Whilst Japan’s third quarter GDP growth paints a strong rebound of the Japanese economy – its economy expanded by 21.4% quarter on quarter, the highest rate recorded since 1980, it’s worth noting that in the preceding quarter, its annualised GDP growth set an anti-record – collapsing to -28.8%. Therefore, quarter four growth is not likely to be as good.
Q3 2020 hedge fund letters, conferences and more
Japan's Real GDP Growth
Japan's real GDP is still way below its pre-Covid size. Given that Japan’s economy had also shrunk by 0.6% quarter on quarter in 1Q, Japan’s economy at the end of September was still 3.9% smaller than at the end of 2019.
The breakdown of GDP by expenditure shows that net exports and consumer spending were the main locomotives of growth in 3Q. Exports were up 7% quarter on quarter, following a 17.4% quarter on quarter contraction in 2Q. We calculate that the increase in net exports accounted for nearly 3ppts out of the 5% growth in Japan's GDP in 3Q. Expansion in household consumption was responsible for the remaining 2ppt.
The most recent foreign trade statistics have also been relatively upbeat. October exports were only 0.2% lower than in October 2019, which marked a substantial improvement vs the September reading of -5%yoy. The improvement likely reflects the recovery in external demand for Japanese products. What are the reasons for the quick recovery in export demand, and will it last?
Covid-19 Statisitics
In the global list of Covid statistics by country, Japan is 51st from the top. Japan has had around 123,000 of Covid-19 cases in total, which is not too bad compared to other major developed economies. Out of G-10, Japan has the lowest number of cases per 100,000 of the population – 97 (for comparison, Belgium is at the top of the table with 4718 cases). Less than 2000 Covid deaths have been registered in total. The number of Covid deaths per 1,000,000 of the population is 15, which is extremely low.
While the UK and the key EU economies are in the second wave of the Covid-19 pandemic, Japan has entered the third wave. New outbreaks of Covid-19 have been traced to hospitals, schools and care homes. During the second wave, the daily peak of new Covid-19 cases never exceeded 2,000 per day. On 18 November, the daily number of new cases for the first time surpassed this number. Covid cases remain on an upward trend.
However, the current Covid-19 situation does not look too bad in comparison with other leading developed economies around the globe. According to the ECDC, the cumulative number of cases in Japan in the two weeks to 18 November was only 14 per 100,000 of its population. The same metric stood at 505 in the UK, 600 in the US, and 797 in France.
Government Support Helps To Keep Services Afloat
Most recent economic indicators suggest that demand recovery may be around the corner. Retail sales in September were still down 8.7% year on year in October. However, imports contracted less than in September (-13.3% year on year vs -17.2% year on year), pointing at a possibility that demand for imports may be on the mend.
What is also encouraging is that Japan has so far avoided a wave of bankruptcies. The government has provided support to businesses to prevent insolvencies with new programs boosting capital and quasi-capital funds and enhanced existing programmes offering guaranteed loans. According to BoJ data, the number of corporate bankruptcies has remained roughly stable in the year to date across the economy. Even in the hospitality sector, the uptick in bankruptcies has been very modest so far.
In late October, the Bank of Japan released its semi-annual Outlook for Economic Activity and Prices, which conveys an upbeat message: the economy is going to do well and continue recovering going forward. The BoJ admitted that the primary assumption behind this conclusion was that the virus was not going to spread on a large scale that would require the imposition of wide-ranging public health measures (i.e. quarantines and lockdowns).
In Japan, face-to-face services account for a large share of the labour market - nearly 30%. Hotels, bars and restaurants employ 6.3% of the workforce. Residential services and recreation account for 3.6% of all jobs, education and learning services, for 5% of them. The share of the labour market occupied by wholesale and retail trade is nearly 16%. The percentage of workers employed in hospitality has expanded in recent years, owing to an increase in inbound tourism. In this context, the relative resilience of businesses in the hospitality sector is encouraging.
The Go To Campaign
To support the hospitality sector, the government unveiled the “Go To” campaign, which offers Japanese residents subsidies of up to 50 per cent on transportation, shopping, hotels, restaurants and tickets to tourist attractions. This measure should, to some extent, soften the blow that the pandemic has dealt to businesses in this sector.
Nevertheless, the services industry has not entirely escaped the adverse impact of the Covid-19 epidemic. According to the BoJ, it is experiencing a protracted slump in the number of working hours per employee, which has been recovering in other industries. Even if Japan manages to avoid new restrictions on economic activity, the hospitality industry may remain its Achilles’s heel.
The return of demand strength in Asia is an apparent reason why Japanese exports have been doing well and driving the country’s economic recovery. The Chinese economy is on track for posting positive growth this year. Before the Covid pandemic, China used to consume nearly 20% of Japan’s exports. Other Asian countries (South Korea, Hong Kong and Thailand) also were among top five destinations for Japanese exports, with the shares of 7.1%, 4.7% and 4.4% (source: UN Comtrade). If Vietnam, Singapore, Indonesia and Australia are included in the group, it turns out that Japan would generally send more than 45% of its exports to it.
Motor Vehicles Are Japan’s Largest Exports
It is worth noting that motor vehicles are the largest item of Japan’s exports (13.4%), with auto parts and accessories accounting for another 5%. In this context, the rapid recovery of auto demand in China, where auto sales were up 12.4% year on year in October, should ensure further growth in Japan’s automotive exports in the coming months.
Japan’s exports to China increased by 10.2% year on year in October. Looking at the breakdown, we see that the fastest-growing items included cars, plastics, and also the equipment required to manufacture semiconductors.
However, while export-oriented sectors of Japan’s economy seem to be on track for fast recovery, those based on face-to-face client interaction may be not entirely out of the woods. Just like the UK and the EU, Japan has distinct seasons and is located in the Northern hemisphere. For this reason, there is a risk that Covid-19 cases will rise during the regular flu season it is currently entering. Also, the third wave of Covid-19 affecting the country may dampen consumer confidence. For this reason, Japan's GDP growth numbers in 4Q are unlikely to look as stellar as the 3Q ones.
