COVID-19 in China and Japan

The Bank of Japan (BOJ) dealt with the economic fallout from the pandemic by declaring that it was ready to buy an unlimited amount of government bonds.  The announcement did not impress the markets given that the BOJ was already purchasing ¥80 trillion bonds per year to address a persistent deflation in the Japanese economy.  Furthermore, the bank preserved its commitment to control the yield curve: to maintain the yield on the 10-year government bond at zero.[1]  This commitment was obviously limiting its room for maneuver during the pandemic.   The BOJ, furthermore, increased the limits on the purchases of long-term corporate bonds and short-term commercial paper to a total of ¥20 trillion per year.[2]  It doubled its annual cap on the purchases of ETFs to ¥12 trillion. [3]  The bank introduced a special fund to facilitate corporate financing.[4]  Through this fund it provided loans at 0% to financial institutions by accepting as collateral private debt, including household debt.[5]   

The bank claimed that these measures were necessary because Japanese companies faced difficulties in obtaining financing.  One must bear in mind, however, that, in comparison with other economies, borrowing rates were quite low in Japan all through the pandemic.   Toyota, a car manufacturer, was able to borrow in April 2020 at 0.19%, a yield that seemed high only when compared with the ultra-low yield of 0.001% it paid before the pandemic.[6]   In terms of fiscal measures, Japan’s government handed out ¥100 000 ($930) to each and every citizen to cushion the blow inflicted by the pandemic.  Given that Japan’s population was around 126 million in 2020, the program was expected to cost ¥12 trillion.[7] 

In May 26, 2020, the Peoples Bank of China (PBOC) set the daily mid-point fix rate of the yuan at 7.13 yuans/dollar.  This was the lowest rate of the fix since February 2008.  China’s CB lets the yuan fluctuate, within a tight band around this fix, on the onshore Chinese market.[8] In the offshore (Hong Kong) market the yuan is much less regulated.[9]   The weaker fixing of the yuan, on the onshore market, had to with China’s reluctance to defend its currency that was under pressure in the global markets. China’s weakening currency reflected the lackluster performance of the Chinese economy as a result of COVID-19, and the relentless trade war with the United States that had doomed China’s economic outlook since 2019.  China did not intervene in the FX market to defend its weakening currency.  It knew that a depreciating currency could boost its exports and could lift its export-dependent economy.[10] 

In addition, regulators and banks worked together to ensure that companies and individuals would not have to suffer due to their inability to make loan payments.  On January 26, 2020, China’s Banking and Insurance Regulatory Commission urged banks to be flexible in lending and to support businesses hit hard by the pandemic including retail, hotels, restaurants and tourism.  Banks were instructed not to withdraw loans, to reduce the IRs on loans, and to be more generous with the provision of unsecured credit.[11]   The majority of loans granted by Chinese banks go to state firms.  Lending to state-owned companies comes with an  implicit state guarantee, making such lending much less risky.[12]   The PBOC further cut the amount of cash banks had to keep in order to lend unleashing the creation of more credit.[13]  

The government announced that it would take advantage of the opportunity offered by the pandemic to spur  the ‘technologically-driven’ structural upgrade of the economy in various sectors including 5G and data centers.[14]  Local governments issued 1 trillion yuans ($141 billion) in new debt to dedicate to infrastructure spending.[15]   In terms of national fiscal stimulus, China’s response was much more constrained than that of rest of G-20 states. China’s fiscal support, as of April 2020, through loans and tax relief, amounted 2.5% of its GDP.   In comparison, the United States’ fiscal support amounted to 18% of its GDP[16]  and Japan’s fiscal stimulus was 21% of its GDP.[17]  

Due to the economic lockdown (January 23-April 18), China’s economy plunged by 6.8% in the first quarter of 2020.[18]   This decline did not affect China’s bond market that was viewed as a safe haven during the pandemic.  As other emerging economies’ bond markets froze, China’s bond market was hardly affected.  In fact, the Chinese bond market enjoyed 60 billion yuans ($8.5 billion) in net foreign inflows.  This placed China’s bond market in a somewhat unique position: a safe but also lucrative market.   Money rushed into China’s market because it was seen as safe much like the markets of developed states.   At the same time, Chinese yields were much more attractive when compared to developed states’ yields. For instance, while the US  5-year Treasury yielded 0.35%, its Chinese equivalent yielded 2.24%.[19]


[1] Elli Louka, The Global Economic Order: The International Law and Politics of the Financial and Monetary System 147 (2020).

[2] BOJ, Enhancement of Monetary Easing, Press Release, Apr. 27, 2020, https://www.boj.or.jp/en/announcements/release_2020/k200427a.pdf.

[3] Id.

[4] BOJ, Enhancement of Monetary Easing in Light of the Impact of the Outbreak of the Novel Coronavirus (COVID-19), Press Release, Mar. 16, 2020, https://www.boj.or.jp/en/announcements/release_2020/k200316b.pdf.

[5] See supra note 2.

[6] The Central Bank that Ate Japan, WSJ, Apr. 20, 2020, https://www.wsj.com/articles/the-central-bank-that-ate-japan-11588026341.

[7] Abe administration talks up ¥100,000 payout, but who is eligible?, Japan Times, Apr. 18, 2020, https://www.japantimes.co.jp/news/2020/04/18/national/shinzo-abe-100000-payout-who-is-eligible/#.XqsKKKhKg2w.

[8] Louka, supra note 1, at 120-22.

[9] Id.

[10] Joanne Chiu, As its Economy Slows, China Embraces a Weaker Currency, WSJ, May 26, 2020, https://www.wsj.com/articles/as-its-economy-slows-china-embraces-a-weaker-currency-11590491068.

[11] Chong Koh Ping, A $100 Billion Breather: China Banks Give Borrowers a Coronavirus Debt Holiday, WSJ, Apr. 19, 2020, https://www.wsj.com/articles/a-100-billion-breather-china-banks-give-borrowers-a-coronavirus-debt-holiday-11587315600.

[12] Why has China’s Stimulus Been So Stingy?: Fighting with shadows, Economist, Apr. 16, 2020, https://www.economist.com/finance-and-economics/2020/04/16/why-has-chinas-stimulus-been-so-stingy.

[13]  Nathaniel Taplin, The Case of the Missing Chinese Stimulus,  WSJ,  Apr. 6, 2020, https://www.wsj.com/articles/the-case-of-the-missing-chinese-stimulus-11586172909.

[14] Jacky Wong, China’s New Infrastructure Push Isn’t All New, WSJ, Apr. 23, 2020, https://www.wsj.com/articles/chinas-new-infrastructure-push-isnt-all-new-11587645996.

[15] Id.

[16] Phill Swagel, Congressional Budget Office’s Current Projections of Output, Employment, and Interest Rates and a Preliminary Look at Federal Deficits for 2020 and 2021, Apr. 24, 2020, https://www.cbo.gov/publication/56335.

[17] Value of COVID-19 fiscal stimulus packages in G20 countries as of April 2020, as a share of GDP, https://www.statista.com/statistics/1107572/covid-19-value-g20-stimulus-packages-share-gdp/.

[18] Jonathan Cheng, China Records First Ever Contraction in Quarterly GDP on Coronavirus, WSJ, Apr. 17, 2020, https://www.wsj.com/articles/china-set-to-report-plunge-in-first-quarter-gdp-11587086697.

[19]The Dollar’s Dominance Masks China’s Rise in Finance:  Bucking the Trend, Economist, Apr. 16, 2020, https://www.economist.com/finance-and-economics/2020/04/16/the-dollars-dominance-masks-chinas-rise-in-finance.