Highlights
Japan’s Q1’21 GDP data showed its economy contracted at the start of the year, shrinking by - 1.3%QoQ after winter virus waves limited activity.
Source: Bank of Singapore, Bloomberg
The decline in activity was broad-based. Consumption fell by -1.4%QoQ as fresh outbreaks of the pandemic led to renewed ‘State of Emergency’ lockdowns and the government was forced to suspend its ‘Go To’ campaign promoting domestic tourism.
Investment also declined by -1.4%QoQ as restrictions on activity weakened demand for services. Exports rose by 2.3% QoQ but imports increased faster by 4.0%QoQ, thus causing Japan’s economy to run an overall trade deficit in the first quarter of the year.
The outlook for Q2’21 also appears challenging.
Source: Bank of Singapore, Bloomberg
First, very slow vaccinations and fresh virus outbreaks have resulted in a fourth wave of infections. The authorities imposed a new ‘State of Emergency’ on Tokyo and other prefectures in April and continue to lock down activity in May.
Second, Japan’s companies are being hindered in meeting strong global demand - as the US, UK and Eurozone economies reopen - by supply chain disruptions. For example, Japan’s important auto sector is currently dealing with the worldwide shortage of semiconductors that is limiting the production of new cars.
The charts show two important measures of activity are giving mixed signals for growth in Q2’21. The forward-looking purchasing manager indices (PMI) are improving with the composite survey back above the key 50.0 level at 51.0 in April, signaling Japanese firms expect orders to expand. In contrast, the Economy Watchers’ survey fell by a sharp 10 points last month signaling concern about renewed lockdowns and the risk Tokyo’s Olympics will be cancelled.
We forecast Japan to experience a firmer recovery from Q3’21 with GDP set to grow by 3.0% for the whole of 2021. But its rebound will still be weaker than its peers - we project 2021 growth for China at 8.7%, the US at 6.8%, the UK at 6.0% and the Eurozone at 4.5%. Further, Japan’s recovery is also likely to start one quarter after Europe’s and several quarters later than China’s and America’s to the detriment of Japan’s financial markets.
