RaboResearch - Economic Research

Japan: A deep recession

Economic Comment

  • Prime Minister Abe has declared a state of emergency in seven prefectures, including Tokyo and Osaka
  • This likely lays the ground for lockdowns in these regions
  • With looming lockdowns and a likely decline in Japan’s exports, we now expect Japan’s economy to shrink by 5% in 2020
  • The Japanese government has announced a historically large fiscal stimulus package of JPY 108 trillion (20% of GDP)
  • Most of this stimulus is aimed at keeping companies afloat and keep jobs from being lost, and although the stimulus will help cushion the impact on consumption, we don’t expect it to keep consumption from declining
  • The Bank of Japan will likely keep its asset purchase program in full steam and might even increase the buying of Japanese Government Bonds

Abe declares emergency and pulls out fiscal bazooka

On April 6th Prime Minister Abe announced a state of emergency in seven prefectures (including Tokyo and Osaka) for one month. Although this is not the same as the announcement of a lockdown, it does lay the groundwork for such lockdowns, which we now expect very soon in these seven prefectures.

To soften the blow for the Japanese economy, Abe’s administration has also announced the biggest fiscal stimulus package in the country’s history, worth JPY 108 trillion (USD 1 trillion), or about 20% of Japan’s GDP. Amongst others, this includes JPY 6 trillion worth of cash handouts to poor households and small businesses and JPY 26 trillion worth of deferrals on tax and social service costs for businesses. According to Bloomberg, the stimulus package consists of two phases. Phase one will try prevent bankruptcies and job losses and phase two will try to stimulate the economy to a V-shaped recovery. We are skeptical about the effectiveness of the second phase.

For one, the actual cash handout is less than 1% of GDP. Most of the fiscal measures will help Japanese firms stay afloat by getting cheap loans or by allowing them to defer costs. That will indeed help bankruptcies from increasing, and yes it will help cushion the initial fall in consumption, but we don’t expect it to give a very big boost to consumption after the lockdowns.

Also, this fiscal stimulus package has to be put into context: Japan has a history of large fiscal expenditures in general and especially during crises, which unfortunately have not done much to stimulate growth. Between 2008 and 2009, for example, the Japanese government rolled out a fiscal stimulus package worth 14% of GDP, yet the economy still shrank by a total of 6.5% in those two years (Figure 1). We acknowledge that this might not be a fair comparison, since 2008/2009 was a financial crisis, while this is a health crisis that has turned into an economic crisis and comparing stimulus packages solely based on their size instead of their composition is a bit blunt. Nevertheless, our point is that the size of the stimulus package itself is not all telling.

Figure 1: Large fiscal deficits have a poor track record in propping up growth
Figure 1: Large fiscal deficits have a poor track record in propping up growthSource: Macrobond
Figure 2: Services PMI has taken a nosedive
Figure 2: Services PMI has taken a nosediveSource: Macrobond

We think that the negative short-term economic effects of COVID-19 will be larger than the GFC’s, which indeed will be cushioned by the fiscal stimulus. But we still think Japan will enter a deep recession with GDP contracting by 5% 2020. The seven prefectures which might go in lockdown represent almost half of Japan’s GDP, while Japan’s exports will decline strongly (given that we also expect much lower growth in China and a contraction in the US) and Japan’s tourism sector will grind to a halt. Recent data show that Japan’s economy is already in a weak position (Table 1), while the recent plunge in services PMI (Figure 2) indicates that economic pain ahead was expected by purchasing managers even before the announcement of the state of emergency and upcoming lockdowns.

Table 1: Multiple indicators still point to weakness
Table 1: Multiple indicators still point to weaknessNote: all figures (ex. sentiment) are % changes in real and seasonally adjusted terms.
Source: Macrobond

BoJ is likely to increase asset purchases

Since the outbreak of COVID-19, the BoJ has introduced a flurry of monetary policy measures: (i) a doubling of targeted net purchases of ETFs (to 12 trillion JPY), (ii) swap lines with the Federal Reserve to increase access to USD, (iii) a one-year lending facility that offers loans at 0%, accepting corporate debt as collateral, and (iv) an increase in the central bank’s limit to purchase corporate bonds and commercial paper by JPY 2 trillion. We think the Bank of Japan could ultimately even increase the amount of Japanese Government Bond (JGB) purchases to absorb the JGBs the Japanese government will have to issue to finance its stimulus package.

Table 2: Economic forecasts Japan
Table 2: Economic forecasts JapanBron: RaboResearch
Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 1038 7752

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