Japan: GDP forecast revised down
The first preliminary reading of Japanese GDP for Q4 2019 surprises significantly on the downside, coming in at -6.3% quarter-on-quarter (q-o-q) annualised (-0.4% year-on-year). The data indicate that the negative impact caused by the consumption tax hike in October was much bigger than we had earlier expected. For full-year 2020, Japanese GDP expanded by 0.8%, slightly below our forecast of 0.9%.
Specifically, household consumption declined by -6.3% (q-o-q annualised) from the previous quarter, compared to our expectation of -3.5%. Another downside surprise comes from corporate investment. Private capex contracted by -2.4% q-o-q annualised in Q4, compared to a 0.3% expansion in Q3 and 0.5% in Q2. The surprise drop in corporate capex in Q4 may suggest that businesses had taken a cautious stance in expanding their capacity towards the end of last year, possibly due to the expectation of a slowdown in consumer demand and/or uncertainties in the global economy.
In our original Japanese macro outlook for 2020, we had expected the Japanese economy to rebound in Q1 after the slump in Q4, driven mainly by a recovery in household consumption. However, the coronavirus outbreak has led us to believe that such a rebound likely will not happen.
Indeed, the latest Japanese purchasing manager index (PMI) readings in February dropped sharply, reversing the moderate improvement in the previous month. The manufacturing PMI came in at 47.6 in February, down from 48.8 in January, and the services PMI came in at 46.7, down from 51.0 in January. The extraordinary decline in PMIs indicates a significant deterioration in corporate sentiment in February, likely reflecting the corporate sector’s increasing concerns over the economic impact of the coronavirus. The coronavirus outbreak could affect the Japanese economy in at least three ways: lower domestic demand, loss in tourism income and disruption in supply chains.
Given the disappointing Q4 performance and the potential impact of the coronavirus, we have decided to revise down our GDP forecast for Japan in 2020 to -0.3% from +0.5% previously. In particular, we no longer expect any rebound in growth momentum in Q1 2020 following the slump in Q4. We expect a modest sequential improvement in Q2, and the economy may start to rebound in earnest in Q3, assuming the virus situation comes under control in most parts of the world by then. On a year-over-year basis, the economy will likely see negative growth until Q4 2020.
This new forecast is based on the fairly benign assumption that the coronavirus outbreak in Japan will not spread out of control and become a public health crisis like it has in China. By extension, this implies that most economic activities will continue (although operating at lower levels), including the 2020 Summer Olympic Games in Tokyo planned to be held in late July. Should these assumptions prove invalid, our forecast would be subject to significant downside risk.
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