Prime Minister Shinzo Abe and His Cabinet - Photo by Prime Minister Office

JAKARTA (TheInsiderStories) – Japan’ real GDP growth for the fourth quarter (4Q) of 2019 was revised down to a 1.8 percent quarter-to-quarter (QoQ) from same quarter in 2018 at 1.6 percent. The downward revision largely reflected weaker private capital expenditure (capex) and low private inventories.

Sluggish capex and changes in inventories offset marginal upward revisions to consumer spending and residential investment. The first decline in capex in three quarters largely reflected drops in investment in machinery and equipment (down 4.2 percent QoQ) and transport equipment (down 10.4 percent QoQ).

In addition to persistent weak external demand, the drop-off in front-loaded demand following the consumption tax increase, as well as disruption caused by natural disasters eroded corporate profits and led to companies to grow more cautious about investment and de-stocking.

The economic watchers’ survey for February, released by the cabinet office, suggests a sharp contraction in all type of economic activities: the diffusion index of current and future condition fell to 27.4 and 24.6, the lowest levels since April 2011 and March 2011, respectively, which was just after the Great Eastern Japan Earthquake and tsunami.

Harumi Taguchi, IHS Markit’ economist rated Japan’ real GDP growth for the first quarter of 2020 to continue to decline, reflecting the impacts of the rapid spread of the coronavirus epidemic on tourism as well as consumer spending. Fear of untraceable human-to-human transmission, concerns about supply shortages from China, and the closure of schools to contain the spread of COVID-19 boosted sales of specific goods and services.

That said, those will not be enough to offset downside effect for the economy from a decline in tourist numbers and self-restraint measures in response to the government’s request. Several major cultural and sports events have been cancelled/postponed/held without audiences, while major amusement parks have been closed.

While declines in working hours hurt income of non-regular workers, fear surrounding COVID-19 and pre-existing weak consumer sentiment is likely to hurt consumer spending during a period of national holidays in late April/early May.

Flash figures of imports for the first 20 days of February declined 16.6 percent year on year, probably reflecting the extended Lunar New Year holidays and low capacity utilization in China. Industrial production could be disrupted to a greater extent throughout the supply chain. Moreover, global uncertainties due to epidemic could delay a recovery in Japan’s exports and capital investment.

He noted, although IHS Markit’ base scenario is still for Japan to host the Olympics, the difficulties facing a V-shaped recovery in global demand is likely to slow global growth, and prompt Japan’ real GDP to shrink by 0.3 percent in 2020 for the first negative growth since 2011, before a turnaround and growth of 0.9 percent in 2021.

The Bank of Japan (BoJ) has limited room for additional monetary easing. However,  it stressed that it will keep ample liquidity to support financial markets following an emergency telephone conference of the group of seven finance ministers and central bank governors on March 4.

Rising downside risks and rapid safe haven Japanese yen appreciation probably lead the central bank to change forward guidance and strive to stabilize markets, by offering sufficient liquidity via market operations and asset purchases. The BoJ could utilize a loan support program, which could help private financial institutions’ efforts to support companies affected by the COVID-19 disease outbreak.

A JPY13.2 trillion (US$129.08 billion) fiscal stimulus package has not been fully utilized yet and the fiscal year 2020 budget, which includes funding for some measures in the stimulus package, is in the process of being approved.

That said, government financial institutions have started to support funding small and medium-sized enterprises affected by the COVID-19 outbreak. Japan also plans a JPY270 billion emergency economic package, but it could consider additional measures if severe economic conditions persist.

US$1: JPY102.26