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Japan 2020: From boom to gloom

Anthony Fensom  |  15 May 2020Text size  Decrease  Increase  |  
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2020 was supposed to be Japan’s year, with the summer Olympics in Tokyo to put the global spotlight on the world’s biggest city and mark the nation’s economic resurgence.

Instead, the global COVID-19 pandemic has forced the postponement of the Games, shut down businesses and deepened an economic recession as Tokyo scrambles to respond with a massive fiscal and monetary stimulus.

The latest forecasts make grim reading. The world’s third-largest economy is projected to contract by nearly 22 per cent during the June quarter, its worst result since the end of World War II, as the crisis stalls business and consumer activity, according to a Nikkei survey.

Economists expect consumer spending to suffer the biggest decline, 6.9 per cent, while business investment is expected to fall by 5.7 per cent. Consumer confidence has fallen to its lowest level on record, with the nation’s death toll from COVID-19 reaching 713 with more than 16,200 cases as of 15 May.

Japan’s economy was in recession even before the coronavirus struck. Last October’s consumption tax hike to 10 per cent from 8 per cent sparked an annualised 7.1 per cent GDP decline in the December quarter, followed by an estimated 5.2 per cent drop in the March quarter.

While the economy “had been recovering from the post-tax hike slump … that was completely cut short,” Taro Saito of the NLI Research Institute told the Nikkei financial daily.

The International Monetary Fund expects Japan’s economy to contract by 5.2 per cent this year after last year’s 0.7 per cent gain. However, the Washington-based organisation has projected a 3 per cent GDP rise for Japan in 2021 as it recovers from the pandemic.

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The economists surveyed by the Nikkei expect a recovery in the September quarter 2020, projecting a 9.9 per cent increase in GDP, akin to a “V-shaped” recovery.

Naoki Kamiyama, chief strategist at Nikko Asset Management, also sees the economy bouncing back in the second half, depending on the extent of the coronavirus.

“Our scenario is quite a big negative GDP drop in the first half, where we see a 6.2 per cent decline in GDP growth, followed by a recovery in the second half of around 3 per cent annualised," he said.

"Overall it’s quite bad, but it really depends on the virus and the containment measures going forward. The most likely scenario is a V-shaped recovery in 2021—hopefully the first half of 2021, when the economy returns to its previous position."

In the meantime, the Japanese government has launched a massive fiscal stimulus equating to about 20 per cent of GDP to rescue the economy, aimed largely at individuals, families and affected sectors such as tourism and restaurants.

The Bank of Japan has also joined the fight, although with official interest rates already around zero it has provided another quantitative easing boost, pledging to buy more financial assets such as government and corporate bonds.

However, Japanese financial markets have not been immune to the coronavirus. On 14 May, the benchmark Nikkei Stock Average closed at 19,914, down 15.8 per cent year to date and well below its 52-week peak of 24,115.

Tokyo stock exchange reflection as man looks on

Japanese financial markets have not been immune to the coronavirus and the Japanese government has launched a massive fiscal stimulus equating to about 20 per cent of GDP to rescue the economy

Nikko AM does not see a rapid rebound in the Tokyo bourse, despite the anticipated economic recovery.

"Our forecast for the Nikkei is 20,500 as at March 2021—we are expecting only a gradual recovery. While earnings should improve, the market won't be convinced about a recovery until the current coronavirus restrictions are fully removed. For the time being, it's a case of being cautiously bullish,” Kamiyama said.

Meanwhile, sports fans have been disappointed by the postponement of the Tokyo Olympics to 2021, but Kamiyama sees only a minor economic impact.

"The economic impact will be minimal—Nikko AM has estimated it at less than 0.5 per cent of GDP,” he said.

“Demand has evaporated due to the coronavirus, so the marginal negative impact of the postponement for this year is quite small. If the delay helps prevent further spread of the virus, it will help the global economy and also Japan".

Structural reform

One analyst who is bullish about post-pandemic Japan is WisdomTree Japan’s Jesper Koll.

The Tokyo-based economist expects Japan to emerge “stronger and more competitive” from the COVID-19 crisis as the pandemic drives structural and behavioural reform.

“Positive signs are emerging already. Corporate managers famously resistant to change are all of a sudden forced to embrace smartphone and information technology as passionately as Japanese teenage girls have been for decades,” he told the Japan Times.

“And, with an urgency not seen since the Meiji modernisation drive, Japan’s captains of industry, commerce and finance are serious about the digitalisation of bottom-up decision-making.

“If I am right and the novel coronavirus kills entrenched resistance to long-overdue reform in corporate decision-making processes and workflow management, it will do more to boost future productivity than anything Prime Minister Shinzo Abe’s ‘third arrow’ of structural reform could have hoped for.”

On Thursday evening, Abe lifted a state of emergency for 39 of the nation’s 47 prefectures, although Tokyo and its neighbouring prefectures together with Osaka remained under the decree. The prime minister also said a second supplementary budget would be compiled to further cushion the pandemic’s impact.

Australian investors seeking to capitalise on Japan’s expected recovery could consider exchange-traded funds such as the iShares MSCI Japan ETF (ASX:IJP), the BetaShares Japan Currency Hedged ETF (ASX:HJPN) or the UBS IQ MSCI Japan Ethical ETF (ASX:UBJ).

With the infection rate dropping, hopes are high that Asia’s second-largest economy will bounce back from the pandemic earlier than initially feared. Tokyo 2021 awaits and with it the world’s expectations of a gold medal-winning economic turnaround.

is a Morningstar contributor.

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