RaboResearch - Economic Research

Japan: Economic and external woes continue

Economic Comment

  • The second wave of coronavirus cases has not abated yet
  • This is holding back the economic recovery
  • The labor market as well as consumer demand are both still weak
  • Japan’s relations with China remain tense
  • Relations with the US will not change materially under a Biden presidency
  • The Bank of Japan (BoJ) did not change its monetary policy at its latest meeting
  • However, the BoJ has become gloomier about Japan’s outlook
  • And core inflation has been negative for two months in a row
  • If the deflation continues or the economy weakens further, the Bank of Japan might start another round of stimulus
  • Another trigger for the BoJ to act would be a strong appreciation of the Japanese Yen

The macroeconomic picture is not pretty

Unfortunately, Japan is still facing a second wave of coronavirus infections. The curve of coronavirus cases is not flattening yet, although the number of deaths is still relatively low (Figure 1). Part of the reason is that containment measures in Japan have been (and remain) loose compared to other countries that are experiencing a second wave of infections (Figure 2).

Figure 1: No curve flattening in sight yet
Figure 1: No curve flattening in sight yetSource: Macrobond, WHO
Figure 2: Containment measures are up, yet relatively loose compared to other countries
Figure 2: Containment measures are up, yet relatively loose compared to other countriesSource: Macrobond, Oxford University

Unsurprisingly, this is having an impact on the Japanese economy. Its recovery after the first wave is being held back. We can see the impact of the second wave on consumer demand as well as the labor market. Starting with the former, retail sales have not continued their climb upwards and were down by 8.8% y/y in September. The same can be seen in motor vehicle sales, which were down by 15% y/y in September (Figure 3). In addition, the available jobs-to-applicants ratio was close to one in September, while unemployment has crept up to 3% since August (Figure 4). Both indicators point to labor market weakness, which will result in consumer demand weakness down the line. We have slightly lowered our GDP forecast for this year to -5%.

Figure 3: Motor sales are still in the doldrums
Figure 3: Motor sales are still in the doldrumsSource: Macrobond
Figure 4: The labor market continues to weaken
Figure 4: The labor market continues to weaken Source: Macrobond, Japanese Statistics Bureau

Although there are still some uncertainties, it seems very likely that Joe Biden will be the next US president. However, this does not have major consequences for Japan’s economic outlook. Japan has had relatively friendly ties with the US under Trump, and there are no clear reasons to think this will change under Biden. Moreover, the US has strong military ties with Japan, as exemplified by their mutual defense treaty. Suga has sent his congratulations to Biden and stated that he hopes to further improve ties with the US.

Relations with China are still tense

Japan has filed a complaint against a Chinese website which mentions the Senkaku Islands as being part of China. Prime Minister Suga’s ability to manage relations with China is already being tested. Although Suga has initially shown willingness to engage in talks with China, his more conservative party members might use the situation to pressure Suga into taking a firmer stance against China. It also does not help that Japan has increased its efforts to incentivize Japanese companies to move out of China.

Meanwhile, the view of the Japanese towards China remain and have become even increasingly more negative, according to a recent report by Pew Research. About 83% of the Japanese people Pew Research surveyed this summer, said they have a negative view of China. This figure is the highest among the 14 countries included in the survey. Finally, China’s increased focus on self-reliance, as mentioned by the Chinese government after its Fifth Plenum, likely means that improving international ties with Japan is not high on China’s agenda.

All in all, it seems that the previously risen tensions between China and Japan will not abate anytime soon, which means that trade between the two countries could suffer in the coming months, or perhaps even years.

The BoJ might move if the situation deteriorates

The BoJ did not change its monetary policy at its latest meeting on 28 and 29 October. However, the BoJ does seem to have become more pessimistic about Japan’s outlook. Its recently released Economic Outlook shows that the BoJ has lowered its median growth expectation for 2020 to -5.5% (down from -4.7% in the previous Outlook), citing a weaker than expected recovery in services demand.

Although the BoJ acknowledged that inflation would remain negative “for the time being”, it also stated that it expects inflation will turn positive again when the economy picks up. Meanwhile core inflation (excluding food and energy) came in at -0.3% y/y for September, after a negative read in August as well. With the curve of coronavirus cases still not flattening and the economy still in a crisis, we expect inflation to remain negative for the coming months, meaning that Japan walks deeper into deflationary territory.

Partially because of this deflationary pressure, we think more stimulus from the BoJ might be possible, especially if either the economic situation in Japan keeps deteriorating or the number of coronavirus cases rise enough to necessitate an increase in containment measures. The BoJ has already stated that risks to economic activity are “skewed to the downside”. A strong appreciation of the Japanese Yen will add to deflationary pressures. Therefore, this could also be a trigger for the BoJ to act.

Table 1: Economic forecasts
Table 1: Economic forecastsSource: RaboResearch
Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO
+31 88 726 7864

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