Question of the week: Is Japan’s Q3 bounce sustainable?
A: Monday’s Q3 GDP report for Japan will probably surprise to the upside, with the bounce likely to come in at 5.2% q/q, recouping a significant chunk of the 7.9% plunge in the second quarter. But the good news ends there, as economic activity looks set to slow sharply this quarter.
Private consumption—which probably drove more than half of last quarter’s rebound—is on fragile ground. Crucially, most of the release of pent-up demand has run its course, judging by the retail sales data, and the near-term outlook is clouded by the emergence of the country’s third wave of Covid-19. The outbreak is nowhere near as bad as what other developed markets are suffering, but it is clear that some social-distancing measures will be reintroduced, and the government may have to hit the pause button on its Go To Travel subsidies to encourage domestic tourism. To be clear, our base case is that a repeat of the spending plunge in the second quarter is unlikely, as we highly doubt that the authorities will pull the trigger on another nationwide state of emergency. Remember that Japan managed to curb its second wave relying merely on a handful of prefectures reimposing soft anti-virus advisories. Looking further ahead, discretionary spending will remain under pressure, with the labour market slackening rapidly and this year’s end-year bonus season set to disappoint.
On the external front, the more rapid spread of Covid-19 across Europe and in the U.S. poses a huge downside risk to the incomplete recovery in Japanese exports. Net trade was one of the stars of the show in Q3, adding an estimated 2.6 percentage points to GDP growth. This is likely to more than halve in the current quarter, at best. Admittedly, China’s advanced economic recovery should be enough to cushion the virus blow from developed markets. More importantly, though, the steady recovery of Japan’s largest export market points to a relatively bright outlook for private non-residential investment in the first half of 2021, even though capex will end this year on a soft note. All told, look for quarterly GDP growth to come in much softer in Q4, at 0.4%. From a policy perspective, a third supplementary budget this fiscal year is almost guaranteed, and we expect the BoJ to extend its special Covid-19 relief measures by another six months, to September 2021.
Senior Asia Economist