Japan’s Economy: Monthly Outlook (March 2020)

◆The COVID-19 outbreak has now reached global pandemic proportions. We have no choice but to expect that, on the extreme end in terms of economic impact, demand could simply vanish in a manner of months in all countries and regions of the world. Meanwhile, there are fears that the downturn in demand could also cause employment and corporate willingness to carry out capital expenditure to deteriorate, thereby generating the hysteresis effect and pushing the long-term potential growth rate down further. Both the global economy and Japan’s economy are headed toward a major downward refraction in their growth paths.

◆While keeping in mind the long-term outlook, we also look back on recent developments where there are three points deserving special mention. These are (1) the geographic spread of the COVID-19 infection, (2) the shift of the focal point of the crisis from supply to demand, and (3) concerns of a coming credit crunch. The first two points are not a big problem as they will most likely have a cumulative effect on the Japanese economy as a whole, but on an industry specific basis, there could be a shake-out in the short-term. What was most feared in the past was the decline in factory operating rates of local Japanese subsidiaries in China and the effect this could have on the materials and electrical equipment related industries. Since the latter part of February, the epicenter of the crisis shifted to Japan’s domestic industries associated with the consumption of services. Now it has shifted to final demand in Europe and the US, affecting especially the capital goods related industries.

◆As for the third factor mentioned above, the low price of crude oil due to the failure of oil producing countries to agree on a production cut, has led to a rise on corporate bond yields. This in turn is generating a reverse leverage situation in leverages accumulated since the global financial crisis of 2008. In response, central banks are continuing to struggle with the effects. The fact that the Fed is providing put options to commercial paper is a development worthy of note here. Concerns about financial uncertainty remain strong. There is a need to pay close attention to the growing turbulence in the low-rated corporate bond market, and the possibility that financial instability originating in Europe could occur as a result of insufficient response on the part of the ECB.