Japan’s Economy: Monthly Outlook (February 2020)

◆The impact of the Novel Coronavirus (COVID-19) on economic activity depends on how quickly the situation returns to normal – will it keep within the range of recoverable damage, or reach a scale such that damage is irreversible? Assuming a risk-averse economic entity, increasing uncertainty could invite diminishing equilibrium of economic activity. At this time it is impossible to foresee the ultimate scale of impact on the economy. The only thing we can do is to continue monitoring the situation as it develops, and keep an eye on probability distribution, telling us whether or not economic activity has fallen into conditions of diminishing equilibrium. In this report, we examine the impact that COVID-19 could have on the Japanese economy, while being careful to avoid over-confident assumptions.

◆Due to the halts in production in China, which were already occurring in the Jan-Mar period, local Japanese subsidiaries may see their sales reduced by around 685.2 bil yen, while operating profit could decline by 206.5 bil yen and net profit by 162.6 bil yen. There are major concerns that Japan’s exports may decline by 288 bil yen, with domestic production declining by 59 bil yen. Meanwhile, if the number of Chinese tourists visiting Japan drops by one million persons, travel services receivables could be forced down about 200 bil yen. What’s more, declines in Japanese consumption and third-country demand would be added to this. In addition to direct effects such as these, we must also remain vigilant regarding the multiplier effect, which could spread through secondary routes such as employment and capital expenditure.

◆With recovery in both domestic and overseas demand already at a worrisome pace, the addition of the impact of the COVID-19 outbreak is resulting in unavoidable downward revisions in corporate business results for the time being. Yet despite this, global stock markets, centering on the US, are maintaining their resilience. Behind this lies none other than the power of monetary easing. In this context, the economy has a fair amount of underlying strength, plus, we should remain aware that the trend in monetary policy in the US considered the impact of COVID-19 to be relatively minor.

◆FRB Chairman Powell indicated that the direction of the FRB’s asset purchase program would be toward reduction starting in July this year. This of course does not mean immediate confusion in the US financial markets. However, we must remain vigilant, since in a country which shows no signs of recovery even as the time approaches when the FRB plans to reduce liquidity supply, downward pressure could be brought on economic activity through the financial markets.