Japan’s Economy: Monthly Outlook (Aug 2021)

◆In light of the announcement of the Apr-Jun 2021 GDP 1st preliminary results, we have revised our economic outlook. We now see Japan’s real GDP at +3.4% in FY2021, with FY2022 at +3.3%. According to our main economic scenario, around 80% of Japanese citizens will have completed their second dose of the vaccination against COVID-19 by the end of October. The pace of economic recovery is expected to pick up starting in the fall of 2021 when economic activity returns to normal.

◆Downside risks to Japan’s economy include the spread of the COVID-19 infection and the shortage of semiconductors, which places supply constraints on automobile production and purchasing of certain types of consumer electronic products, as well as the prolonged stagnation of exports. The negative impact of the high price of natural resources on corporate earnings and household income is also a concern. If terms of trade in August and beyond remain flat as they were in July, it is estimated that income outflow overseas from Japan in FY2021 could reach 22 tril yen. There are fears that a decline in income could place restraints on investment in capex and personal consumption.

◆With uncertainty running high regarding the future of Japan’s economy, trends will depend on the rate of vaccination and the status of mutant strains. If mutant strains of COVID-19 spread further, the fact that vaccines have half as much effectiveness against mutant strains means that the declaration of a fifth state of emergency at the beginning of CY2022 could become unavoidable. If that is the case, economic losses could reach around 3.7 tril yen, exceeding the amount recorded during the first state of emergency. Economic normalization, which has progressed up to this point centering on the advanced nations, could fall significantly behind, and there are fears that economic activity could remain stagnant until a vaccine which is effective against mutant strains of the disease are developed and dissemination progresses.