Speeding up the Process: Covid-19’s Impact on a struggling Japanese economy

September 14, 2020

2 min read

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What's going on here?

Covid-19 has hit economies around the globe with an unprecedented slowdown in trade and consumption, and Japan’s economy was no exception. Japan experienced a fall in GDP of 7.8% in the period from April to June, the country’s worst contraction on record.

What does this mean?

Even before the start of the Covid-19 pandemic, Japan’s economy had already experienced two successive quarters of negative growth, i.e. a recession. This economic struggle followed a 2% hike in consumption tax (taxes on goods and services) and was worsened by the economic fallout from typhoon Hagibis in October 2019. Across 12 months, the fall was 27.8%, the worst ever recorded for the country, and far above the 17.8% contraction in the January to March period in the wake of the 2009 financial crisis.

What's the big picture effect?

With fewer people eating out and shopping, Japan’s private consumption levels decreased by an annual rate of 29% in the second quarter of 2020. The goods and services sector was particularly affected in the previous two quarters as a response to the hike in consumption tax, and the further reduction contributed significantly to the country’s stark economic contraction. Reduced levels of consumer spending affect the level of corporate earnings (a company’s expenses subtracted from their total income) within a country, and with this will likely negatively affect unemployment.  

Japan’s export-dependent economy saw a fall in exports of goods and services, including foreign tourist spending, by an annualised rate of 56%. Global demand for cars and auto parts, which make up over 20% of Japan’s exports, decreased hugely during strict lockdown periods. As normal life resumes, the rate of recovery of GDP from exports will be dependent on the relaxation of restrictions across the globe.

While this was the worst contraction ever for Japan, larger falls were seen in economies across the US and Europe. In the same period, the US’ economy shrunk by 9.5%, erasing five years of growth. The UK’s economy saw a shocking fall of 20%. Economic revitalisation minister Yasutoshi Nishimura stated that Japan minimised the GDP contraction through a number of government support policies, such as the universal cash handouts of 100,000 yen ($940). Unlike the US and UK’s harsh lockdowns, Japan’s reliance on an effective contact tracing system and government advice to limit social contact allowed some parts of the economy to continue moving.

Following Japan’s second spike in Covid-19 cases, which is seemingly under control, and the resumption of a more ordinary way of life, it will be interesting to see how the country’s economy rebounds. But according to Masamichi Adachi, an economist at UBS in Tokyo, Japan’s recovery will not depend on the next quarter, and instead “the real challenge is the coming months – Q4 not Q3 – and what policymakers are going to do as they go into next year”.

Report written by Sophie Falk

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