2008 crisis," said Toshihiro Nagahama, chief economist at the Dai-ichi Life Research Institute.

Nagahama is one of those calling on the government to reduce consumption tax from 10 percent back to 8 percent on all products -- not just food and daily items -- as a provisional measure until the economy returns to normal.

Ahead of the tax hike, Abe and other ruling party lawmakers repeatedly said the increase would be nixed if the economy faced a situation as serious as the financial turmoil.

The Japanese economy shrank an annualized real 7.1 percent in the October-December period as the higher tax dented consumer spending. And it could further contract in the current quarter through this month, entering a technical recession, defined as at least two consecutive quarters of declining gross domestic product.

First-quarter GDP is expected to contract 2.9 percent, according to the average estimate of 34 economists surveyed by the Japan Center for Economic Research, as the viral outbreak has disrupted production and exports and cast a shadow over the global economic outlook.

The government's policy of restricting public events to prevent infections "is causing great damage" to the economy, Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities Inc., said.

The worldwide spread of the virus has also threatened the Tokyo Olympics, slated to begin on July 24. Abe still hopes the games will help sustain a tourism boom in Japan and support growth.

Amid growing speculation that the event could be postponed for a year or two, or even be cancelled, analysts have started simulating tremendous losses to the economy.

"If it's cancelled, the damage would be unmeasurable. This could also deteriorate public sentiment significantly," said Nagahama.

The focus is on how large the next fiscal stimulus by the government will be.

Following the financial crisis, the government unleashed an emergency policy package worth 57 trillion yen ($513 billion) in April 2009 to shield the economy from negative fallouts under then Prime Minister Taro Aso, who is now finance minister.

The upcoming package, which Abe aims to put together early next month, could match the 2009 stimulus in size, some analysts said.

To buoy household spending, the emergency steps are likely to include cash handouts, extension of a government reward points program for cashless payments, as well as lowering the just-hiked consumption tax rate, sources close to the matter said.

Austerity is also in focus, however.

Abe has already introduced policy packages worth more than 1 trillion yen to fight the coronavirus, in addition to the 26 trillion yen stimulus launched in December to address shocks from the Oct. 1 tax hike.

The latest measures will likely be financed under a supplementary budget for fiscal 2020 with the government issuing new debt, adding to pressure on Japan's fiscal health, the worst among major developed countries.

But Maruyama said, "Now is the time to temporarily shelve the viewpoint of fiscal discipline, and to give priority to putting the economy back on a growth path."