Recession in Japan - bottom not yet reached

In the first quarter of 2020, the Japanese economy contracted by -0.9 percent compared to the previous quarter, slightly less than expected. After -1.9 percent in the final quarter of 2019, however, this is the first time in four years that Japan has experienced a "technical recession" with two negative quarters in succession. While the increase in value-added tax in the final quarter of 2019 led to a slump in overall economic demand, it is now the corona crisis that has become increasingly apparent in the first quarter and is having a negative impact on the economy.

Private consumption fell by a total of -0.7 percent compared to the previous quarter, with negative rates in service sectors such as restaurants and hotels as well as the retail trade slumping even more sharply under the impact of the corona pandemic. Corporate investment and production also suffered severely from the restrictions imposed at the beginning of the year, mainly due to the lockdown in China and the disruption of global supply chains. Private plus government capital investment in Japan fell by 1 percent overall. Despite the announcement of an economic stimulus package, the government's expansionary impulse in the first quarter thus remained very limited. Public consumption rose by just 0.1 percent compared with the previous quarter. Ultimately, however, it was exports that suffered a particularly dramatic slump, namely by around 6 percent compared with the final quarter of 2019. The main reason for this is the poor state of the US and Chinese sales markets.

The severe economic crisis in Japan is likely to continue for quite some time. The signs are particularly bad for the second quarter, as a national emergency has been in effect in Japan since 7 April due to the corona pandemic, and has now been extended until the end of May at least for eight major cities including Tokyo and Osaka. The service sector, gastronomy and tourism will therefore continue to suffer heavily due to the measures taken against corona. Where new clusters of infection are discovered, companies are likely to be asked to stop production or close down. The export situation will also remain extremely difficult for Japan in the recessionary global environment.

Even though Japan itself may currently be in a relatively good position by international standards in terms of both the number of infections and the number of deaths from corona, which gives hope that emergency measures will soon be eased, the picture here may very well cloud over again very quickly. In any case, the mood of private consumers has fallen dramatically in the current situation, and the propensity to buy and employment expectations are now at record levels. Especially part-time and temporary workers, small businesses and the self-employed fear for their jobs and incomes and are strictly holding back on consumer spending. The unemployment rate is rising. Even the government's generous fiscal package, which was announced on April 7, is not much help here for the time being. The short-term outlook for Japan thus remains bleak for the time being. The Japanese growth rate of -5.8 percent we forecast for 2020 undercuts even the extreme negative rate of 2009, when the global financial crisis overshadowed the world economy.

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