Japan’s outlook is brightening again after the surge in virus cases following the Summer Olympics curbed growth sharply.
Admittedly, Japan’s latest GDP data was worse than expected in Q3’21 as ‘state of emergency’ lockdowns hurt consumption. We thus lower our forecasts for growth in 2021 to 2.0%. But we raise our 2022 forecasts to project growth of 3.5% as Japan’s economy is set to rebound robustly.
Source: Bank of Singapore, Bloomberg.
In Q4’21, activity is already picking up despite fears over Omicron. This week, Japan’s quarterly Tankan data was released. The first chart shows the important survey tracks the economy closely.
Source: Bank of Singapore, Bloomberg.
The latest release showed sentiment amongst large manufacturers remained at its highest level in three years in Q4’21 while large non-manufacturers saw a sharp jump in confidence as the economy’s reopening boosts services.
Similarly, monthly surveys also show a strong rebound in firms’ sentiment. The second chart shows November’s composite purchasing manager index (PMI) hit 53.3, its highest level in four years, as the proportion of companies expecting activity to expand continues to rise. In addition, the Economy Watchers survey showed confidence among Japan’s merchants in November reached its highest level since 2005.
Though Omicron presents near-term risks, we think Japan will experience stronger growth in 2022 compared to 2021. High vaccination rates will allow the authorities to impose less restrictions in the new year compared to this year’s stop-start lockdowns. The Bank of Japan is also set to remain far behind the Federal Reserve, European Central Bank and Bank of England in raising interest rates over the next few years as inflation remains close to zero in Japan. Last, new Prime Minister Kishida’s government unveiled a record supplementary budget in Q4’21 including fresh borrowing of 4% of GDP to support the rebound.
Thus, we expect Japan’s recovery is likely to accelerate in 2022. In contrast, the US, UK, Eurozone and China are all set for lower growth after their strong rebounds in 2021.
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