The macroeconomics of COVID-19 exit strategy: the case of Japan

In this paper, I use a simple SIR Macro model to examine Japan’s soft lockdown policies in 2021 under the COVID-19 crisis. As real-time research, this paper consists of two parts written during two different research periods. The first part, which was originally reported in February 2021, studies the Japan’s second soft lockdown policy (state of emergency declaration) from January to March 2021. After the model is calibrated using 2020 data, the results show that a long enough lockdown can avoid future lockdowns, improving both the infection and the economy. In addition, I propose the ICU targeting policy, which keeps the number of severe patients at a constant level, mimicking the monetary policy’s inflation targeting. The model’s prediction is evaluated from an ex-post perspective in the second part, written in July 2021. I find that the model broadly captures the realized consequences of the second soft lockdown and the subsequent paths. Furthermore, the simulation is projected to the end of the pandemic under a revised scenario, incorporating the proliferation of COVID-19 variants. Finally, I discuss the effectiveness of the inverse lockdown (economic stimulus) policy in the fall of 2021 under the dynamic infection externality.