Japan’s Economic Outlook No. 206 (Summary)

Japan’s Economy in the Era of Living with Corona: In this Report we Examine the Following Issues. (1) Balancing Social & Economic Activity with Prevention of Spread of Infection, (2) Effects on Potential Growth Rate

  • Mitsumaru Kumagai
  • Keiji Kanda
  • Hikaru Sato
  • Masaaki Yamasaki
  • Masahiko Hashimoto
  • Hiroyuki Nagai
  • Akane Yamaguchi
  • Yutaro Suzuki
  • Wakaba Kobayashi
  • Munehisa Tamura
  • Megumi Wada
  • Kazuma Kishikawa


◆Real GDP Outlook: FY2020 -6.0%, and FY2021 +3.4%: The real GDP growth rate for the Apr-Jun period recorded the steepest decline of the entire postwar period at -27.8% q/q annualized. Meanwhile, the Jul-Sep period is expected to achieve growth of +13.0% q/q annualized. However, this merely manages to make up for around 40% of the decline in GDP during the Apr-Jun period. The pace of recovery is expected to be moderate. The main scenario of this outlook assumes that measures to prevent the spread of COVID-19 will be continued to be implemented to a degree, with the outlook for FY2020 real GDP growth rate at -6.0%. However, if an explosion of infections occurs in Japan, the US and Europe there would be a reissuance of a nationwide state of emergency in Japan and an unavoidable repeat of tough restrictions on economic activity in all of these countries as well as voluntary restraint and lockdown orders, which could lead to a double-dip recession. In this case, the FY2020 real GDP growth rate could be expected to deteriorate, falling as low as -9.3%. There is a danger that this could cause a sharp increase in the number of corporate bankruptcies, ultimately developing into a financial crisis. If a financial crisis along the lines of the Great Depression were to occur, the real GDP growth rate could deteriorate to as low as around -16%.

◆(1) Issues Associated with Increasing Social & Economic Activity in the Era of Living with Corona: Japan, as with most countries, faces the issue of balancing social and economic activity with the prevention of the spread of the COVID-19 infection. The economic rationale is that the state of emergency caused an excessive suppression of personal consumption. The current situation differs from the month of April when the state of emergency was declared in that there is now more room for the coexistence of social and economic activity and prevention of the spread of infection. Japan is no longer at the stage where an immediate reissue of an emergency declaration to all prefectures is required. Rather, it is necessary to take appropriate measures according to the infection situation to prevent the spread of local infections that are explicitly a problem. It is necessary for the government to sort out the form that its demand stimulating measures take, and to clearly indicate its framework for infection prevention measures so that an explosion of infections can be prevented.

◆(2) Effects of Spread of Infection on Potential Growth Rate: With the sharp decline in demand due to the Coronavirus Crisis, the pressure to carry out stock adjustment for capex is growing for services depending on face-to-face contact. However, capital expenditure in these industries accounts for only a small portion of overall industry. Moreover, for some industries the Corona Disaster is expected to actually be a positive factor in relation to capital expenditure. Finally, in the macro view, pressure to carry out stock adjustment for capex will be limited. In regard to labor input, while both the labor force participation rate and working time have recently fallen, it is likely that they will return to the original trend with the normalization of economic activities. However, there is a risk that stock adjustment for capex could become more serious and labor input could suffer a downturn if voluntary restraint of activities as a result of the spread of infection moves into the long-term. According to our standard scenario, although Japan’s potential growth rate is near zero, it is expected to maintain its position just into the positive side. However, if the spread of infection is not brought under control, a major negative will be inevitable.

◆Yet Another Potential Problem – Fears of a Real Estate Bubble Collapse: Abnormal conditions have also been seen in the real estate market due to the Coronavirus Crisis. The cap rate, which indicates the profitability of real estate, is at its lowest level in recent years, hence caution is required. However, unlike the financial crisis of 2008, government bond yield spreads have widened sufficiently, and there is little concern that land prices will fall sharply for the time being. In addition, there is increasing momentum to think seriously about the problem of the concentration of population in large cities in the context of the Corona Disaster. Due to changes in social structure, land prices in large cities may be subject to softening pressure over the medium to long-term.

◆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. With economic recovery dragging its feet, a strong need for support of corporate financing is expected to continue. 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 +1.6% in FY20, and +1.3% in FY21.
We see an average exchange rate of Y106.8/$ in FY20, and Y106.5/$ in FY21.
US real GDP growth is seen at -5.6% in CY20 and +3.5% in CY21.

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