EC Japan: Riding Their Luck

A reasonable pandemic so far looks at risk of a sudden rise in infections, though longer-term growth prospects should be supported by the recent pledge to shift the economy to net-zero greenhouse gas emissions by 2050. The near term outlook, however, is unpredictable and will almost be driven by the pandemic. Japan has been lucky twice, but a third time?

The Japanese economy has not had a particularly bad pandemic, despite limited measures undertaken to prevent the spread of infection. Helped by some very generous fiscal stimulus, Japan's recovery should be no slower than most other G-7 peers. But despite (and perhaps because of) decades of failed stimulus policies, the biggest boost to Japan’s economy might come from its new pledge to be a net-zero carbon emitter by 2050.

Though this will be hugely disruptive, it will require tens if not hundreds of trillions of yen to achieve and could provide an engine of growth for years to come.

Is Japan's luck about to run out?

Admittedly, the current numbers don’t look very encouraging, but so far Japan has been extremely lucky during this pandemic.

With a large volume of passenger traffic between Japan and China in the early stages of the outbreak, Japan could easily have seen a much higher rate of infection back in March and April this year. Instead, the maximum daily case rate back then did not rise much above 750.

Japan hasn't really been a role-model during this pandemic. It held back from widespread testing to avoid over-burdening the health system with people with only mild symptoms (which it would be legally obliged to treat), and also managed to avoid a national lockdown. The northern island of Hokkaido was quick to implement a regional national emergency on 28 February but lifted it less than three weeks later on 19 March.

That came just before a 3-day weekend during which people went out to celebrate the end of their confinement, and probably sowed the seeds of the next wave, which three weeks later, had reached a new peak before a new state of emergency for 7 prefectures was announced by former prime minister Shinzo Abe on April 7, and then expanded to the whole nation on 16 April.

Compared to what has been undertaken in Europe and some US states, Japan’s “states of emergency” lack teeth due to the extensive civil rights built into the constitution. Business closures and other restrictions are typically voluntary. Indeed, for full-time workers, the rate of home working has been estimated to have been as low as 15%.  

With the April measures looking disappointing, our expectation at the time was that Japan would suffer a bad outbreak that would cause far more damage to the economy than has in fact been the case. Against our expectations, the national state of emergency did work, and cases dropped right back to low double digits through the summer.

Exactly why Japan had such early success with the virus is still a matter of much debate which we don’t have space for here. Whatever it was though, Japan experienced a second wave from July to early August which saw cases spiking up to a daily high of 1998 cases. There was no second state of emergency, but a heightened request of firms and individuals to limit social interaction.

Japan's pandemic

Source: CEIC, ING

Again, these limited moves seemed to work, and case numbers dropped. But whatever aspect of this request was doing the most good, recently seems to have stopped being effective, and Japan is now facing heightened daily case numbers once more, with daily cases now back up to 2500 and rising sharply.

So while the numbers still look very favourable compared to the US and Europe, for one of Asia’s more northerly and seasonal countries, Japan will have to be lucky again to avoid a more negative COVID-19 scenario, and we should have now learned that it doesn’t take long to go from 2500 to 25,000 cases per day when COVID-19 gets started.

GDP Outlook

Our full-year forecast for 2020 is -5.4%. But let’s be clear, there is no merit in the decimal places here, and not even that much distinction between this and say -3% or -7%. The fact is, COVID-19 dealt a massive blow to Japan’s GDP, as it did everywhere else. The real question is, how well will Japan recover in 2021 and 2022?

On the assumption that Japan avoids a bad second wave, which right now is looking optimistic, we see scope for growth to be faster than 2% in both 2021 and 2022.

Admittedly, this doesn’t bring Japanese GDP back to pre-COVID levels until the end of 2022, but that is no worse than most of its G-7 peers (a bit slower than the US).

GDP recovery in "levels" (4Q19 = 100) - ING forecasts from 4Q20 onwards

Source: ING

GDP growth in 3Q20 came in a little above consensus expectations, but following the 7.9% quarter-on-quarter contraction in 2Q20, a 5% bounce was roughly in line with the wild guesses from forecasters. There is not much “science” in forecasts when facing this degree of volatility.

The vast bulk of the 3Q bounce came from net exports. Export growth in Japan in 3Q20 was up 7% year on year. That isn’t much, but it’s not bad compared to some other regional peers, and it does look as if Japan is benefitting from the semiconductor and technology upcycle that is driving some other parts of North Asia. 

Looking at the breakdown of the contribution to export growth, electrical machinery tops the table, albeit with a relatively modest 0.3pp contribution. But nonetheless, it is a turnaround from the 0.4pp drag it exerted on total export growth at the end  of 2019.

Exports by type

Comparison with December 2019

Source: CEIC, ING

That electronics upcycle is a combination of China’s push for technological self-reliance, which in the short-term is lifting substitutes to US electronics to which it no longer has access, 5-G rollout, and the IT upgrades that are a part of the new normal way of working from home.

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