Japanese Exports face the Steepest Plunge as Economy sinks into Recession

Summary

• Japan’s economy slipped into recession in May, with a contraction in GDP by 3.4% annually in Q1 2020, followed by a 7.3% plunge in the previous quarter.
• Exports plunged 26.2% in June from a year ago as overseas demand for cars, and other industrial goods plummeted amid coronavirus outbreak.
• Exports to China fell 0.2%, while overall shipments to the US dived 46.6% in the year to June 2020.
• Lately, Bank of Japan (BOJ) has stated that the Japanese economy is likely to recover in the second half of 2020, and has forecasted it to grow by 3.3% in fiscal 2021 on the assumption that second wave would not occur on a large scale.
• However, risks to both economic activity, and prices are skewed towards the downside, mainly due to the impact of COVID-19.

Japan slipped into recession by 18 May for the first time since last four and a half years, as coronavirus took a toll on businesses and consumers. The Japanese economy shrank 3.4% in the first 3 months to March, after a 7.3% drop in the previous quarter due to decline in exports, private consumption, and capital expenditure, recording a second consecutive decline for the quarter. Coronavirus has disrupted supply chains and businesses massively in the trade-dependent country.

Coronavirus has infected 25,096 people in Japan and has taken away 985 lives in the country, as on 21 July. Moreover, Japan recorded another 510 cases on 19 July.

Together, domestic demand and external demand shed 0.7 percentage point and 0.2 percentage point off the GDP growth of the world’s third-largest economy in the March quarter, straining the labour market.

The factory output decreased by 8.4% month-on-month in May to 79.1, lowest since March 2009. Subsequently, jobless rate rose, and jobs availability fell due to deteriorating economic conditions. The jobless rate increased to 2.9% in May from 2.6% in April, in seasonally adjusted terms but stayed below 3%, below compared to several advanced economies.

Analysts have claimed that the trade data in future may undermine expectations of a rapid recovery in demand globally and Japan’s export-driven economy due to resurgence of virus cases in the US, Brazil and India.

Exports witnessed the sharpest drop in a decade

Exports in Japan fell by double-digits for the fourth month, consecutively as the economy is following the direction of an intense postwar collapse due to the economic fallout of COVID-19. Japan’s exports posted the biggest year-on-year fall in the past 10 and a half years due to shrinking demand for cars and other industrial goods overseas amid coronavirus.

Figures from the Ministry of Finance reflected that exports of Japan plunged 26.2% in June from a year ago, surpassing economists’ expectations. The contraction slowed marginally in June from a 28.3% drop in the preceding month.

The latest downturn was worsened by a huge annual drop in the US-bound car batches, which is one of the major export items for the Asian economy. The US was Japan’s biggest export market in 2018, followed by China. Overall shipments to the US dropped 46.6% owing to 63.3% fall in exports of automobiles, 56% plunge in airplane engines and 58.3% drop in car parts.

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Exports to China fell 0.2% in 2020 to June as falls in consignments of chip-making machinery and chemical materials overweighed the surge in nonferrous metal, and car shipments. Batches to Asia, responsible for more than half of Japanese shipments, sank 15.3%, while shipments to the European Union (EU) tumbled down by 28.4%.

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Imports plunged 14.4% in 2020 to June, showing bleak demand and falling oil prices compared to the median estimate for a 16.8% fall, heading towards a deficit of 268.8 billion yen in the trade balance.

The outlook report released on 16 July states that exports of Japan would upsurge gradually, when overseas economies witnesses some recovery based on the assumption that the second wave would not occur on a large scale.

Bank of Japan outlook on the economy

Lending by Bank of Japan rose at the highest annual pace in June as businesses attempted to store funds to cope up with the impact of COVID-19. The Bank asserted that major companies are still bearing the ill-effects of coronavirus even when the majority of the restrictions were relaxed by late May. Total bank lending by banks and “shinkin” credit unions surged 6.2% in June 2020 compared to June 2019, to record $5.3 million.

BOJ expects the Japanese economy to contract 4.7% and CPI to drop 0.5% in fiscal 2020 to March 2021.

As per its latest policy meeting on 15 July, BOJ decided to maintain its monetary policy by keeping short-term rates at -0.1%, while directing long-term rates at around 0%. Though Japan has experienced a much less severe coronavirus epidemic than Europe and the US, recent reports of a spike in the number of cases in Tokyo continues to weigh on consumer sentiment, and inflation has dropped below zero. Manufacturers in the country are still highly dependent on the demand from markets amid the pandemic.

As per the latest quarterly report of BOJ, the central Bank has forecasted economy to grow by 3.3% in fiscal 2021, with hopes of economic activities returning to pre-coronavirus levels. Further, the economy is projected to keep developing with overseas economies resuming to a steady growth path as coronavirus impact subsides.

Source: BOJ Outlook Report, July 2020

With the global spread of coronavirus cases, Japan’s economy is likely to stay in a severe situation. Further, with a phased resumption of economic activity, the economy is expected to recover in the second half of 2020 through increased demand backed by accommodative financial conditions and government measures.