Japan: A new hope

We reassess Japan’s growth outlook in the context of a new government and the lifting of Covid state of emergency.
Ma Tieying01 Oct 2021
  • The broad direction of LDP policies is expected to continue
  • A sizeable supplementary budget focusing on household support is likely to be unveiled soon
  • Consumption is poised for a moderate recovery, driven by pent-up demand
  • We maintain GDP growth forecast at 2.2% for 2021 and raise it modestly to 2.0% for 2022
  • The BOJ will still lag the Fed in withdrawing monetary stimulus
Photo credit: Unsplash

A new government

Fumio Kishida was elected as the ruling Liberal Democratic Party’s new president on 29 September. This virtually ensures that he will be appointed as Japan’s new prime minister when the parliament holds an extraordinary session on 4 October. The appointment of a new leader also paves the way for the LDP and its coalition to win enough votes at the general election in November to stay in power.

The broad direction of LDP policies that Abe and Suga have pursued in the past nine years is expected to continue under Kishida’s government. These include the ultra-accommodative monetary policy, flexible fiscal policy, decarbonization, digitalization, promotion of free trade, among others.

Kishida has openly said that Japan should maintain ultra-low interest rates for the time being and deploy a fiscal stimulus package worth more than JPY30tn (5.5% of GDP) to revive the economy. His government is likely to unveil a supplementary budget in the next few weeks, before announcing the general election in late-October. This will be the fourth Covid stimulus package since last year and the first for this year. To cushion the impact of the Covid pandemic, Suga’s government implemented three stimulus packages totalling JPY308tn in 2020, including JPY77tn funding through the supplementary budgets.

Kishida has also said during the election campaign that Japan needs a new type of capitalism to address the income disparity caused by the pandemic. Measures aimed to expand support for social welfare and increase household disposable incomes could be expected in the upcoming supplementary budget and next year’s general budget.

Lifting of Covid state of emergency

On a separate note, Japan has lifted the Covid state of emergency covering 19 prefectures and the quasi-state of emergency in other areas, starting from 30 September. This is the first time since April that none of the country’s total 47 prefectures is under a state of emergency or quasi-state of emergency. The number of new Covid cases in Japan has fallen to 2k per day since late-September, sharply down from the peak of 20k in August. Meanwhile, vaccination has gathered pace significantly. The share of the population that received at least one vaccine dose has risen to 69% this week, while that fully vaccinated has also risen to 58%. These have exceeded the 64% and 55% in the US.

As a state of emergency was repeatedly declared this year, consumption recovery was postponed. The retail and recreation activities captured by Google mobility data exhibited a W-shaped pattern through Jan-Sep. Private consumption expenditures under the GDP account barely grew in 1H, after contracting 5.8% in 2020. A long-awaited recovery in consumption, aided by pent-up demand, could be expected in the coming months.

Nonetheless, a new wave of infections after the loosening of restriction measures remains possible, given the heightened transmissibility of the Delta variant, vaccination rate below 80%, and risk of breakthrough infections. Should strains re-emerge in the healthcare system, the government would re-tighten measures to contain infections. It remains too early to expect a strong and sustainable recovery in consumer spending in the quarters ahead.

Implications for forecasts 

Additional fiscal stimulus and the lifting of Covid state of emergency provide support for the near-term domestic growth outlook. On the other hand, external environment is deteriorating, in the context of China’s slowdown, supply chain disruptions in ASEAN, and the continuation of global chip shortage. Japan’s exports growth slowed notably to 26.2% YoY in August from 37.0% in July, dragged by weaker demand from China, ASEAN and the US. Toyota announced to slash its global production by 40% in September, citing the shortage of chips and other auto parts. Uniqlo’s parent company Fast Retailing also reported delays in its clothing release, due to the shortage of workers in the lockdown areas in Vietnam.

Considering the improved outlook for domestic demand and weakening outlook for exports in 4Q, we are keeping the 2021 GDP growth forecast unchanged at 2.2%. We are raising the 2022 growth forecast to 2.0% (from 1.5%), in the view that domestic recovery momentum will carry forward into 1Q22 and external environment will gradually stabilise.

Two years of 2% growth will still be insufficient to recoup the 4.6% GDP loss incurred in 2020. Output gap will remain slightly negative and underlying inflation pressure should remain subdued. Accordingly, we continue to expect the Bank of Japan to maintain an accommodative policy stance through 2021-22 and lag the Fed in withdrawing stimulus.

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Ma Tieying 馬鐵英, CFA

Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣

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