The repercussions of coronavirus have hit an already weakening economy.
A severe disruption of economic activity due to the coronavirus pandemic
In 2020, GDP is expected to contract 6%, as government measures to contain the spread of the coronavirus severely impact domestic spending, while manufacturers and exporters suffer from the global recession and supply chain disruptions.
The repercussions of the coronavirus outbreak have hit the economy at a time it was already showing signs of weakness. Export growth slowed down in 2019 due to lower global trade and manufacturing expansion, less demand from China and the increased risk of protectionism. Amid slowdowns in China and other regional economies last year the yen has continued strengthening, weighing on the competitiveness of Japanese exports.
At the same time, an increase in the consumption tax rate from 8% to 10% in October 2019 immediately pushed up prices and lowered consumer spending. All this lead to a sharp contraction of the economy in Q4 of 2019, by 6.3% compared to the previous quarter.
Household consumption is expected to contract by more than 5% in 2020 due to measures to curb the coronavirus spread, wage freezes and rising unemployment. Retail sales are forecast to decrease more than 6% as sales of non-essential items deteriorate.
Industrial production is forecast to contract more than 9%, as the pandemic will strain the recovery of the ICT sector, automotive producers have announced partial suspensions, and domestic as well as foreign machinery demand is deteriorating. Exports are forecast to contract by more than 19% year-on-year in 2020, as demand from main trading partners in Asia (especially China) and the US is sharply declining.
In April 2020 the government has increased its stimulus measures to USD 1.1 trillion in order to support businesses and households affected by coronavirus-related disruptions. Measures include direct cash transfers to households, expanded lending programmes, increased financial support for firms to maintain employment, postponement of tax and social security charges and emergency measures for small- and medium-sized businesses.
In March 2020 the Bank of Japan eased its monetary policy by doubling its pace of buying risky assets such as exchange-traded funds, and created a new loan program to extend one-year, zero-rate loans to financial institutions, in an effort to boost lending to businesses impacted by the coronavirus outbreak. End of April the Bank of Japan even increased its scope for buying corporate bond and commercial papers, by more than doubling its ceiling on holdings to yen 20 trillion (USD 186 billion) in order to provide more liquidity to the economy (e.g. make it cheaper and easier for commercial banks to borrow, and offer new incentives for banks to lend to small businesses). The Central Bank also decided to shift to unlimited government bond-buying (lifting the 80 trillion yen per year cap) to support government borrowing.
Business insolvencies expected to increase sharply
Despite the comprehensive fiscal and monetary measures to support the economy, business insolvencies are forecast to increase 9% in 2020. Mainly affected are retail, transport and hospitality sectors, while export-oriented businesses will be strained by lower demand (especially from China), especially for ICT-related products.
In 2021 a rebound in GDP growth of about 4% is expected, but a strong recovery remains susceptible to several downside risks. A larger and longer-lasting coronavirus pandemic could lead to persistently low consumer sentiment, more financial market volatility and an even deeper contraction of global growth. The effects of a further escalation of the Sino-US trade dispute and rising protectionism on the Asian supply chain would hit Japan hard.