Japan’s Economic Outlook No. 205 (Summary)

◆Revised economic outlook: FY2020 -5.5%, and FY2021 +3.0%: The GDP growth rate registered negative growth for the second consecutive quarter during Jan-Mar period of 2020. The Apr-Jun period is expected to suffer the greatest effects of the COVID-19 pandemic, and is expected to record a decline of more than 20% q/q annualized. The main scenario of this outlook assumes that the COVID-19 epidemic will be on the way to being brought under control by somewhere around June, with the real GDP growth rate seen at -5.5% in FY2020. However, the possibility that the process of bringing the pandemic completely under control could slide into CY2021 and beyond is not small. If this happens, the FY2020 real GDP growth rate could suffer a major deterioration at -10.1%, and the risk of a financial crisis occurring as a result would increase. Possibilities are that the unemployment rate may rise by around 5%pt at worst, making additional economic measures to uphold business and maintain employment urgently needed.

◆(1) Risk of excessive debt due to Corona Disaster: The rapid decline of the global economy has brought increasing worries regarding the spread of debt risk. Debt has already accumulated to high levels worldwide in the private sector non-financial industries as well as in the public sector, and is likely to remain a concern for some time. As for private non-financial sector debt, pressure to reduce it could increase at any time. Private sector debt reduction is considered to be related, to a degree, to decline in economic growth rate because of decline in investment, but the point is to what extent. As for public sector debt, an increase in the short-term is unavoidable due to the necessity of governments carrying out economic measures. However, caution is necessary here since fiscal capacity differs depending on the country. On the other hand, there is also concern that economic growth could be hampered by excessive government debt continuing in the long-term. Maintaining fiscal discipline is likely to become more important in the future.

◆(2) What will happen in the emerging nations (precaution required): Risk of default in the emerging nations is increasing due to the COVID-19 pandemic. Countries with the highest risk out of a total of eighteen emerging nations taking into consideration four factors –risk of default as of 2019, risk of spread of COVID-19 infections, the low price of crude oil, and extent to which default on loans would have a ripple effect reaching other countries – are South Africa, Saudi Arabia, Russia, Brazil, and Turkey. If debt risk comes to the surface, the creditors of these countries, for the most part advanced nations such as the US and the UK, will also experience negative effects. Spain suffered especially major economic impact due to the COVID-19 pandemic. Its fiscal condition was already bad even before the pandemic. The emergence of risk of default in emerging nations will make Spain’s fiscal condition even worse, and this could cause negative effects in the European countries.

◆(3) The ripple effects of stagnant production due to supply chain problems: The COVID-19 pandemic has caused not only a crisis in demand, but a crisis in supply as well. We analyzed the possible ripple effects using an international input-output table and found that the ripple effect per unit of production would be large for Taiwan and Korea, but small for the US, Europe and China. However, if we also take into consideration the scale of industry, the importance of China is huge for the global supply chain, both in supply and demand. The US, Europe, Japan, and China have all built a supply chain network with neighboring countries, and they have an interdependent relationship. This suggests that if the US and Europe suffer from stagnant production, the recovery of China’s economy will be hindered. Japan is easily influenced by issues of supply from foreign countries in its automobile industry and other industries, and it is possible that downward pressure on Japan’s production will continue due to supply constraints.

◆BOJ’s monetary policy: During the period covered by this outlook, the CPI is expected to register year-to-year declines in FY2020 and FY2021. A strong need for support of corporate financing is expected to continue due to the rapid deterioration of the economy. Hence we expect the BOJ to maintain its current monetary easing policy, with additional easing measures taken as necessary.

◆Our assumptions
Public works spending is expected to grow by -0.5% in FY20, and +3.1% in FY21.
Average exchange rate of Y107.1/$ in FY20, and Y107.0/$ in FY21.
US real GDP growth of -4.8% in CY20 and +3.2% in CY21.