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Outlook for Japan’s Economy in 2020

The key to regaining accelerated growth: recovery scenario for the global manufacturing industry

Shunsuke Kobayashi

Yutaro Suzuki

Summary

◆With overseas demand shifting into decline due to the slowdown in the global economy centering on the manufacturing industry, Japan’s economic growth was supported by domestic demand. However, at least a portion of domestic demand, which was especially favorable during the first half of FY2019, included last minute demand prior to the consumption tax hike. Now, with the reactionary decline in response to last minute demand, and the negative income effect associated with the consumption tax hike coupled with the slowdown of improvements in employment and income, it is highly probable that contribution to growth from domestic demand centering on consumption will begin to shrink. However, the effects of the tax hike will be temporary. Moreover, new economic measures are expected to shore up domestic demand to a certain extent. Hence we expect that the contribution of domestic demand to the overall economy will be able to avoid falling into decline.

◆At the same time, however, in order for the Japanese economy to shift into the positive direction and regain accelerated growth, it will first be necessary for the effects of the consumption tax hike to dissipate, or for the contribution rate of overseas demand to Japan’s economic growth to move clearly onto the positive side. There are some bright spots beginning to appear for overseas demand. These include a recovery in demand for semiconductors centering on Asia, global inventory adjustment coming to completion, and the signing of a “Phase 1” agreement in the US-China trade talks. However, considering all the factors that remain, including the risk that US-China conflict could reignite in areas where agreement is more difficult, such as military and ideological questions, and the possibility that a lagging slowdown could occur in demand for capital goods and durables centering on the advanced countries due to low global factory operating rates, there is a good possibility that more time will be required before overseas demand moves toward recovery. We therefore expect Japan’s economic growth rate to gradually slow in the future, with +0.3% y/y seen in CY2020, and +0.5% expected in comparison with the previous fiscal year in FY2020.

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