Japan' economy could contracts 4.5 percent in this year due to the pandemic, said some observers - Photo by Prime Minister Office

JAKARTA (TheInsiderStories) – Japan’ economy could contracts 4.5 percent in this year due to the pandemic, said some observers. While, Fitch Ratings has revised its outlook on Japan’ Long-Term Foreign-Currency Issuer Default Rating to Negative from Stable and has affirmed the rating at ‘A’.

Earlier, Bank of Japan (BoJ) also sees the economic growth to shrink 4.7 percent and the consumer price index to fall 0.5 percent in the fiscal year until March 2021 caused of the COVID-19 outbreak. According to the governor, Haruhiko Kuroda, Japan’ economy has been in an extremely severe situation.

However, he is projected the economy to grow 3.3 percent with expectations that economic activity will gradually return to the pre-pandemic level. He also asserted such steps had supported the Japanese economy amid the pandemic with the government’ two extra budgets financing massive economic stimulus packages. 

While, Fitch said, the pandemic has caused a sharp economic contraction in Japan, despite the country’ early success in containing the virus. A downturn in consumer spending and business investment has been exacerbated by a steep decline in exports associated with weak external demand.

The authorities have responded with size-able fiscal measures to bolster virus containment efforts, provide relief to households and businesses, and support economic recovery. Fitch projects the economy to contract by 5 percent for the full year in 2020, before rebounding to 3.2 percent growth in 2021 due partly to the low base effect.

Even then, GDP would not recover to its pre-pandemic level until 4Q 2021, a full two years from the onset of the health crisis. A nationwide state of emergency was announced in mid-April under which stay-at-home policies were encouraged, and was lifted gradually through the end of May.

However, a renewed surge in cases is creating the possibility of further containment measures and risks to the economic outlook. Confirmed cases now top 30,000, still far lower than Japan’ G7 counterparts. The fiscal support and an expected recovery in external demand should set the stage for a return to quarterly growth in 2H 2020 under Fitch’ baseline.

“In addition, sharply wider fiscal deficits in 2020 and 2021, as we project, will add significantly to Japan’s public debt, which even before the pandemic was the highest among Fitch-rated sovereigns as a share of GDP. The low interest-rate environment will continue to facilitate the sovereign’s ability to service this debt burden for some time,” said the report.

The negative outlook reflects that the higher debt ratio and downside risks to the macroeconomic outlook will nevertheless exacerbate the challenge of placing the debt ratio on a downward path over the medium term. This challenge is all the greater given Japan’ mixed record with debt consolidation over the past decade, when low interest rates, positive nominal GDP growth since the inception of Abenomics, narrower general government deficits and last year’s consumption tax hike all helped to stabilise – but not reduce – the debt ratio.

“Moreover, we expect an ageing population and declining work force, together with lingering supply side damage from the coronavirus, to weigh on Japan’s medium-term growth potential,” told Fitch.

It also project the deficit to narrow to 10.9 percent of GDP in 2021 and 5.3 percent in 2022, as the recovery gradually solidifies and the authorities seek to return to their path of debt reduction. The projections are uncertain, pending clarity on the authorities’ budget plans in the fiscal year ending March 2022 and medium-term fiscal outlook, as well as how the virus develops and ongoing risks to the macroeconomic outlook.

In the meantime, the higher public debt ratio in Fitch’ view increases the sovereign’ vulnerability to a tightening of financial conditions or other shocks. Fiscal measures are being accompanied by ongoing quantitative easing, including stepped up efforts by the BoJ since mid-March to facilitate stable financing of financial institutions and firms, and stability in financial markets.

The former is being addressed by lending programs and an increase in central bank purchases of commercial paper and corporate bonds through March 2021. The latter entails provision of US dollar liquidity and stepped up purchases of Japanese Government Bonds, exchange traded funds, and J-REITs.

These measures have been effective toward meeting their objectives, in Fitch’ view, although they entail longer-term risks for the BoJ balance sheet, particularly the purchase of ETFs and fluctuations in underlying equity prices. Its expects the BoJ to maintain current interest-rate settings through at least the end of 2022 under its yield-curve control framework.

“We believe the BoJ views interest rate cuts as part of its arsenal for potential further easing, but that it will refrain from doing so because of the impact that further rate cuts into negative territory would have on bank profitability. Rather, an extension of temporary quantitative easing programs beyond their expiry in March 2021 or refinements to its forward guidance remain more likely,” said Fitch.

The official 2 percent inflation target remains elusive, and the BoJ has refrained from setting a target date. Fitch project headline inflation of -0.6 percent at end-2020, turning marginally positive in 2021.

Prime Minister Sinzo Abe‘ third term will end in November 2021, by which time elections must be held. It appears unlikely that he would seek a fourth term based on his public statements and the requirement of another change in the LDP ruling party’ internal rules, which were previously revised in 2016.

The expected change in leadership does, however, create some uncertainty as to the course of policies in 2021 and beyond. Fitch nevertheless anticipates that an emphasis on returning the debt trajectory to a sustainable path will remain a core policy goal in a post-Abe administration.

Edited by Editorial Staff, Email: theinsiderstories@gmail.com