Morning Commentary: Japan: From Good to Bad and Back to Good
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Japan: From Good to Bad and Back to Good
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Andrew Kositkun Senior FX Advisor
Preliminary GDP data showed the Japanese economy beating market consensus, as the economy expanded 3.0% quarter over quarter in the fourth quarter of 2020 after growing 5.3% in third quarter.
The stronger-than-expected pickup in fourth-quarter GDP helped to narrow the contraction in full-year GDP to -4.8% year over year. While this is the second worst yearly contraction in the post-war period, after the 2009 plunge, the Japanese economy’s recovery has been much swifter, reflecting the unique nature of this downturn. After slumping more than 10% below pre-COVID-19 levels, output is now back to just 3% below pre-crisis levels. Conversely, it took nearly two and a half years for the economy to stage a similar rebound after the Global Financial Crisis and five and half years before the economy finally exceeded its pre-crisis highs.
The key difference between these two shocks is that the COVID-19 recession did not result from excesses in the financial system but rather reflected a pure exogenous shock, that is, a pandemic that necessitated a temporary freeze on some parts of the economy, such as social consumption. With large-scale policy easing underpinning the economy, household and corporate spending on durable goods has been able to rebound quickly.
Unfortunately, the road ahead appears bumpy, with Japan likely to see a contraction in first-quarter 2021 GDP due to the renewed slump in mobility and discretionary services resulting from the lockdown measures implemented by the government’s State of Emergency (SOE) declaration in early January. While this SOE appears to have a smaller drag on consumption relative to previous rounds, the two-month SOE is estimated to deliver a 0.5% hit to annual GDP growth.
Looking further out toward the second and third quarters, expectations return to that of fairly strong growth, reflecting the continued expansion in exports and a mechanical rebound in consumption following the end of the third COVID-19 wave and easing of restrictions on services activities. Domestic investment should also be supported by structural tailwinds, such as digitalization, decarbonization and supply chain reorganization — all policy areas that the government is actively trying to promote via stimulus.
However, once we are past the mechanical rebound, the recovery in the services sector is likely to remain sluggish over the medium term. Japan’s vaccine rollout, which just started this week, is likely to take time for a variety of reasons, making it unlikely that the services sector, and especially tourism, can fully reopen before 2022. Secondly, unlike the U.S. where the pandemic has had little impact on the consumer psyche, there is evidence that shows deeper damage to Japanese households. This raises the risk that precautionary savings will remain elevated and spending sluggish once support from “spend it or lose it” stimulus programs such as the “Go To” campaign are phased out.
Over in the U.S., January retail sales absolutely blew away market expectations, as the headline number rose 5.3% versus estimates for a 1.1% month-over-month increase. Additionally, the retail sales “control group,” which is a tighter category (excludes food services, automobile dealers, building materials and gas stations) for GDP calculations, rose by 6.0% month over month against expectations for a 1.0% gain. For context, this home-run report comes before any new stimulus and with some parts of the country still in shutdown. Clearly, once the economy fully reopens, consumers draw down on over a trillion dollars of excess savings and the new stimulus hits, there will likely be a significant acceleration in demand and household spending. As such, this retail sales number likely emboldens Republican opposition to Biden’s $1.9 trillion stimulus plan that Democrats remain on track to pass without Republican support.
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