OECD Asia Pacific 1/2022

Japan

Update on latest developments

While the most recent 4Q21 indicators show strong momentum, the Japanese economy’s strong decline in 3Q21 GDP growth was revised down even further in the most recently published set of numbers, mainly due to COVID-19 restrictions lowering domestic consumption. For 3Q21, GDP was reported to have declined by 3.6% q-o-q SAAR. While government stimulus continued in 3Q21, with government expenditures growing by 4.1% q-o-q SAAR, private consumption declined by 5.1% q-o-q SAAR. As Japan entered 4Q21 in a largely improved situation, with vaccination rates now around 80%, consumer confidence strongly increased and leading business sentiment indicators point to an improvement in 4Q21. Considering the ongoing US recovery, exports should also be well supported in the current quarter. In addition, ongoing fiscal and monetary stimulus is forecast to support the recovery in 4Q21.

After industrial production (IP) declined significantly in October on a yearly basis, falling by 3.5% y-o-y, it recovered in November, rising by 2.5% y-o-y. On a monthly basis, the IP rose even more significantly, by 6.5% in November, after seeing a monthly rise of 1.8% y-o-y in October.

Closely correlated to IP, exports in November rose considerably as well, showing a yearly growth level of 20.5% y-o-y, after rising by 9.4% y-o-y in October and 13% y-o-y in September, all on a non-seasonally adjusted basis. On a monthly basis, November exports rose by a seasonally adjusted 5.3% m-o-m, compared with a rise of 2.9% m-o-m in October.

Retail sales rose as well in November, at a rate of 1.9% y-o-y, after rising by 0.9% y-o-y in October and declining by 0.5% y-o-y in September. This rising trend in the last two months comes after a 3Q21 declining trend, which was seemingly impacted by the emergency measures implemented in large swathes of the country to counter rising infection rates, following the Summer Olympics in Tokyo, and some tapering off in retail activity.

Consumer confidence also held up well. The consumer confidence index level, as reported by the Cabinet Office, remained almost unchanged at 38.9 in December, compared with 39.3 in November and 39.2 in October, though lower at 37.9 in September. This points to a continued rebound in domestic consumption, which is likely to be supported by further stimulus measures.

Near-term expectations

Japan will follow a slightly different track in the near term than its OECD peer economies. While both the US and the Euro-zone experienced strong growth in 2Q21 and 3Q21, the Japanese economy was locked down over large parts of the country and growth was dampened by emergency measures, in addition to supply-chain bottlenecks. Vaccination rates were also still very low in 3Q21, but reached around 80% in Japan in 4Q21. With these developments, the economy is estimated to have staged a strong rebound in 4Q21 and shows ongoing momentum in 1Q22, despite the latest global Omicron wave, which may cause a delayed effect. This dynamic was already seen in economic measures taken in 4Q21, a trend that is forecast to continue. However, its trajectory will depend on supply-chain developments and COVID-19-related issues.

Taking into consideration a reported decline in 3Q21 GDP growth, the GDP growth forecast for 2021 was lowered considerably again. As reported by Japan’s statistical office, 1Q21 GDP declined by 2.9% q-o-q SAAR. Despite lockdown measures in 2Q21, growth was reported to have recovered, reaching 2% q-o-q SAAR. As reported, quarterly growth in 3Q21 declined significantly, falling by 3.6% q-o-q SAAR. Supported by high vaccination rates, fiscal stimulus and an ongoing recovery in global trade, 4Q21 is forecast to rebound significantly, reaching 8.3% q-o-q SAAR. In 2022, 1Q22 GDP growth is forecast to stand at 2.3% q-o-q SAAR and move towards 1% q-o-q SAAR entering 4Q22.

Ongoing economic momentum is also reflected in December PMI numbers, albeit with somewhat of a retraction in both the manufacturing and services sectors. The PMI for the service sector, which constitutes around two-thirds of the Japanese economy, fell back slightly to stand at 52.1, compared with 53 in November. The manufacturing PMI fell slightly as well, to stand at 54.3 in December, compared with 54.5 in November.

By taking into consideration the strong decline in 3Q21, and despite assuming a significant and reasonable rebound in 4Q21, the 2021 GDP growth forecast was revised down to stand at 1.8%, compared with 2% the previous month. In addition to the ongoing recovery in external trade, GDP growth is expected to remain supported by domestic demand in the      near      term,     although    COVID-19-related developments remain influential. Ongoing stimulus measures  are  expected  to  support  a  recovery   in private household consumption and investment, leading to a carry-over of 4Q21 momentum into 2022.

Hence, GDP growth for 2022 remains at 2.2%, unchanged from the previous month. However, COVID-19- related developments, and most recently the Omicron variant, pose a downside risk to the expected recovery.