Perspectives

A very gradual normalisation process

st  
Eco Perspectives // 1 quarter 2021  
economic-research.bnpparibas.com  
7
JAPAN  
A VERY GRADUAL NORMALISATION PROCESS  
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.  
BEGINNING TO RETURN TO NORMAL  
GROWTH AND INFLATION (%)  
Faced with the first wave of the pandemic, Japan declared a state of  
GDP Growth  
Forecast  
Inflation  
emergency from early April to the end of May 2020, albeit without  
a legally enforced lockdown. Even so, economic activity plummeted,  
real GDP contracting by an unprecedented 8.2% in Q2 2020 (q/q, non-  
annualised). In Q3, GDP rebounded more strongly than expected (up  
Forecast  
3
2
1
.8  
1.5  
0
.7  
0.5  
1
0
.0  
5
% q/q). Consumption regained vigour as consumer confidence picked  
0
up, while exports were supported by Japan’s main trading partners  
-1  
-2  
-3  
-4  
-
0.4  
-0.3  
(
led by China) return to growth. In contrast, corporate investment still  
seems to be weak and will probably remain depressed given the low  
production capacity utilisation rates and persistently high uncertainty.  
-
-
-
5
6
7
The most recent cyclical indicators are sending mixed signals. The  
Bank of Japan’s Tankan index improved very slightly in Q3 2020 but is  
still holding at a low level, while the composite purchasing managers  
index (PMI) stagnated in November below the 50 threshold, separating  
expansion from contraction. After the strong Q3 rebound, GDP growth  
is expected to slow significantly in Q4, up only 0.6% q/q. The rise in new  
Covid-19 cases in both Japan and its main trading partners will strain  
both foreign and domestic demand, especially household consumption.  
Activity is still expected to be fairly lacklustre in H1 2021 due to un-  
certainty over the health situation and the labour market. By H2 2021,  
hopes for the distribution of a vaccine should boost global demand  
and reduce uncertainty. The yen is expected to appreciate mildly over  
the course of 2021 (JPY/USD of 98 in Q4 2021 vs. 101 in Q1 2021) and  
should not have a significant impact on Japanese exports. According  
to our scenario, Japanese GDP will not return to Q4 2019 levels until  
our forecast horizon (year-end 2022). Under this environment, inflation  
will remain low or even negative, and fiscal support will remain strong.  
-
5.4  
2019  
2020  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
EXPORTS (VOLUME, YEAR-ON-YEAR)  
4
3
2
0
0
0
Total exports  
to China  
…to EU  
…to United Sates  
10  
0
-
-
-
10  
20  
30  
FISCAL POLICY: THE FRONT LINE OF DEFENCE  
In the midst of a slow and incomplete recovery, disinflationary  
pressures will persist. Headline inflation entered negative territory in  
October 2020 (-0.4% y/y, after 0% in September) and should remain  
there throughout 2021. Wages will not be very attractive as companies  
initially seek to restore margins.  
-40  
-50  
-
60  
2018  
2019  
2020  
CHART 2  
SOURCE: MINISTRY OF FINANCE  
Fiscal policy will continue to be the main vector of public support in  
2
021. A bigger fiscal package is currently being discussed, including  
subsidies for service sector companies hard hit by social distancing  
measures and lockdown restrictions, as well as financing for the digital  
transition. Under this environment, the Bank of Japan’s main action  
will be to maintain its 10-year rate at about 0%. BoJ might also extend  
its corporate financing support, but we do not expect to see any major  
changes in monetary policy in 2021, despite low inflation.  
Completed on 7 December 2020  
The bank  
for a changing  
world  
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