Perspectives

Economic policy continuity

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
7
JAPAN  
ECONOMIC POLICY CONTINUITY  
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.  
The Japanese economy experienced a historic contraction of GDP in  
GROWTH AND INFLATION (%)  
Q2 2020 (-7.9% q/q), the third consecutive quarterly decline (-0.6% in  
Q1 2020 and -1.8% in Q4 2019). The lag created by the Covid-19 crisis  
will not have been closed by the end of our forecast horizon.  
GDP Growth  
Forecast  
Inflation  
Forecast  
3
2
1
0
1
2
3
4
5
6
1
.2  
ANOTHER TOUGH YEAR ON THE ECONOMIC FRONT  
1.0  
0
.7  
0.5  
0
.3  
0
.0  
Even though lockdown measures were less restrictive than in other  
regions of the world, especially compared to Europe, Japan was not  
spared the economic shock of the Covid-19 pandemic. Real GDP  
temporarily plummeted to mid-2011 levels, prior to the launch of  
Abenomics. Prime Minister Shinzo Abe’s recent resignation is not  
expected to significantly change the economic policy trajectory (see  
below). Hard hit by private consumption and corporate investment,  
Q2 2020 GDP contracted by 7.9% q/q. Moreover, the expected catching-  
up effect in Q3 2020 and beyond risks being relatively mild.  
-
-
-
-
-
-
-0.3  
-5.4  
2020  
2018  
2019  
2021  
2018  
2019  
2020  
2021  
Indeed, the latest cyclical indicators suggest that the economic recovery  
is losing momentum. According to the Bank of Japan’s Tankan indicator,  
business activity deteriorated sharply in the manufacturing and non-  
manufacturing sectors in Q2 2020 (Q3 statistics were not available  
yet when this article was written). More recently, after rebounding  
strongly, the composite Purchasing Managers Index (PMI) levelled off  
in August at 45.2, far below the 50 threshold separating expansion from  
contraction. In the manufacturing sector, which accounts for more than  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
REAL GDP (BILLION YEN, ANNUALIZED)  
550000  
5
30000  
10000  
2
0% of GDP, activity continues to improve (47.2 in August after 45.2  
5
in July). Business in the services sector has stalled, in contrast, and  
continues to be undermined by lacklustre household spending. Retail  
sales are still trending downwards (-1.9 % year-on-year in August,  
after -2.9% in July). The latest figures on household confidence did not  
alleviate concerns about private consumption: after picking up briefly,  
confidence seems to have stagnated below its level at the beginning  
of the year. Moreover, Japanese exports, which tend to be dominated  
by high value-added products, could be further strained by sluggish  
external demand, notably in the machinery and transport equipment  
segment. Lastly, the Haishen typhoon that swept the country in early  
September could place another squeeze on demand, notably in terms  
of corporate investment.  
490000  
70000  
450000  
4
4
30000  
10000  
4
390000  
3
70000  
90 92 94 96 98 00 00 02 06 08 10 12 14 16 18 20  
CHART 2  
SOURCE: CABINET OFFICE  
POLICIES CONTINUITY AFTER SHINZO ABE’S RESIGNATION  
Yoshihide Suga was named Prime Minister to replace Shinzo Abe, but  
this is unlikely to lead to any major economic policy changes. According The new Prime Minister underscored how fiscal support was more  
to preliminary information at our disposal, Mr. Suga is expected to important than ever to turnaround the Japanese economy during these  
provide continuity with “Abenomics” and the three “arrows” of Mr. times of crisis. Getting a grip on public debt -which will exceed 250% of  
1
Abe’s programme: a very accommodating monetary policy, abundant GDP in 2020 - does not seem to be a priority.  
public spending, and structural reforms.  
1
Fiscal Monitor: Chapter 1 – Policies to support people during the Covid-19 pandemic, IMF, April 2020  
The bank  
for a changing  
world  
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