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Japan’s Economy: Monthly Outlook (Apr 2021)

Third state of emergency due to mutant strains brings increasing risk of economic downturn

Keiji Kanda

Akane Yamaguchi

Wakaba Kobayashi

Summary

◆While world trade volume hit a historic high during the month of January 2021, the number of international tourists fell by nearly 90% in comparison to the previous year. In Japan’s domestic economy, consumption has been held down centering on services associated with risk of COVID-19 infection. As a result of the spread of infection concentrating in the tourism, eating & drinking, and entertainment industries, the disparity between industries in terms of economic activity has grown as large as it did after the global financial crisis of 2008. On the other hand, neither corporations in the manufacturing industry nor the non-manufacturing industry have suffered major declines in anticipated growth rate. One of the factors behind this fact may be that, unlike the global financial crisis of 2008, adjustment of capital stock and labor input was completed in a relatively short period of time.

◆The Special Stricter Measures implemented in ten prefectures are estimated to bring downward pressure on real GDP of around 0.4 tril yen per month. Osaka Prefecture moving toward requesting the national government to declare another state of emergency, and the Tokyo Metropolitan Area is seriously considering doing the same. If an explosion in infections occurs in a large number of regions due to the spread of highly infectious mutant strains of COVID-19, severe measures along the same lines as the state of emergency declared in the spring of 2020 will become unavoidable, in which case the economy in the Apr-Jun period is expected to deteriorate significantly. The spread of mutant strains continues to require close attention, and progress in vaccination has become all the more important.

◆As for the outlook for the economy in the near future, it will be important to keep in mind the effects of the shortage in semiconductors on holding down domestic automobile production. If domestic automobile production declines by 500,000 units due to the shortage in semiconductors, the direct effect on real GDP will be around -0.2 tril yen. If we include the short-term effects on related industries, this comes to around -0.5 tril yen. If the effects are long-term, negative effects could spread to a wide range of industries via the supply chain, bringing downward pressure on real GDP to around -0.9 tril yen.

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