Lockdowns will soon be imposed across much of Japan, triggering a decline of more than 10% in economic activity this quarter. The government’s latest fiscal package is intended to help firms stay afloat and to maintain employment while lockdowns are in place. But even with this support, the coronavirus outbreak will leave a legacy of persistent demand weakness that will put downward pressure on wages and prices for the next couple of years. Monetary policy is close to its limits, but the Bank of Japan may yet respond with a small further reduction in its policy rate.
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