In Japan, economic growth was strong in the third quarter (+5.3 percent) following the lockdown-induced slump of 8.3 percent in the second quarter. While private and public consumption stagnated in the final quarter of 2020, private investment was reduced. Net exports expanded in the face of rising exports and lower imports. Global demand picked up, particularly for motor vehicles and IT goods, which stimulated exports. All in all, I expect that gross domestic product slumped by somewhat more than five percent in 2020. The Covid-19 pandemic and the measures taken to contain it also led to a dramatic decline in economic output in Japan. After the pandemic was contained for the time being in the summer, significantly higher Corona case numbers and renewed lockdown measures to contain the pandemic occurred again in the winter. Various containment measures and uncertainties about the further course of the pandemic remain, dampening economic momentum – especially until the end of winter. The increasing availability of vaccines and the associated gradual immunization of the population, as well as the onset of the summer season, should gradually ease the pandemic situation. Restrictions on personal services are likely to remain in place for some time.
In the first quarter of the current year, Japanese economic output will probably decline somewhat. From the second quarter, gross domestic product is expected to grow more strongly again; exports in particular will probably continue to increase strongly in the wake of the global economic recovery and growing foreign demand. Above all, however, expansionary monetary and fiscal policies are supporting the Japanese economy. The Japanese central bank is likely to continue its policy of “yield curve control,” with which it controls yields on government bonds with short and long maturities, thus also keeping interest rates low for private companies. The central bank purchases securities to enforce monetary policy.
Inflation is likely to remain low in the forecast period; the inflation target of two percent is likely to be missed by a wide margin for the time being. This is also indicated by the recent decline in inflation expectations. Fiscal policy is also expansionary. Having already adopted far-reaching aid and stimulus programs in 2020, the government announced a further stimulus program in December 2020 amounting to around seven percent of GDP. Public consumption is expected to increase markedly, also in view of higher spending on healthcare. In addition, the government plans to significantly expand public investment – in particular to better prevent natural disasters and at the same time stimulate the economy. Temporary construction is also planned in the first half of the year in preparation for the Summer Olympics. However, it is currently uncertain whether the Summer Olympics, which have been postponed to this year, will be held in Tokyo. Even if the Games are held, only a small number of foreign spectators are likely to travel to Japan and only a small number of Japanese residents are likely to attend the Games; a significant stimulating effect on GDP is therefore not to be expected.
Despite expansionary fiscal and monetary policies, I still expect a rather dampened rebound overall. The economic recovery is being hampered by rising unemployment and fears of job losses. The unemployment rate has risen to 3,0 percent in the third quarter from 2.2 percent at the end of 2019. As the economy gradually recovers, unemployment will slowly decline. Business investment is also expected to gradually increase.
All in all, I currently expect the Japanese economy to expand by 2.5 percent in 2021. In 2022, the growth rate might be at around two percent.
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