Global Economic Outlook: Summer Boom

Japan

• Japan’s economy remained weak in the first half of 2021 due to states of emergency imposed to contain the COVID-19 pandemic. Japan’s gross domestic product (GDP) fell 1% quarter-over-quarter in the first three months of the year due to enduring weakness in domestic demand amid tightened public health restrictions. Japan’s recession is likely to continue through the second quarter.
• The outlook for the second half of 2021 remains positive. Growth elsewhere in the world should increase demand for Japan’s manufacturing exports, and improvement in public health conditions will allow more domestic consumption. Extension of government support for firms, households (including employment subsidies) and the health care system will also underpin the recovery.
• Despite increasing pressure to postpone, Japan looks set to host the delayed Tokyo Olympic games next month. Though the government has allowed up to 10,000 domestic spectators at venues, the event will take place without the benefit of a million international visitors, who would have provided much-needed impetus to the economy. As we highlighted here, postponing the event would have been the least economically damaging outcome. We are hoping the mega-event won’t cause a fresh wave of infections in Japan and abroad.
• While the reopening surge is leading to high inflation readings in countries like the U.S., we do not anticipate similar inflationary pressures in Japan. For the first time in 14 months, Japanese inflation is only starting to edge into the positive territory. Thanks to rising commodity costs, consumer prices (excluding fresh food) rose only 0.1% for the 12 months ending in May.
• The Bank of Japan (BOJ) left monetary policy unchanged at its June meeting. It did extend the deadline of its funding-for-lending scheme, targeted at the victims of the pandemic, by six months, to March 2022. The central bank also announced its plans to institute a new funding measure for financial institutions to support investment and loans tied to climate change. With inflation likely to remain elusive throughout our forecast horizon, rate liftoff remains out of the picture.
• The Japanese unemployment rate rose by two-tenths to 2.8% in April amid renewed public health restrictions. While employment of regular or full-time workers has risen, jobs of non-regular workers, in sectors like leisure and hospitality, have shown little sign of recovery since the second quarter of 2020.
  • The government’s push to achieve a 3% increase in wages, to combat deflation, has not been successful. Amid uncertainty, labor unions (during the annual spring negotiations for fiscal 2021) agreed to a 1.8% rise on average, the lowest in eight years.
  • With Japan’s workforce expected to decrease notably over the next two decades, government programs have helped more women join the labor force. However, challenges remain as womens’ participation remains concentrated in part-time and low-paid jobs.
• Japan’s trade sector has underpinned the economy. May’s data confirmed the strength in exports growth on the back of the global recovery; strong demand from the country’s largest trading partners, the U.S. and China, has been helpful. Despite temporary supply-side bottlenecks (including chip shortages) in the auto sector, the outlook for exports remains favorable as the global recovery establishes a firmer footing.
• Japanese policymakers would prefer to see a weaker yen as it boosts exports and inflation. However, investors’ interest, owing to its safe-haven status, will likely keep the yen stronger than the BoJ would prefer.
• The outlook for the Japanese economy is improving, but risks are tilted to the downside. Japan’s vaccination program lags other advanced economies, with the government aiming to inoculate its elderly citizens (one-third of the population) by the end of July. A consumption-led recovery could come under threat from a combination of a relatively sluggish vaccine rollout, threat of new virus variants and inadequate healthcare capacity to treat patients. As recent moves suggest, even a modest rise in infections could see restrictions re-imposed.

Global Economic Forecast - June 2021

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