As a continuation of Hideo Tamura’s essay, this article examines the post-coronavirus international financial environment and the possibility of renewed Chinese expansion. As after the Lehman shock, monetary easing by the FRB and the European Central Bank may create surplus funds that flow into China. Japan should not deepen cooperation with China, but break away from China and thoroughly pursue an “own economy first” policy through the abolition of the consumption tax and bold domestic-demand expansion.

April 7, 2020
In order to prevent that from happening, Japan has no choice but to thoroughly pursue an “own economy first” policy centered on bold measures to expand domestic demand, in order to escape negative growth.
The consumption tax should be abolished until the economy is revived.
The following is the continuation of the previous article.
Surplus funds flow to China
What about the international financial environment?
As stated earlier, the trigger that enabled China to rapidly gain economic power to the point where it would challenge American hegemony was the Lehman shock of 2008.
At that time, in order to avoid a situation like the Great Depression of the 1930s, the U.S. Federal Reserve Board, FRB, adopted a quantitative easing policy of zero interest rates and massive issuance of dollar funds.
Financial markets gradually regained calm, and consumers maintained consumption.
China then launched an offensive of low-priced exports, obtained huge dollar funds, easily expanded finance, and the Chinese economy returned to a double-digit high-growth path.
The FRB ended its quantitative easing policy in the autumn of 2014.
But due to Japan’s Abenomics, which had begun the previous year, huge surplus funds from Japan were drawn into the New York market.
Vast surplus money at ultra-low interest rates sought investment destinations and flowed out of the United States further into China and elsewhere.
China increased its foreign-currency debt and endured capital flight.
This is the equation of China’s expansion after Lehman as seen from finance.
In that respect, the novel coronavirus shock is trying to reproduce the post-Lehman financial model.
The FRB’s easing measures in the face of the continuing stock-price crash are one example, and the European Central Bank has also announced quantitative expansion.
Because the Bank of Japan’s unprecedented monetary easing policy has reached its limit, it limited itself to small additional quantitative measures, such as purchases of stock-index-linked exchange-traded funds, ETF.
But there is no doubt that the issuance of funds by the central banks of the United States and Europe will greatly increase surplus funds in financial markets.
Moreover, crude oil prices, which are where speculative funds would normally head after selling stocks, are falling even more sharply than stock prices.
Due to expectations of a major decline in oil demand accompanying the downturn in the real economy caused by the novel coronavirus shock, as of March 18 crude oil prices had fallen to one-third of their previous level, into the 20-dollar range per barrel.
If this continues, it will not only give momentum to China’s diplomatic offensive toward oil-producing countries in the Middle East, Latin America, and Africa.
China, the world’s largest oil importer, will be able to reduce the burden on its entire national economy.
Chinese companies that had been struggling to pay foreign-currency debts will be able to refinance with abundant surplus funds at ultra-low interest rates.
Giant Chinese companies aiming to expand their market share will be able to raise low-cost funds as much as they wish in overseas markets.
What should Japan do?
The construction of a “new era of Japan-China relations,” meaning the strengthening of cooperation with Xi’s China, was the central theme of Xi’s state visit to Japan, which has for the time being been postponed.
In a situation where the Chinese economy, which had been reaching a dead end before the spread of the virus, may regain its breath and again accelerate its expansion, Japan could be overwhelmed.
Because of the 10 percent consumption tax rate, the Japanese economy fell to an annualized negative 7.1 percent from the previous quarter in GDP for October to December of last year.
With the additional blow of the novel coronavirus shock, the negative margin is certain to widen further from the January–March quarter onward.
If the hope of a V-shaped recovery becomes visible in China, the business world will become excited over cooperation with China.
Exhausted regions such as Hokkaido will lean even more toward Chinese capital, and shopping streets across the country will strengthen their dependence on inbound consumption by Chinese travelers.
What the Abe Shinzo administration should take is no longer cooperation with China.
It should boldly steer toward breaking away from China.
Considering the possibility that the gap in economic power between Japan and China will widen after the coronavirus crisis, leaning toward dependence on China may become the easiest path.
But if things continue as they are, the scenario in which Japan is swallowed by China will take on reality.
In order to prevent that from happening, Japan has no choice but to thoroughly pursue an “own economy first” policy centered on bold measures to expand domestic demand, in order to escape negative growth.
The consumption tax should be abolished until the economy is revived.
Any shortage in revenue can be covered by government bonds.
Japan has more than one quadrillion yen in surplus funds when households and corporations are combined.
Moreover, Japan is the world’s largest creditor nation.
If only Prime Minister Abe Shinzo makes the decision to mobilize the enormous resource of abundant money for the sake of his own country, the path to the revival of the Japanese economy will become visible as soon as tomorrow.
The coronavirus crisis is a good opportunity to shift to a course that cuts off the threat of an expanding China.