Perspectives

Confidence needs to be restored to accelerate the recovery

nd  
Eco Perspectives // 2 Quarter 2021  
economic-research.bnpparibas.com  
7
JAPAN  
CONFIDENCE NEEDS TO BE RESTORED TO ACCELERATE THE RECOVERY  
As in other countries the world round, Japan reported a record-breaking recession in 2020 and the lack of consumer  
confidence, stifling domestic demand, could slow the dynamics of its economic recovery. Japan’s vaccination  
campaign has been relatively slow, notably compared to the United States, but the country was not hit as hard by  
the pandemic as other countries. Faced with expectations of sluggish demand, Japanese companies will continue  
to be reticent about making investment decisions. This outlook could undermine Japan’s already weakened growth  
potential. Tighter financing conditions would be especially harmful, and the Bank of Japan will remain vigilant in the  
current environment of rising interest rates.  
STARTING TO RETURN TO NORMAL  
GROWTH AND INFLATION (%)  
Compared to other countries, Japan was not hit as hard by the Covid-19  
pandemic, and the decline in economic growth was relatively more  
moderate in 2020, notably compared to the European countries.  
Japanese GDP contracted 4.8% last year, compared to 5.3% for Germany  
and 8.2% for France.  
GDP Growth  
Forecast  
.0  
Inflation  
Forecast  
4
3
2
1
0
1
2
3
4
5
6
3
2.3  
The signal from the most recent economic data is mixed. As in the  
Eurozone, there is a divergence in the catching-up movement between  
the manufacturing sector and market services. After bottoming out in  
April 2020, the purchasing managers index (PMI) for the manufacturing  
sector has risen almost continuously, and is now in expansion territory  
0
.7  
0.5  
0.0  
0.0  
-
-
-
-
-
-
-0.3  
(
51.4 in February 2021). This favourable momentum must still be  
confirmed by hard data, since industrial output declined again in  
January on a year-on-year basis. The services PMI, in contrast, has  
been stagnant on the whole since June 2020, and has not risen above  
the 50 threshold since the pandemic began. The lack of confidence of  
Japanese consumers has hurt the services sector, which is dependent  
on private consumption. Granted, Japan’s vaccination campaign has  
been relatively slow compared to countries like the United States,  
but the country was not hit as hard by the pandemic. Even so, the  
consumer confidence index is still below pre-crisis levels. This  
situation is straining corporate investment in Japan, which declined  
again in Q1 2021. Japanese companies are expecting economic growth  
-
4.8  
2019  
2020  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
SOVEREIGN 10-YEAR INTEREST RATES (%)  
1
to remain feeble in the years ahead , which is hampering their  
investment decisions. These dynamics are harmful for the country’s  
growth potential, which is already weak.  
2.0  
Germany  
United Kingdom  
Japan  
United States  
1
1
0
0
.5  
.0  
.5  
.0  
RISING INTEREST RATES: THE BANK OF JAPAN IS VIGILANT  
Early 2021 has been marked by an upturn in long-term rates, a trend  
that fits within the dynamics of rising inflation expectations in the  
United States. Japan, like other economies, is facing upward pressure  
on the cost of financing, and this trend is likely to continue. The Bank of  
Japan has largely managed to contain these pressures by maintaining  
a yield curve control policy. The central bank is taking action to avoid  
any tightening of financing conditions. Japan’s 10-year sovereign yields  
have not risen nearly as rapidly as their UK counterparts. Japanese  
monetary policy will continue to be especially accommodating  
in a persistently deteriorated economic environment at a time of  
unfavourable pricing trends. Core inflation fell again on a year-on-year  
basis in February 2021. Consequently, monetary policy will continue to  
support fiscal policy, since reducing the public debt is currently not a  
priority (the debt ratio may have reached 266% of GDP in 2020).  
-0.5  
1.0  
-
CHART 2  
SOURCE: REFINITIV  
Completed on 31 March 2021  
1
According to an annual survey by the Ministry of Finance, the GDP growth rate expected by Japanese companies has trended downwards since the 1980s and is now at only about 1%.  
The bank  
for a changing  
world  
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