Canceled Olympics Would Jolt Japan’s Financial System: BNP Paribas

(Bloomberg) -- If the coronavirus forces the scrapping of the Tokyo Olympics it would jolt Japan's financial system and the shock could be reminiscent of the European debt crisis, according to BNP Paribas SA economist Ryutaro Kono.

In addition to the loss of inbound tourism spending, a canceled Olympics would trigger a jump in non-performing loans in the tourism and real estate sectors, Kono said in a report Friday. The government would likely have to respond with spending support for the economy and with bailouts for struggling regional banks, he said.

The Bank of Japan might also eventually step in to provide loans to the banking sector at negative rates and buy more exchange-traded funds, Kono said.

In the worst-case scenario should the global economy also fall into a recession, Japan could see a negative spiral similar to the one in Europe in the 2010s, where government loans to suffering banks caused financial difficulties for the state that in turn impacted the banking sector in a loop, he said.

“Until now there were more than a few people worrying about a likely dip in the economy after the Olympics,” he said. But if the Olympics are canceled, “the Japanese economy may be forced to deal with problems in the financial system itself, as the expected growth rate is driven down.”

Prime Minister Shinzo Abe this week announced school closures throughout the country and called for big events to be halted, delayed or scaled back. If current situations continue, Japan's economy may shrink by over 2% on an annualized basis in the January to March quarter, Kono said.

Still, Kono played down the likelihood of his worst-case scenario, given that the BOJ has been buying up government debt and keeping interest rates at ultra-low levels.

To contact the reporter on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Karthikeyan Sundaram

©2020 Bloomberg L.P.