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Japan: a difficult year ahead in 2020

2/28/2020

Japan experienced a sharp decline of its GDP in the Q4 2019, due to essentially the VAT hike in October 2019. Private consumption, which is structurally a weak component of the Japanese economy, was hardly hit. The Coronavirus crisis could exacerbate these difficulties, through mainly two channels: trade (directly or via value chains) or tourism. Economic relations between China and Japan are tight.

Louis BOISSET

TRANSCRIPT // Japan: a difficult year ahead in 2020 : February 2020

Japan experienced a sharp contraction of its GDP in the late 2019. Two shocks in the 4th quarter put a significant dent in domestic demand. First, after delaying its implementation, the VAT hike from 8% to 10% finally came into effect in October 2019, hitting consumer spending. In addition, non-residential private investment fell, due notably to the effects of the violent typhoon that hit the country in the fourth quarter.

Japanese private consumption makes up a structurally small share of its GDP compared to the OECD average or the USA. The historical dynamics of consumption is fairly uneven and it has virtually stagnated since 2014. Previous VAT hikes hit consumer spending, which showed no significant recovery in the following quarter. These previous tax increases were subject to criticism, and the most recent rise could again raise criticism given the already weakened state of the Japanese economy.

The start of the year 2020 is thus already difficult for Japan given the negative momentum from 2019. This could be exacerbated by the Coronavirus crisis which would hardly hit the Chinese economy, due to spillovers effect, has as well a significant impact on the Japanese one, through both main channels: trade and tourism.

From a trade side

  • China receives 20% of Japanese good exports. Overall, Japan will suffer from weaker external demand for motor vehicles and capital goods. In these sectors, although some Japanese companies have diversified their supply chains, others have suspended parts of their operations.
  • In addition, Japan’s role in value chains could amplify the negative effect on the country. Today, Chinese final demand embodied a not insignificant share of Japanese added value. The inverse is also true. Japanese consumption incorporates Chinese added value. In some cases, domestic production cannot substitute for these products in the short term.

Tourism:

In 2019, tourism helped to partially offset the impact of the negative shock from trade tensions on the Japanese manufacturing sector. Since China now accounts for somewhere between 25% and 33% of annual tourist arrivals to Japan, the fall in visitor numbers as a result of the Coronavirus represent a new weak point for the economy in 2020.

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