As in other economies across the globe, Japan will report a record-breaking recession in 2020. The path to a full economic recovery will be probably longer because growth would remain very subdued. According to our forecast, Japanese GDP will not return to pre-crisis levels before the end of 2022. Domestic demand remains sluggish due to corporate investment, although household consumption seems to be picking up again. For the moment, Japanese exports are benefiting from China’s robust economic rebound. Fiscal policy, the front line of defence, will continue to receive support from the Bank of Japan’s monetary policy. There are also talks of a new fiscal package.
The Japanese economy is in a particularly difficult position. Japanese GDP contracted for the third consecutive quarter in Q2 2020: falls of 1.8% in Q4 2019 (quarter-on-quarter) and 0.6% in Q1 2020 were followed by a record-breaking contraction of 7.9% in Q2 2020...
It will take a long time for Japan to erase the economic shock of the Covid-19 pandemic. Even though lockdown measures were less restrictive than in other countries, Japanese GDP is poised for a record contraction in 2020. The expected rebound could be mild. Household confidence and business activity indicators have stagnated, sending mixed signals about the strength of domestic demand. The Covid crisis is bound to accentuate the weaknesses of the Japanese economy: sluggish growth, low inflation and record-high public debt. Prime Minister Shinzo Abe’s resignation is unlikely to lead to any major policy changes as Japan continues to pursue expansionist economic policies.
Like the vast majority of economies, Japan will go into recession in 2020. The expected rebound in 2021 is likely to be relatively mild. The latest economic indicators reveal an economic situation that is still highly deteriorated compared to normal times. Once again, massive fiscal stimulus has been set in motion. The Bank of Japan’s monetary policy, notably through the Yield Curve Control, should largely reduce the risk of higher financing costs due to the expected rise in public debt.
Like most economies, Japan was hard hit by the Covid-19 crisis in the first half of 2020. The rebound of the Japanese economy will depend notably on an upturn in private consumption, which has been in a slump since year-end 2019. Retail sales plunged sharply again in May, for the third consecutive month. Sales were down 12.3% year-on-year (y/y), after declining 13.9% in April and 4.7% in March [...]
The shock of the Covid-19 pandemic comes hard on the heels of a difficult second half of 2019 for the Japanese economy. Like many others, the country is exposed to the economic fallout from this crisis. Its significant economic dependence on China, for imports, exports and tourist flows, further weakens the Japanese economy. The latest economic indicators suggest that the shock will be important. Japan will thus go into recession this year. Lacking adequate room for manoeuvre on the monetary front, fiscal policy will need to provide support. To this end, the Abe government would be preparing a major stimulus package.
The Japanese economy ended 2019 on a negative note. As has happened before, consumer spending was hit by the VAT hike introduced in October. Typhoon Hagibis also put a significant dent in domestic demand, particularly in the area of private sector business investment. The start of 2020 looks difficult given the Coronavirus outbreak and the close economic relations between Japan and China.
In December 2019, the Japanese authorities decided to launch a major fiscal stimulus for the years ahead. A large part of the programme will target disaster prevention after the country was hit by a series of natural disasters recently. The stimulus will also limit the negative impact of last October’s VAT hike, which probably strained private consumption in the year-end period. Buoyed in part by early purchases ahead of the VAT hike, household spending continued at a dynamic pace in Q2 and Q3 2019. The export sector, in contrast, was hard hit by the sluggish global environment. In 2020, public investment is expected to partially offset weak private consumption.
Japan is the world’s fourth largest economy. The country has one of the largest financial systems in the world. The country experienced remarkable growth after WW2, which ended with the bursting of the asset price bubble in the early 1990s. It was followed by a period known as the ‘lost decade’. Real economic growth dropped and inflation started to inch down, turning negative in the latter half of the 1990s. Fiscal stimulus and loose monetary policy were not successful in reviving the economy, but resulted in huge government debt.
The election of Shinzo Abe in 2012 has led to a reinforcement of loose monetary and fiscal policy to reinvigorate the economy. The so-called Abenomics strategy was built around three arrows: fiscal stimulus, a very loose monetary stance and structural reforms.
Progress on structural reforms needs to be further intensified to raise the economy’s potential growth and tackle significant demographic challenges. Progress has been made, for example, in increasing women’s participation in the workforce. However, one of Japan’s most serious structural problems is the rapidly ageing population. According to official projections, the Japanese population could shrink by over 25% in the next 40 years. This would have a significantly negative impact: in addition to negative effects on productivity and potential growth, for example a rise in the dependency ratio will reduce the tax base and limit the reduction of the primary deficit.
