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Japan’s Economic Outlook No. 207 (Summary)

Prospects for Japan’s Economy with a View to the Post-Corona Era: In this Report We Examine the Following Issues. (1) US Presidential Election, (2) Digitalization, and (3) Economic Measures

Mitsumaru Kumagai

Keiji Kanda

Hikaru Sato

Masaaki Yamasaki

Masahiko Hashimoto

Shotaro Kugo

Hiroyuki Nagai

Akane Yamaguchi

Yutaro Suzuki

Wakaba Kobayashi

Munehisa Tamura

Megumi Wada

Kazuma Kishikawa

Takuto Toyama


◆Real GDP Outlook: FY2020 -5.5%, and FY2021 +3.2%: The real GDP growth rate for the Jul-Sep period achieved major positive growth at +21.4% q/q annualized, but growth made up for just over half of the previous period’s decline. Meanwhile, the pace of recovery from the Oct-Dec period is expected to be moderate at best. The main scenario of this outlook assumes that measures to prevent the spread of COVID-19 will continue to be implemented to a degree, with the outlook for the CY2021 real GDP growth rate at +2.0%. However, explosive growth in COVID-19 infections has been occurring recently, and possibilities that a declaration of a state of emergency and lockdown orders as occurred during the months of April and May this year will be unavoidable are increasing rapidly both in Japan and abroad. Our risk scenario is based on the assumption that explosive growth in COVID-19 infections will occur twice in Japan, the US and Europe in the first and second halves of 2021. In this case, the CY2021 real GDP growth rate is expected to decline by -0.8%. If this occurs, there is a danger that it could cause a sharp increase in the number of corporate bankruptcies, ultimately developing into a financial crisis. Although the probability is low at this time, if a financial crisis along the lines of the Great Depression were to occur, the real GDP growth rate of CY2021 could deteriorate to as low as around -8% y/y.

◆(1) Effects of a New Biden Administration on Japan’s Economy: While President-Elect Biden has pledged to raise taxes, he has suggested large-scale fiscal spending and is generally aiming for an economic stimulus policy. However, congress is expected to remain split, and it will likely be difficult to realize such a policy with the opinions of the Democratic and Republican parties in conflict. Fiscal policy is expected to boost US GDP by an average of +0.5% between 2022 and 2025. The impact on Japan's real GDP is expected to be +0.33% in 2022, +0.54% in 2023, and +0.61% in 2024. However, under the Biden administration, procurement from within the United States will be emphasized in government spending, so the impact on the Japanese economy may be limited. Furthermore, it is necessary to keep in mind the possibility that Mr. Biden's tightening of regulations may have a negative impact on the US and Japanese economies due to the possible worsening of corporate sentiment.

◆(2) Economic Revitalization through Digitalization and Challenges: Digitization of government services is still inadequate in areas that lead to improvements in the business environment. There are many issues related to the Japanese business environment that can be solved by digital technology. If digitalization is actively promoted with the Digital Agency (tentative name) as the control tower and these issues are resolved, the real GDP growth rate per capita may increase by about 1.1% pt. Meanwhile, if the business environment is improved to the maximum while implementing regulatory reforms, the rate of increase will increase to 1.6% pt. In addition, the digitalization of government guidance will lead to the strengthening of the household safety net and the improvement of the quality of government services. The need for a stronger infrastructure will become even more necessary in the future for managing income information of Japanese citizens and bank accounts by linking them to the Social Security and Tax Number system.

◆(3) Effective Economic Measures: Japan's economic measures during the Corona Disaster were implemented more quickly than during the global financial crisis of 2008, and so far they have achieved results as notable in an international comparison. However, from the viewpoint of the extent of shortage of demand as seen in the GDP gap, and in terms of the fiscal situation as seen in an international comparison, additional fiscal spending of about 3% of GDP appears to be needed. Among the policy choices envisioned for additional economic measures, including the upcoming third supplementary budget, the various "Go To Campaigns" focus on industries with harsh business environments, with relative production spillover and large employment-inducing effects. An extension of the implementation period for economic measures should be considered assuming that thorough measures to prevent the spread of COVID-19 infections will continue.

◆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 +2.3% in FY20, and +1.0% in FY21.
We see an average exchange rate of Y105.5/$ in FY20, and Y104.0/$ in FY21.
US real GDP growth is seen at -3.6% in CY20 and +3.6% in CY21.

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