The year 2020 was not a good one for the Japanese economy. It was battered by the Covid-19 pandemic, as were many other economies in the region. While Japan’s economy did show some signs of recovery in the third quarter, it seems to be too early for comfort. The “ Go To Travel ” Campaign, which was one of the highlights of the government’s strategy to tackle the economic slump following the coronavirus outbreak, has been suspended until January 11 on account of the recent spike in Covid-19 cases. The capital city of Tokyo reported more than 1,337 cases on December 31, setting a record high. So where does Japan stand in 2021? First, the biggest challenge will be to successfully host the Summer Olympics, scheduled for later this year. There are still many concerns, but Prime Minister Yoshihide Suga pledged in his new year address to continue with the preparations for the Tokyo Olympics and Paralympics. Second, the tourism sector needs a big boost as it has been badly hit by the pandemic. The local economies of many of the smaller towns in Japan have also suffered. In addition, Japanese companies operating outside Japan have seen their revenues plummet during the pandemic and this has hit their balance sheets. Third, fraying ties with China are likely to have an impact on the economy as well as China is Japan’s biggest trade partner. Japan-China economic ties seem to be heading for a reset. Japan has allocated 220 billion yen (US$2.1 billion) to firms shifting production back to Japan and 23.5 billion yen for Japanese firms wanting to move production to third countries. In addition, reports suggest that more than 40 per cent of Japanese firms the government has recognised as “possessing sensitive technology” have already started shifting their supply lines out of China or are considering doing the same. This in itself is a major fallout of the pandemic. Fourth, in response to the mutant strains of Covid-19, Japan has barred non-resident foreign nationals from entering the country until the end of January. How this will be seen later, especially around the time of the Summer Olympics, will need to be analysed carefully. Japan has already reported its first case of the new coronavirus variant, with a woman who arrived from South Africa testing positive for the new strain. One silver lining amid all this is the signing of the Regional Comprehensive Economic Partnership, which will help Japanese exports to China as well as to Southeast Asian countries. In addition, with the Biden administration set to take over in Washington later this month, Japan’s trade ties with the United States might see better times. The US under President Donald Trump walked out of the Trans-Pacific Partnership, following which Japan led the process of concluding the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. In 2021, Southeast Asian countries will be a key market for Japan, as was seen in the visit of Suga to Vietnam and Indonesia in his first foreign visit after taking office. Japan’s economy in 2021 will also depend to some extent on how the ties between China and the US develop under US President-elect Joe Biden. In addition, Tokyo stocks are set for an upward trajectory in 2021 as global vaccinations pick up and Japan’s monetary policies show results. Last month, the government introduced a fresh stimulus worth around 73.6 trillion yen . This is over and above the US$2.2 trillion from two previous stimulus packages, which were aimed at easing the financial burden on households and businesses. Tokyo has also upgraded its latest economic growth forecast for fiscal 2021 to a real 4 per cent, pinning its hopes on the latest coronavirus stimulus package. Japan’s Suga faces critical election year as Covid-19 rages, Olympics loom Last year, Japan pledged to go carbon neutral by 2050 , a big challenge for the world’s third-largest economy. The recent stimulus includes about 40 trillion yen to bring down carbon emissions and boost the adoption of digital technologies. This presents Japanese firms working in these areas with tremendous opportunities. Be that as it may, 2021 presents Japan with an unique opportunity to recast its economy and move into new and emerging areas instead of depending on traditional sectors such as tourism. While this year promises to be challenging for its economy, whether Japan manages to turn the tide will depend on whether it has learned the right lessons from 2020. Dr Rupakjyoti Borah is a senior research fellow at the Japan Forum for Strategic Studies, Tokyo. The views expressed here are personal