In this report we examine the impact of the Novel Coronavirus epidemic on Japan’s economy (No. 204Update)[Summary]

Japan to see real GDP growth of -0.1% in FY19, +0.1% in FY20, and +0.8% in FY21. Meanwhile, nominal GDP growth is seen at +0.7% in FY19, +1.3% in FY20, and +1.3% in FY21.

  • Mitsumaru Kumagai
  • Keiji Kanda
  • Hikaru Sato
  • Masahiko Hashimoto
  • Akane Yamaguchi
  • Yutaro Suzuki
  • Wakaba Kobayashi
  • Munehisa Tamura
  • Tomoko Yazawa
  • Tsubasa Fujiwara


Revised economic outlook: The 2020 Jan-Mar period real GDP growth rate is expected to decline in comparison to the previous period due to voluntary restraint of economic activities and the deterioration of overseas demand arising from the Novel Coronavirus (COVID-19) epidemic. Our outlook for the real GDP growth rate has been revised downwards as follows: -0.5%pt in FY2019, and -0.3%pt in FY2020. For the time being, the greatest risk to the Japanese economy will be the COVID-19 epidemic. If the spread of the infection continues for the long-term, Japan’s economy could move into a major downturn. The main scenario of this outlook assumes that the COVID-19 epidemic will last for around three months, and then economic activity will be back to normal by sometime in the Apr-Jun period of 2020. In addition to the recovery of the Chinese economy and the comeback for the silicon cycle, Japan’s domestic economy is expected to maintain underlying strength with the help of the expansive fiscal policy and tight labor market. Though moderate, economic recovery is expected to continue. Though moderate, economic recovery is expected to continue, but risk of the economy’s entering a recession is increasing rapidly.

(1) The future of the economy according to the cyclical view:The economic recovery pattern which has been observed in the past is that first China recovers, then the US, and after that Japan. Based on this pattern it is Japan’s turn to enter a recovery phase, which is expected to occur sometime in CY2020. The recovery of exports will be an important point for some time to come. Looking at the situation by industry, production growth is expected in electronic parts and devices in association with the recovery in demand for semiconductors. On the other hand, transport equipment, which is highly sensitive to the influence of household income, is expected to continue marking time. The pattern of divergence between these two industries is expected to continue. However, according to our estimate, which takes into consideration the structure of interdependence between industries, overall industrial production should continue in a moderate growth trend with increasing demand for capital goods due to rising factory operating rates. At the same time we recommend paying close attention to the risk that our major assumption, the silicon cycle, may be negatively affected by the COVID-19 epidemic.

(2) The future of personal consumption after the consumption tax hike:The last time the consumption tax was raised, consumption fell into a downturn due to the decline in purchase power, especially amongst low-income households. This time around, however, purchase power actually increased due to social security enhancement measures, such as a reduced tax rate, and free early childhood education. This brought stability to the consumption behaviors of low income households. In contrast, this time around different characteristics have been seen, such as the fact that buying restraints in high-income households have pushed down consumption instead. The future of personal consumption is expected to continue experiencing harsh conditions for the time being due to the voluntary curtailing of activities in association with the COVID-19 epidemic. Consumption is expected to make a comeback once the COVID-19 epidemic comes to an end and the economy returns to normal. However, with stagnant growth in income and the increase in the tendency to economize, as well as the gradual phasing out of government programs to counter the effects of the consumption tax hike, growth is expected to continue to decline somewhat.

(3) Risks in 2020:In the run-up to the US presidential election, President Trump has made his support of the American manufacturing industry an issue. There is a limit to the kinds of policies that could be put into place the short time left before the elections, so it is quite possible that he may strengthen his tendency to lean toward a weak dollar policy. Here too we must remain vigilant. On the other hand, if election results bring in a new administration, we will see yet other risks to the economy. This would entail the rolling back of the Trump tax cuts and the strengthening of the regulatory framework. Meanwhile, rising tensions in the Middle East bring the risk of rising oil prices. The concern here is that Japan’s real GDP could be pushed down by a maximum of around -0.8% coupled with yen appreciation which would occur due to risk-off behaviors. As for concerns that construction demand will disappear after the Tokyo Olympic and Paralympic Games, this will likely not break the back of the economy since there is still a huge backlog of construction orders which have not yet been filled due to insufficient supply.

BOJ’s monetary policy:During the period covered by this outlook, the CPI is expected to -0.1% in FY2020 and +0.4% y/y in FY2021. Hence we expect the BOJ to maintain its current monetary easing policy for the time being. With central banks in the US and Europe strengthening their monetary easing policies, Japan too is expected to begin moving in the direction of a limited addition to its range of monetary easing.

Our assumptions
◆Public works spending is expected to grow by +5.4% in FY19, +1.8 in FY20, and +0.0% in FY21.
◆Average exchange rate of Y108.5$ in FY19, Y105.0$ in FY20, and Y105.0/$ in FY21.
◆US real GDP growth of +1.9% in CY20 and +2.0% in CY21.

Daiwa Institute of Research Ltd. reserves all copyrights of this content.
Copyright permission of Daiwa Institute of Research Ltd. is required in case of any reprint, translation, adaptation or abridgment under the copyright law. It is illegal to reprint, translate, adapt, or abridge this material without the permission of Daiwa Institute of Research Ltd., and to quote this material represents a failure to abide by this act. Legal action may be taken for any copyright infringements. The organization name and title of the author described above are as of today.