The most important thing to know about Japan’s latest recession is how much worse conditions may get in 2020 – and beyond.
This is not the narrative coming out of Prime Minister Shinzo Abe’s government and the legions of Tokyo economists who defer to its spin. That line is it’s a “technical” recession, as if to say: “Don’t worry, better days are coming.”
There was nothing “technical” about the 7.3% plunge in gross domestic product between October and December. And that was before Japan logged its first Covid-19 case.
Nor is the 3.4% drop in first-quarter GDP a statistical anomaly. And adding up data since then, the second quarter’s contraction is looking “much worse,” says Tom Learmouth of Capital Economics.
At the moment, economists generally estimate a 21% or 22% contraction between April and June. That would be the largest about-face in growth since at least the mid-1950s.
Exports dropped by more than 20% in the first 20 days of April alone, an omen of pain to come for companies from Toyota Motor to Sony to SoftBank.
And a drop in domestic demand is its own harbinger of doom. In April, consumer confidence was weaker than amid the 2008 global crisis or the Fukushima nuclear meltdown in 2011.
Though stats on April tourism are still being tabulated, they’re likely to be worse than the 93% drop in year-on-year arrivals in March.
Even the government admits Abe’s record US$1 trillion rescue package is not enough.
On Monday, Economy Minister Yasutoshi Nishimura said growth is in a “severe state” and telegraphed another extra budget to come, and quickly. The priority is aiding small businesses to avoid mass lay-offs of the kind upending the US economy.
Japan’s recession, though, isn’t a straightforward macroeconomic challenge, but also a pandemic maintenance one.
Back in January, the International Monetary Fund saw Japan growing 0.5% in 2021. That leaves little cushion for an economy already suffering a deepening recession, particularly if Japan’s coronavirus caseload increases – and if Japan’s biggest export markets, including the US and China, don’t recover in short order.
All this uncertainty makes estimates for the third and fourth quarters both fuzzy and implausible.
Things will get bloody
A survey of economist predictions from Trading Economics sees another 3.4% contraction between June and August, a 4% drop from September to December and then a bounce-back to 2% in the January-March 2021 period.
The idea there’s light at the end of this tunnel seems a reach given a dearth of growth engines – and the odds that coronavirus fallout will be with the global economy for some time.
Bad as Japan’s numbers seem, they’d be much worse if Abe’s government were forced to impose a full national lockdown, rather than the lite quarantine currently in place.
At the moment, the focus is on reopening. In recent days, Tokyo lifted its state of emergency for 39 of 47 prefectures. Any second wave of infections, like one experienced in the northern island of Hokkaido, could lead to more draconian shelter-in-place orders that will slam GDP yet further.
So far, Japan’s number of infections is remarkably low at 16, 285. Yet Tokyo’s testing capacity is low and contact-tracing protocols are behind the curve.
The real question, should Covid-19 fallout intensify, is whether Japan might find itself on course for yet another lost decade?
Certainly, Japan is taking one blow after another.
Since Abe took over leadership in December 2012, the pendulum was supposed to have swung toward bold structural reforms.
Instead, Abe pushed the Bank of Japan to supersize stimulus efforts, while his government relied on Olympics 2020 construction to create jobs.
The US-China trade war complicated the strategy. So did an ill-timed hike in consumption taxes to 10% last October. And now the 2020 Olympics is postponed to 2021.
Even if Japan’s pandemic experience is proving far less mortal to Europe’s or America’s, Covid-19 shock is effectively closing all Japan’s most important export markets – neither the US nor China seems primed for a “V-shaped” recovery or even a “U-shaped” bounce-back.
And given that Japan had been flirting with recession late last year, the country, says economist Izumi Devalier of Bank of America Merrill Lynch, “entered the coronavirus shock in a very weak position.”
Japan will surely churn additional waves of stimulus into a rigid and aging economy. That, however, will add to the developed world’s biggest public debt burden.
The BOJ can do more, certainly. But it already holds roughly half of all outstanding government securities, warping trading dynamics. By June 2018, it ranked among the 10 top shareholders in nearly 40% of listed Japanese companies. Its exchange-traded fund holdings have grown steadily since.
Problematically, Japan is bumping up against the point of diminishing returns from conventional pork-barreling.
It has spent the last 20-plus years repaving roads, rebuilding dams and bridges, constructing giant conference facilities and municipal halls and christening more international airports than any nation of 126 million needs.
The “concrete economics” model won’t help Toyota, Honda or Nissan sell more cars. It won’t help Rakuten salvage the big 5G mobile network rollout it planned for 2020. It won’t help property developers watching values plummet since the Tokyo Olympics was postponed.
It won’t make manufacturers more competitive, the services industry more productive or the finance industry nimbler.
Nor do banks seem willing to use any new BOJ liquidity injections to extend credit. That would deprive Governor Haruhiko Kuroda and his team of the multiplier effect that makes monetary easing so powerful.
“Japanese banks’ challenges to restore profitability – a structural ratings weakness – have been overlaid by operating conditions that we have assessed to be weaker and more disruptive following the coronavirus outbreak,” says analyst Kaori Nishizawa of Fitch Ratings.
Adds Taro Saito at NLI Research Institute: “We’re not at a stage where the Bank of Japan can boost demand with monetary easing. The BOJ will focus on corporate financing for now.”
Financing, though, is no replacement for a return of steady demand heading toward 2021. In the first quarter, private consumption shrank 0.7%. That may not look like Armageddon, but it is “just the tip of the iceberg,” says Learmouth of Capital Economics.
Though consumption is a big worry, says economist Naoya Oshikubo at SuMi TRUST, uncertainty stemming from the spread of the virus is worth watching as companies “curtail their expenditure programs.”
It follows, then, that any second wave could see corporate spending plans put completely on hold – and possibly shoulder-bump Japan Inc onto a slippery slope that leads down to another rocky decade.