Japan braces for a deeper Q2 downturn; global recession to hit exports

SINGAPORE (ICIS)–Japan is bracing for a steeper downturn in economic activity after slipping into a recession, as the full impact of the coronavirus pandemic on businesses, investments and consumption will hit the second quarter.

“Japan’s outlook has definitely worsened in light of the COVID-19 [coronavirus disease] pandemic and the measures taken to contain the spread, and we see Japan facing significant challenges due to the virus impact, on both trade and the domestic economy,” Singapore-based UOB Global Economics and Market Research economist Alvin Liew said in a note.

UOB has revised its forecast for Japan’s Q2 GDP contraction to 5% quarter on quarter, which implies an 18.6% year-on-year decline. Other economists were projecting a more severe double-digit shrinkage.

The world’s third-biggest economy has officially plunged into a recession in the first quarter, when GDP posted a 3.4% year-on-year contraction, following on from a 7.3% decline in the preceding quarter, which was hit by a two-percentage point hike in consumption tax.

Economists are predicting that the worst is yet to come for Japan following a declaration of a state of emergency on 7 April to contain the spread of the deadly flu-like disease that emerged late last year in China.

The measure was partially lifted in 39 of its 47 prefectures on 14 May, while it remained in eight others, including in the capital Tokyo.

As of 18 May, Japan has a total of 16,305 confirmed coronavirus cases with 749 deaths, according to data from the World Health Organization (WHO).

The pandemic – which has infected more than 4.6m people globally and killed more than 300,000 to date – has plunged the global economy into a recession as countries implement border closures and lockdowns to contain the deadly flu-like disease.

Expecting enormous fallout from the pandemic, the Japanese government has launched a massive $1.1tr stimulus package to cushion the economy.

“While the copious amounts of fiscal and monetary stimulus will help cushion some of the economic fallout, we believe it is inevitable Japan will enter a full recession this year,” Liew of UOB said.

Following a sharp downgrade in second-quarter economic outlook, UOB now forecasts Japan full-year GDP to contract by 5.5% in 2020, a sharp reversal of last year’s 0.7% growth.

The first-quarter GDP contraction although widely expected “given the disruptions caused by the coronavirus and negative Q1 prints seen elsewhere, it nonetheless underscores the vulnerable position of the Japanese economy”, said Stefan Angrick, senior economist at research firm Oxford Economics in a note.

“Growth has now been negative for two consecutive quarters confirming the economy is in recession. This is even before the bulk of the impact from the pandemic is felt,” he said.

“While conditions should improve later in 2020, helped by accommodative policy, the experience elsewhere implies that consumption will likely recover only very gradually,” Angrick said.

Japan is export-oriented like most economies in Asia and there lies its vulnerability as the pandemic has plunged the world into possible the worst recession since The Great Depression of the 1930s.

In the first 20 days of April, the country’s exports were down 22.4% year on year at Japanese yen (Y) 4.35tr, continuing the contractions registered in the first quarter, official data showed.

Japan overall exports (in billion yen)

Full month	2020	2019	% change
January	5,431	5,574	-2.6
February	6,321	6,385	-1.0
March	6,358	7,202	-11.7

Source: Japan Ministry of Finance

More gloomy data will likely pour in for the rest of the quarter as most countries in world have largely remained under lockdown.

Japan is a major exporter of key petrochemicals such as benzene and propylene. Both products showed double-digit declines in shipped-out volumes in the first quarter, according to ICIS Supply and Demand Database.

Japan Q1 petrochemical export volumes (in tonnes)

Product	Q1 2020	Q1 2019	% change
Benzene	121,146	149,647	-19.0
Ethylene	163,179	172,968	-5.7
Propylene	177,228	237,866	-25.5

Source: ICIS Supply and Demand Database

In end-April, the Bank of Japan pegged the economy’s contraction for the fiscal year ending March 2021 at 3.0-5.0%. Recovery is projected in the next fiscal year, with growth likely to be in the range of 2.8-3.9%.

Japanese central bank governor Haruhiko Kuroda had said on 14 May that “downward pressure on the global economy is expected to be extremely significant as economic activity is likely to be constrained worldwide until the impact of the spread of COVID-19 wanes”.

“It also is difficult to project the impact of constrained economic activity, which differs from a typical economic downturn. Moreover, there are uncertainties over the pace of economic improvement after the spread of COVID-19 subsides,” Kuroda had said.

The International Monetary Fund (IMF) may revise its 3% forecast contraction in world GDP this year, with full recovery in 2021 unlikely as the impact of the pandemic was proving to be more severe than initially expected.

Focus article by Pearl Bantillo

Additional reporting by Clive Ong

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