Japan’s Economic Outlook No. 208 (Summary)

Vaccine Dissemination and Normalization of Global Economy: In this Report We Examine the Effects of the Spread of COVID-19, Vaccine Dissemination, and Spread of the Mutant Strain

  • 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
  • Taisei Watanabe


◆Real GDP Outlook: FY2020 -5.0%, FY2021 +3.8%, and FY2022 +2.3%: The main scenario of this outlook assumes that economic activity will increasingly return to normal beginning in latter half of FY2021 and throughout FY2022 with vaccinations having begun both overseas and in Japan. The outlook for real GDP growth is -5.0% in FY2020, +3.8% in FY2021, and +2.3% in FY2022. We expect growth on the high side in FY2021 and FY2022 due to progress in vaccination and the improved outlook for the US economy. However, the risk of the spread of COVID-19 infections is expected to remain great for some time, and there is a real possibility that an extension or reissuance of a state of emergency could be unavoidable. If the mutant strain of the disease spreads in Japan, the number of deaths in FY2021 is expected to grow by about 4,800 compared to the main scenario, while personal consumption is expected to decline by about 24 tril yen. Even if the mutant strain does not spread, there is still a possibility that a state of emergency could be declared again sometime in FY2021 if the pace of vaccination is slower than expected.

◆(1) Challenges faced by Japan in international comparison of decarbonization policies: CY2020 was a year of great social and economic turmoil due to the coronavirus crisis, but it was also a year in which countries made more concrete plans to strive toward the realization of decarbonization. In Europe, the Next Generation EU, a large fund for reconstruction, is expected to accelerate green investment, while in the United States, President Biden has set a goal of achieving decarbonization by 2050, having made an election promise to invest $2 tril in the effort over the president’s term of four years. This trend of international decarbonization highlights Japan's challenges such as the increasing risk of protectionist policies, the need for early development of new industries, and the question of how to handle the Carbon Border Adjustment Mechanism. In Japan’s efforts to transform its industrial structure toward the realization of decarbonization, problems in the labor market, such as the slowness of employment adjustment, and the lack of sufficient government spending on labor market policy, will be issues in the future.

◆(2) How vaccine dissemination could change the export environment, transformed by the corona-disaster: Global trade in goods was reduced significantly during the year 2020 due to the corona-disaster, but China’s share of global trade grew rapidly as a result of the emergence of special demand for goods associated with measures to prevent the spread of COVID-19 and the new trend of working from home. While dependence on China for exports of goods related to measures to prevent the spread of COVID-19 has been weakening of late, demand for information related goods is expected to maintain underlying strength backed by the expansion of telework and its having firmly taken root in Japan, as well as efforts towards digitalization. China's export share in 2021 will settle at a level slightly higher than before the spread of the infection. Japan’s exports of goods are expected to continue their recovery trend as overseas economies move toward normalization. Above all, a recovery for US manufacturing will be key to this development. As for the export of services, there should be a rapid recovery in 2022 as vaccination progresses and restrictions on immigration are relaxed, allowing for growth in the number of tourists visiting Japan from China, the US and the UK.

◆(3) The problem of post-corona debt: The worldwide balance of debt has grown rapidly during the corona-disaster, and government debt has been the leader in this growth. The sustainability of government debt is supported by low interest rates, hence the future trend in interest rates is an important point. On the other hand, private sector debt does not pose a risk for the time being, though in certain countries, it has already reached a level which should cause concern. We recommend paying close attention to policy changes in the future as the global economy moves toward normalization. There is some tail risk here, for if the FRB’s reduction in monetary easing causes a stir in the market, this could trigger capital outflows from the emerging nations. Most of the emerging nations have increased their resistance to capital outflows due to the experiences of the past, but there are still concerns regarding those countries that are more susceptible to crisis, such as Argentina, Turkey, and Kazakhstan.

◆BOJ’s monetary policy: During the period covered by this outlook, the CPI is expected to register year-to-year declines in FY2020, but then shift into the positive area at +0.4% y/y due to economic recovery and an expected rise in the price of crude oil in FY2021. The CPI will likely rise by +0.8% in FY2022. With the spread of COVID-19 expected to continue for the long-term, the trend in prices is expected to be moderate. Hence we expect the BOJ to gradually reduce its coronavirus crisis policy a step at a time, while at the same time maintaining its monetary easing policy for some time.

◆Our assumptions
Public works spending is expected to grow by +4.7% in FY20, +1.9% in FY21, and +1.1% in FY22.
We see an average exchange rate of Y105.7/$ in FY20, Y105.0/$ in FY21, and Y105.0/$ in FY22.
US real GDP growth is seen at +5.8% in CY21 and +4.1% in CY22.

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