Japan Economy in a Snapshot Q3 2020 Report

Economic Outlook

The smoothed CEIC Leading Indicator fell to 66.8 in June 2020, its lowest level on record, from 69.7 and 73.8 in May and April respectively. This indicates how rapidly economic conditions have deteriorated in Japan.

Even though the state of emergency was lifted in late May 2020, a sustained economic recovery is likely to prove elusive in FY2020 (to end March 2021). Overall, the economy will contract at its fastest pace in decades, which is likely to compel the government to announce another fiscal stimulus package.

 As of July 2020, the authorities have announced two stimulus packages totalling USD 2.2tn. According to the UK-based consultancy firm, Oxford Economics, real GDP is forecast to contract by 6% in 2020 before it grows by 2.8% in 2021.

According to Atsushi Takeda, chief economist at Itochu Research Institute, it will take two-to-three years for economic activity in Japan to return to normal, as the economies of Japan’s trading partners continue to suffer the after-effects of the pandemic.  

Business investment is expected to drop markedly in 2020 due to weak demand. According to Oxford Economics, declining profitability, falling production of capital goods and further falls in both domestic and foreign machinery tool orders seem to suggest that Japan is likely to witness a marked pull back from business investment in the coming quarters of 2020, weighing on GDP.

Consumer spending, which accounts for around 60% of Japanese GDP, is expected to recover very gradually after plummeting in Q2 2020 resulting from the state of emergency in Japan which was lifted on May 25, 2020. However, various factors, such as concerns regarding the coronavirus pandemic, rising unemployment, falling wages and plunging consumer confidence pose the risk of consumer spending sliding over the coming months.