Japanese economy slumps to decade low amidst Covid-19 pandemic

• Japanese economy slumps for the 3^rd straight quarter
• Government rolls multi trillion-dollar stimulus package to support the ailing economy
• Some green shoots visible, but economy not out of woods yet

Japan, the world’s third largest economy registered sharp drop in GDP performance during the Apr-Jun quarter, following the trend in other major countries around the globe which too recorded acute drop in their economic activity amidst the fallout of the Covid-19 pandemic. Economies around the globe went to a standstill during most of the first half of 2020 as coronavirus affected the health of millions of individuals, pushing governments to announce complete and/or partial lockdown in industries across the length and breadth of the economy. In Japan, report from Cabinet office showed, overall economic output contracted by 7.8% during the Apr-Jun quarter, when compared sequentially and marking its third continuous quarterly drop. This was the worst performance in any quarter for the Japanese economy, at least dated back to 1980 when the government started providing comparable economic performance. The fall was so big in terms of quantum that the overall size of the real GDP came down to 485 Trillion Yen, the size seen in early 2011, around the time the much talked and debated ‘Abeconomics’ started under the leadership of Japan’s PM, Shinzo Abe. Japan’s economy was already under pressure during the last quarter of CY 2019, as rise in consumption tax from 8% to 10% during October last year, slowing demand in China and other major importing nations and a number of natural disasters during the past year pushed it into contraction even before the pandemic hit the country in early 2020. Growth in the earlier 2 quarters Oct-Dec 2019 and Jan-Mar 2020 stood at -1.8% and -0.6%.

Fall in Japanese economy during the Apr-Jun 2020 quarter was even worse if we look at the data on an annualized basis with the reading standing at negative 27.8% as local demand plunged whereas exports of goods and services crashed nearly 20% during the period under review. Silver lining was attached with the fact that numbers stood broadly in-line with major economists’ estimates, and moderately better than the performance reported by other key world economies during the same quarter. During the same period, US GDP came down by 32.9% while double digit drop was seen in the most major EU region countries. Data from Eurostat showed, quarter on quarter GDP during Apr-Jun quarter slid by 12.1% in the EU while UK GDP also fell by 20.4% in the period. Nevertheless, almost all Asian countries fared better with China even registering modest growth in economic output after the slump in past quarter. 

Onto the health management front, Japan has fared better than many other economies in comparison to its overall size and also when equated to total population in the country. Total number of cases in Japan stand just above 55,000 (16^th Aug) with mortality rate standing just near 2%, faring better than the world average and indicates strong government and local control of the situation as against many other developed and developing countries. Around the onset of the Covid-19 fallout, Japan was amongst the first ones to announce closure of schools while incorporating a number of and public safety measures along with government initiatives that aided in keeping overall numbers low. Still, Japan being one of the major exporting nations in the world maintains critical position in technology, manufacturing, and industrial sectors across the globe. With other nations hard hit due to the Coronavirus pandemic, indirect effect was felt on Japan as well, a gift of globalization and result of its dependence on exports as well as imports (natural resources).

Positively, the Japan's government and central bank have announced series of fiscal and monetary policy measures to contain the effect of the pandemic. The government in May month approved second round of stimulus measures amounting to nearly 117 Trillion Yen of budgetary allocations, which is a follow-up of a similar amount worth of investments and budget allocations announced in April this year. The new package pushed the total spending the Japanese government has put to fight Covid-19 to be around 234 Trillion Ten or around $2.18 trillion, standing at ~40% of Japanese GDP and marking it as one of the biggest ever fiscal package announced by any government around the world. The package would be a mix of bond buying by the central bank, incentives to small and medium enterprises, interest free loans, increased spending on medical and healthcare and inclusive of direct payment to individuals and corporates who were directly affected by the pandemic amongst other measures. Some green shoots are visible as well in the different economic cues in the last few months which showed amelioration. As the economy started to reopen gradually towards May end and with further improved business activities in June and July, economic cues have improved with fall in unemployment rate, rising retail sales as well as improvement in industrial activity.

On one hand, we see some optimism coming back into the Japanese economy, however, on the other end, Covid-19 cases which fell for most of May and stayed under 100 per day for most of June month have seen sharp rise in July and first half of August. This doesn’t sound very well as second round of case rise is likely to affect the psychology of corporate and the people alike and has capacity to stall or at least derail the rebound. While almost all countries in the world are moving into unlock mode as they try to seek the balance between economic and individual growth along with caution being kept in terms of health and safety, Covid-19 is testing the public and administration both as they fight against the pandemic, with Japanese people and government also working on similar lines. From a macro level, while the worst seems behind for the Japanese economy, but it is going to be followed by slower growth for many quarters going forward before the economy really starts to accelerate on the growth path ahead.