Issue 03 - 2020 MAGAZINE

How is Japan re-emerging from despair?

An assessment was carried out by the government only to find out that the economic contraction had stopped in August

In October, the Government of Japan carried out a reassessment of the economy which found that the economic contraction had stopped in August. Based on the improved performance of a few key indicators, the government had upgraded its assessment for the first time since May 2019. The Cabinet Office said that economic indicators which measure a range of data including factory output, employment and retail sales numbers, rose a preliminary 1.1 percentage points from the previous month to 79.4 percentage points in August. This data suggests that the Japanese government has upgraded its assessment and even concluded that the economy grew by 0.6 percent in August.


As the third largest economy in the world, Japan has recorded its worst performance in May this year. Positively, the economy since then has gradually increased and is moving upward in its growth trajectory. Japan’s economy also contracted an annualised 6.3 percent during the fourth quarter of 2019, primarily due to a sales tax hike that affected consumer and business spending. It was the first economic decline witnessed by the country in five years. Previously,  Japan had witnessed an economic contraction during the second quarter of 2014. The International Monetary Fund (IMF) in its latest forecast said that Japan’s economy will decline by 5.3 percent in 2020.


The pace of decline in exports is lessening 

Last year, Japan exported $705.7 billion worth of goods globally and the. items shipped included metals, vehicle parts, industrial printers, refined petroleum, LCDs, rubber tyres, air pumps, gold, telephones, thermostats among others. The country had exported goods worth $349.2 billion in the first seven months of 2020 and more specifically, exports in August amounted to $49 billion, which points to a 15 percent drop. However, in the country’s exports  in the previous month that recorded a drop of 19 percent and in the two months prior to that it had recorded a drop of 26 percent and 28 percent respectively. Statistically, the recorded drop directly aligns with the 21st consecutive monthly drop in overseas sales during the deteriorating demand in goods and services as part of the pandemic’s negative impact on supply chain.


With that, the pace of decline in exports lessened as countries ease their lockdown rules and resume economic activities including global trade. The 15 percent drop in exports was outpaced by more than 20 percent decline in imports. In fact, trade across several product categories had declined with exports of transport equipment such as vehicles declined as much as 23 percent. Even electronic devices such as computers and phones had recorded a strong demand. But the silver lining for Japan is that its exports to China had increased by 5 percent during that period. It is important to take into account that Japanese exports to China had increased by 8 percent in July, while exports to the US decreased by 21.3 percent. Even exports to Western Europe fell by 15.3 percent, South Korea by 13. 8 percent and Hong Kong by 4 percent, observed the United Nations Comtrade database on international trade.


August sees a significant rise in factory output 

In August, factory output in Japan had increased 1.7 percent from the previous month. This is attributed to its growing production of automobiles and car parts as well as minerals such as iron, steel and non-ferrous metals. This was the third consecutive month in which the factor output had increased in Japan, which suggests that it is positive and a key indicator of its growth. Mainly, the demand had plunged significantly as the coronavirus had forced governments to impose lockdowns in an attempt to curb the infection spread. Overall, the move has affected global trade and production.


Now manufacturers in Japan expect the output to rise 5.7 percent in September and 2.9 percent in October, according to a survey published by the Ministry of Economy, Trade and Industry. They also expect output to decline 1.5 percent in November and rise 1.1 percent in December. Japan’s small and medium manufacturers are expecting the pace of economic recovery to be quite slow.


The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) was largely unchanged at 47.3 in September compared with a final 47.2 in the previous month. Output contracted for the first time in four months weighing on the headline index which remained below the 50 threshold that separates contraction from expansion for the 17th month. The PMI survey further revealed a slight improvement in service-sector activity this month, which contracted at its slowest pace in seven months. The au Jibun Bank Flash Services PMI rose to a seasonally adjusted 45.6 from the previous month’s final of 45. It is noteworthy that Japan’s industrial output recorded the biggest fall in the last two years in October 2019, exposing the country’s economic vulnerability and highlighting the growing decline in domestic and foreign demand. Factory output fell 4.2 percent in October from the previous month, according to data from the trade ministry. .


Japan’s stimulus package equals to 22% of GDP 

To further protect its economic growth, the Japanese government is considering an additional trillion-dollar economic stimulus package which is focused on boosting consumption in the country. Former Prime Minister Shinzo Abe announced a $1.1 trillion stimulus package to cope with the protracted coronavirus pandemic—which was noted to be the largest stimulus package in the word. The authorities and policymakers in Japan will be pinning their hope on the new stimulus package which is expected to firm up the economy again on the back of severe downgrades in the last two quarters.


On February 13, the Shinzo Abe-led government announced its first coronavirus emergency response package. Besides providing support for Japanese travellers returning home, the regime also emphasised on strengthening immigration control and loan facilities for small and medium-sized enterprises (SMEs) in the country. This was followed by the second coronavirus emergency response package which was announced on March 10, 2020. Some of the key measures of the package include increasing the number of hospital beds for infected patients, additional loan support for struggling businesses in the country and strengthening employment support measures among several others.


However, the biggest economic package was revealed in April when the government announced a $1.1 trillion stimulus package. This was equivalent to 22 percent of the country’s GDP. Around 25 percent of the trillion-dollar fund was allocated to employment and business support, while the rest was allocated to the healthcare system, consumption promotion campaign and public investment.


Japan is considering an additional economic stimulus package that will focus on boosting the consumption levels in the country. On the political front, newly appointed Prime Minister Yoshihide Suga is expected to delegate the drafting of the budget soon and the draft is likely to be submitted to next year’s parliamentary sessions in January when  the initial budget for the next fiscal year from April 2021 is also set to be discussed.


Relapse in unemployment rate affects industries 

In 2019, the unemployment rate in Japan was at about 2.29 percent. But  its unemployment rate reached up to a three-year high in August this year. This is mainly due to additional citizens entering the labour market in search of employment amid increasing economic activity. The Internal Affairs Ministry reported that the jobless rate increased to 3 percent from 2.9 percent in July. The number of unemployed Japanese citizens increased by 490,000 from a year earlier to 2.06 million and it topped two million for the first time since May 2017.


Data released by the labour ministry in Japan also showed that the job availability ratio in August had further deteriorated to 1.04 from 1.08 in the previous month. The latest figures suggest that businesses in the country are finding it difficult to sustain their workforce as consumption has taken a serious hit due to the coronavirus pandemic. Despite a second monthly uptick in the unemployment rate, Japan has suffered from a reduction in the national job count compared to other major economies during the crisis.


For the uninitiated, the country is facing severe labour shortages due to its ageing population. When it comes to Japan’s manufacturing sector, more than half a million positions have been lost. Other sectors that have faced the repercussions of the pandemic are tourism and hospitality. Even continuing restrictions on international travel has weighed heavily on hotels, restaurants and the overall ability to sustain their business. In this regard, new job offers were down by 49 percent in August compared to last year.


Experts believe that a solid recovery in employment could be a long way off. Wage support from the government and low-interest rates on loans have helped keep workers on the payroll, while a strong balance sheet or legal protection have also helped many global corporations retain their current workforce. That said, a full recovery is hard to predict at this point in time and much of it depends on the global discovery of a vaccine for the novel coronavirus.


The non-adjusted number of people in work dropped from a year earlier for the fifth consecutive month. It dropped 750,000 to 66.76 million, including 29.54 million women. Among several industries, the accommodation and restaurant services sector have been hit hardest by the pandemic. The industry saw the largest fall in its number of workers, losing 280,000 from the previous year to 3.91 million this year. In the manufacturing sector, the numbers fell by 520,000 to 10.26 million. Japanese citizens who were no longer part of its labour force grew 110,000 from a year earlier to 41.88 million, also up for the fifth successive month. Around 710,000 people among those unemployed voluntarily left their jobs, which was down 10,000 from a month earlier, 590,000 were laid off, which was up 30,000, and 530,000 were new job seekers, which was up 40,000.


METI records increase in retail sales 

Japan’s retail sales had increased by 4.6 percent month-on-month in August and the sector had recorded sales worth ¥12.419 trillion, according to the Ministry of Economy, Trade and Industry. It is a positive sign for the economy as retail sales dropped by 3.4 percent in July. However, retail sales fell 1.9 percent year-on-year, after slipping by 2.9 percent in the previous month. Department store sales in Japan had dropped by 22 percent in August from a year ago for the 11th consecutive  month and the drop is not attributed to the coronavirus pandemic or as the humid weather that prompted people to stay indoors most of the time. According to data released by the Japan Department Stores Association, the decline was steeper than the 20.3 percent decrease recorded during the month of July. Department stores recorded sales worth ¥323.12 billion across 203 outlets in the country. As Japan maintained sweeping travel restrictions, duty-free sales took a hit from a sharp drop in foreign tourists, sliding 86.1 percent to ¥3.55 billion.


In fact, the association had added that August often proves to be a good month for store operators to draw customers as it is the time of year when several Japanese citizens take off for summer vacations. However, the pandemic has forced stores to cut down on promotional activities this year which has greatly reduced the number of shoppers.  Also, customers are more inclined to shop online in addition to declining stores. Automakers in Japan recorded a 14 percent drop in global vehicle sales in August as the coronavirus pandemic continued to sap demand even after factories and dealerships reopened. It was for the sixth consecutive month that sales had dropped in Japan. The country’s seven major automakers, including Toyota Motor and Nissan Motor, sold a combined 1.97 million vehicles during that period and the decline in monthly sales has slowed significantly since a 50 percent slump in April. In fact, only Suzuki Motor had recorded a 2.2 percent increase in sales during the same period.


Despite positive signs of recovery, the growth also depends on stimulus packages from the government. Even consumers need to be encouraged to spend and for that reason, governments will need to invest funds in its people. As discussed earlier, a huge part of the economy’s growth is relying on the discovery of the vaccine to bring the coronavirus under control. With these setbacks, the Asian Development Bank predicted that the Japanese economy will grow by 7.7 percent in 2021 and panelists at FocusEconomics also expect the economy to contract 5.5 percent this year before growing 2.7 percent in 2021.


Looming concerns for Japan

Despite the fact that the economy exited recession for the first time, experts have warned that the sharp economic bounceback was a one-off. They further warned that the future still remains uncertain as a moderate  resurgence in infections at home and abroad could push the economy into recession again. With that, there are looming concerns for Japan. This is because the Japanese Cabinet Office recently compiled a report which indicated that the economy is in a ‘severe situation’ due to the pandemic, but it is showing movements of picking up. The Japanese government too kept its economic overview unchanged in its monthly report, adapting the same overview for the fifth straight month. Although the government downgraded its assessment of business investment for the first time since September, the report states that the sector has been decreasing recently.


Assessment for industrial production was upgraded for the first time since September. The upgrade was attributed to robust exports in automobiles to Southeast Asian countries and the US, well supported by domestic demand. The government has also kept private consumption unchanged with government officials clarifying that levels are roughly on par with those in the last three years.


Experts and policymakers are expecting the Bank of Japan to extend its corporate funding programme beyond its March deadline and the central bank of the world’s third biggest economy is expected to make a decision by  January 2021. Economy Minister Yasutoshi Nishimura said that Japan still had a $287 billion negative output gap, or spare capacity, part of which must be filled by a new stimulus package.


For that reason, the country has announced a fresh $708 billion economic stimulus package to pull itself out of the deep coronavirus-driven slump. In addition, the new stimulus package will be targeting investment in growth areas such as green and digital innovation. Prime Minister Yoshihide Suga, said in a meeting, “We have compiled the new measures to maintain employment, sustain business and restore the economy and open a way to achieve new growth in green and digital areas, so as to protect people’s lives and livelihoods.”

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