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The country’s quirks make similar deflation for the US and Europe a stretc

Japan’s coronavirus-induced decline into recession that was revealed this week is a sorry outcome given Prime Minister Shinzo Abe’s protracted efforts to arrest years of economic stagnation. The annualised economic shrinkage of 3.4 per cent in the first quarter follows a 7.3 per cent contraction in the last quarter of 2019.

It is also sobering for western investors who fear Covid-19 may herald a Japanese-style future for the US and European economies. That would imply continual dependence on fiscal and monetary pump priming to fight endemic deflation, at the cost of ever bigger government debt: Japanification, in a word.

There can be no denying that there are common symptoms in the other advanced economies that make the notion of Japanification resonate. Yet common causes are another matter.

When recovery comes, thanks to unprecedented fiscal and monetary measures, lockdown’s self-imposed decimation of the supply side of the economy points to potential bottlenecks and upward pressure on prices in some sectors. Yet pricing in bond markets points to zero inflation over the longer run. Any upturn will also likely be subdued because of risk aversion. In the corporate sector, heavily indebted companies will give priority to paying down debt and rebuilding balance sheets. Households will also be cautious, after the trauma of devastating unemployment.

To assume Japanese-style deflation for the US and Europe is nonetheless a stretch because of some very quirky aspects of Japan’s performance since the bursting of the bubble economy in 1990.

Economists tended to assume that as the Japanese population aged, private savings would fall because the elderly consume most or all of their retirement incomes. This has not happened. While households have indeed run their ­savings down, the decline has been ­offset by a huge increase in corporate savings.

To mitigate the deflationary impact of excess savings and inadequate consumption, the government has run deficits that have caused net debt of 154 per cent of gross domestic product, the highest in the developed world.

The corporate sector was able to rack up this saving, despite a marked loss of global export market share and a decline in innovatory spark in recent years, because of the labour supply shock arising from the entrance of China and other emerging markets into the global economy. For the past 30 years this put a lid on wages in advanced economies, including Japan. Equally important, as Charles Dumas of TS Lombard points out: “The combination of a plunging world market share and very high profit margins has only been possible with wage rates falling relative to output, incomes and gross business profits.”

Things will be very different in North America and Europe. While it is true that savings exceed investment in the German and other northern European economies, the benign environment for corporate profitability is almost certainly over. US President Donald Trump’s trade wars have brought deglobalisation, which increases costs. Covid-19 is also forcing business to strike a different balance between efficiency and resilience, with the same result.

In the post-pandemic world, society may reassess the value of poorly paid jobs that put workers’ lives and health at risk. A political backlash against insecure employment in the gig economy seems probable. Much of the higher taxation needed to shrink burgeoning public debt will be paid by the corporate sector. At the same time, business is under growing pressure to adopt more inclusive policies towards employees and society at large.

Furthermore, in a forthcoming book economists Charles Goodhart and Manoj Pradhan argue that the balance of bargaining power is swinging back to workers, away from employers, not least because workforces in the west are set to shrink or are shrinking already. The stage is thus set for a very un-Japanese distributional struggle in which workers exercise power through the labour market while the elderly fight back via the ballot box.

Meanwhile, the disinflationary bias in monetary policy over the past 30 years of independent central banking is at an end. In responding to the coronavirus-induced recession, central banks are co-operating with governments. Quantitative easing — central bank asset buying — did not lead to inflation after the financial crisis. That is because the injections of liquidity mostly stayed in the banking system in the form of excess reserves, held by banks at the central bank.

Today’s policy measures, in contrast, are putting cash directly into industry and commerce, which affects broader money and thus inflation.

It will be very hard for governments to retreat from fiscal largesse when un­employment remains high and many over-indebted companies will still be at risk. And given the fragility of debt-burdened economies, central banks will be reluctant to raise interest rates to combat inflation for fear of killing recovery and jeopardising their independence.

Despite the insouciance of the bond markets, everything points not to Japanification but to a resumption of inflation. The only question is one of timing.

The new entertainment service from WarnerMedia will have to overcome a global pandemic, entrenched rivals and the absence of a highly anticipated ‘Friends’ reunion

The launch of HBO’s streaming service was just three weeks away when HBO Max boss Kevin Reilly laid out the situation for his fellow executives on a video call.

The good news, he told them, was the service had more than 100 shows in various states of production. The not-so-good news? Many were in limbo due to the coronavirus pandemic.

Some of the biggest shows—including a much-anticipated “Friends” cast reunion—won’t be ready when WarnerMedia’s HBO Max debuts Wednesday, the latest entertainment giant to join the streaming wars. That puts additional pressure on HBO Max executives to make sure the platform—which at $15 a month is also much pricier than rivals like Netflix Inc.’s $12.99 standard fee and Disney+’s $6.99—won’t be starved for new shows in coming months.

The stakes are high for WarnerMedia Entertainment and its parent AT&T Inc. HBO Max is WarnerMedia’s hedge against consumers cutting the cord to traditional cable and satellite services. It wants to establish its own direct relationship with its audience much the way Netflix and Disney+ have. AT&T, in turn, will use its base of phone, broadband and pay-TV customers to drive subscriptions to the service as well.

The pandemic has been a boon to the streaming industry: Netflix recently reported its largest subscriber surge in years, while Walt Disney Co. ’s Disney+ topped 50 million users just months after it launched.

But it has been a different story for the services that had yet to launch when the virus hit. Sign-ups for Quibi, which produces short-form videos tailored for people on the go, have been underwhelming. Comcast Corp. ’s streaming service Peacock, which became available to Comcast customers last month but won’t be seen by the broader public until July, is uncertain when some of its highly-anticipated new shows like a “Battlestar Galactica” reboot will be ready.

In mid-March, when the virus started forcing most Americans to stay home, top HBO Max executives briefly considered delaying the streaming service’s launch, according to Robert Greenblatt, chairman of HBO Max parent WarnerMedia Entertainment.

“I think we wrestled with it over a couple of days,” Mr. Greenblatt said in an interview. “It quickly dawned on us that people were watching more television and we thought...‘let’s get this thing to the customers.’”

For a while, it wasn’t clear the tech platform on which the service would run could be completed by people working remotely. That was further complicated when a power outage in Seattle affected a building where HBO Max was being tested.

“We had to go out and buy new equipment and let people put it in their apartments and homes to carry on with the testing and examine the results,” incoming AT&T Chief Executive John Stankey said.

The pandemic is the most formidable challenge to stand in the way of HBO Max, but certainly isn’t the first. The service’s inception was delayed by a nearly two yearlong antitrust dispute between then-acquirer AT&T and the Justice Department, which meant AT&T only gained control of HBO parent Time Warner at a time when most rivals had already laid out plans for their own streaming services.

“It would have been great to have been in the market a year ago,” Mr. Greenblatt said.

Another difficult endeavor was turning HBO, which decades ago championed the edgy and high-production TV content that is now widespread on streaming services including Netflix, Amazon.com Inc.’s Prime Video and Disney-controlled Hulu, into the anchor of a broader, more prolific platform.

There have been concerns among HBO purists that its brand—which current AT&T CEO Randall Stephenson, whom Mr. Stankey will succeed at the end of next month, once compared with the high-end jewelry store Tiffany—would be hurt by HBO Max.

The first marketing effort from the new streaming service showcased its various offerings with pictures from “The Sopranos,” “Friends” and “The Big Bang Theory” and a tagline: “From Bada to Bing to Bang.” It caused some eyerolls among HBO employees.

Mr. Reilly brushed off those concerns. “We’re going to have Tiffany aisles within a larger store,” he said.

HBO Max head of original programming Sarah Aubrey said HBO Max’s originals will complement HBO, not duplicate it. The shows ready for launch will include a talk show from the “Sesame Street” character Elmo, new Looney Tunes cartoons and “Love Life,” a romantic comedy starring Anna Kendrick, part of what Ms. Aubrey called an effort to focus on children, Generation Z and millennial viewers. Programs for children has been in high demand during the coronavirus lockdowns across the country.

HBO’s subscriber numbers have been relatively flat for the past several years at around 33 million, and WarnerMedia is betting that the broader mix of programming available on HBO Max will appeal to people who steered clear of HBO because of its often dark and risqué content.

HBO has been churning out more new shows and movies since the AT&T takeover as well in the wake of increased competition from Netflix, Amazon and others. It is launching a new version of “Perry Mason” starring Mathew Rhys and the drama “Lovecraft Country” produced by Jordan Peele and J.J. Abrams.

The streaming service will have 10,000 hours of content including 1,300 feature films at launch, part of a big library of movies and TV shows including “South Park” and the “Harry Potter” franchise. HBO Max is expected to release 11 more original series between mid-June and August including new episodes of the cult favorite “Search Party,” a series about a group of friends who become entangled in a hunt for a missing friend, and the DC Universe show “Doom Patrol, a drama about superheroes who received their powers under tragic circumstances. In August, HBO Max will premiere “An American Pickle,” a comedy starring Seth Rogen about an immigrant who falls into a vat of pickles and has a Rip Van Winkle experience.

HBO Max also scored a coup, cutting a deal with sister movie studio Warner Bros. and director Zack Snyder to release his cut of the film “Justice League,” which hard-core fans of the DC Comics property have been clamoring for since 2017.

At a price of $15 a month, the service is more expensive than all its streaming rivals, which could make it a harder sell at a time when the worsening economy may prompt consumers to cut back on nonessential expenses.

WarnerMedia had no wiggle room on HBO Max’s pricing because it isn’t allowed to make the service cheaper than HBO or current streaming service HBO Now under existing agreements with cable and satellite operators.

Current subscribers to HBO will have access to HBO Max at no extra charge either through HBO Now or if their pay-TV distributor has cut a deal to offer the new service. If not, subscribers will have to drop HBO from their current service and subscribe directly to the platform.

WarnerMedia is still working to make sure HBO Max is available on all pay-TV and streaming platforms by Wednesday—holdouts still include Comcast Corp., Dish Network Corp., Amazon Fire TV and Roku.

Asked how many homes the service would be available in at launch, Mr. Stankey said, “check with me at about 11:58 p.m. on the 26th.”

Mr. Stankey also said the company isn’t planning to disclose HBO Max’s subscriber numbers a day after the launch, something Disney did back in November when it touted 10 million Disney+ sign-ups on its first day.

“We don’t have to worry about one day’s worth of activity to say, ‘are we successful or not?’” he said.

The world’s top luxury brands make much of their European heritage, but their future is looking more Chinese than ever. However this contradiction plays out in the long run, it poses one immediate problem: too many boutiques on their home continent.

Amid all the uncertainty about how the Covid crisis will change business, it is probably safe to say that designer brands will be more reliant than ever on sales to Chinese shoppers—and on Chinese turf.

Before the new coronavirus hit, labels like Birkin handbag maker Hermès and trench coat specialist Burberry were already making more than a third of their world-wide sales to consumers from China, who overtook Americans as the top luxury shoppers by nationality back in 2011. The crisis may amplify the trend as Chinese consumers recover their appetite for top-end handbags and watches faster than Americans and Europeans. Burberry, which reported its full-year numbers Friday, said shoppers have queued outside some reopened boutiques in mainland China.

The International Monetary Fund expects the current health crisis to hit the U.S. and European economies harder than China. And Chinese luxury consumers, who are almost two decades younger and less indebted than their Western counterparts, can afford to spend a larger chunk of their disposable income on designer baubles. Already there are signs of what stock analysts are calling “revenge spending” as lockdowns lift in Chinese cities and shoppers head to the mall. Consulting firm Bain estimates that by 2025, up to 49% of global luxury sales will be made to Chinese shoppers, an increase from the consulting firm’s earlier forecast of 46%.

The expectation of a fairly rapid, China-led recovery partly explains why some luxury stocks have been resilient this year, despite forecasts of a 35% fall in industry sales this year compared with last—three times the decline recorded in 2009. Shares in Hermès are up 3% since the start of the year, while sector bellwether LVMH Moët Hennessy Louis Vuitton is down 14%. The Stoxx Europe 600 index has fallen 17%.

However, capturing spending by Chinese consumers is trickier now that worries about infection have hobbled long-haul travel. Last year, China’s shoppers made 70% of their luxury purchases abroad or in Hong Kong, often on overseas trips to Europe where it is much cheaper to buy designer goods. A Louis Vuitton Speedy 25 handbag currently costs 46% more in Shanghai than in a European boutique, according to a price comparison by analysts at brokerage Jefferies.

As air-passenger numbers aren’t expected to recover to pre-Covid levels until 2023, brands now need the Chinese to spend at home instead.

Bain estimates that sales made within mainland China itself will almost triple from 2019 levels to €88 billion by the middle of the decade. Some labels such as Gucci and Burberry already have plenty of boutiques in the country. Others like Christian Dior, owned by LVMH, have fewer. They are likely to open new outlets or invest heavily in online platforms and logistics to capture more spending through e-commerce.

Ramping up sales capacity in China has an awkward corollary in Europe. Brands will face tough decisions about whether they can afford to keep as many locations open closer to home—Prada currently has 230 stores in the region, for example. Last year, half of all sales made in European luxury shops were to overseas visitors.

Business has dried up overnight, with little immediate prospect of returning. Revenue generated in Europe is expected to be 14% lower by the middle of the decade than last year, Bain estimates. Labels understand the branding power of a store on the Rue Saint-Honoré in Paris or London’s Bond Street, but less prominent locations may be quietly closed up or downsized.

Brands probably have less to worry about in the U.S., where stores are far less dependent on sales to tourists. That said, the outlook is far from clear: The key to continued demand for luxury goods among well-heeled Americans is how well the stock market holds up.

The luxury sector isn’t as exposed to China as some other industries—mining giant BHP Group generates up to 70% of revenue there, according to RBC Capital Markets analyst Tyler Broda—but it has raced ahead of other consumer categories. Even Apple made just 15% of its net sales there in the three months through December, before the Covid-19 outbreak closed its Chinese stores.

This dependence on one nationality carries risks, even if luxury companies have no choice. Aside from the possibility of a China-specific crisis, there is the question of brand image. Among Chinese consumers, there was a certain cachet in traveling to Europe to buy designer handbags or clothing that often weren’t available in local boutiques. And the marketing myth of European haute couture may be trickier to maintain when the locals show so little interest in the goods—though this has been the case for some years now.

As luxury brands turn further to the east, they will have to work hard to disguise an ever more lopsided look.

TAIPEI (Reuters) - Taiwan urged China on Friday to “sincerely start a dialogue” with people in Hong Kong after China proposed new national security legislation for the former British colony.

Taiwan will be more determined to defend democracy and freedom, and China’s “one country, two systems” proposal to rule the democratic island goes against those principles, Alex Huang, the spokesman of the presidential office, said in a statement.

China uses the system, which is meant to guarantee a high degree of autonomy, to run Hong Kong, which returned to Chinese rule in 1997.

China regards Taiwan as one of its provinces and has offered the system to it as well, although all the major political parties have rejected it.

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