Japan emerges from recession with GDP bouncing sharply in Q3

Japan‘s gross domestic product (GDP) rebounded by 5% between July and September compared to the previous quarter, with a stronger than expected recovery marking the exit of the country’s recession after three consecutive quarters of contraction.

The GDP of the third world economy had suffered a historic collapse in the second quarter of 2020, further revised on Monday downward (-8,2% versus -7.9% previously), according to data published by the government.

The decline in GDP began in the fourth quarter of 2019 (-1.8%) following an increase in Japanese VAT, and continued in the first quarter (-0.6%), marking the country‘s recession, defined by a contraction of national wealth over at least two consecutive quarters, for the first time since 2015.

For the third quarter, the consensus of economists surveyed by Bloomberg expected a slightly smaller rebound (+4.4%).

Growth between July and September was driven mainly by household consumption (+4.7%), which plunged in the second quarter against the background of the state of emergency set up by the Japanese authorities in April and May to try to stem the Covid-19 pandemic.

Exports also rebounded sharply (+7%), notably benefiting from the economic recovery in China and the fall or lifting of restrictions this summer against Covid-19 in a large number of countries.

However, both land and non-residential investment by companies fell sharply over the quarter (-7.9% and -3.4% respectively).

While large Japanese companies are slightly more confident in the future, according to the quarterly reference barometer Tankan published at the beginning of October by the Bank of Japan, their morale remains low, particularly in the hospitality and catering industries or automotive sectors.

Expected braking

Growth in the Japanese economy is also likely to slow down significantly in the fourth quarter, โ€œwhile demand is expected to slow down, mainly due to the second waves of Covid-19 abroad,โ€ economist Naoya Oshikubo said in a note published upstream of GDP.

The increase in Japanese industrial production, which has restarted since June, was revised very slightly for September (+3.9% over one month versus +4% in a first estimate published at the end of October, according to figures published later on Monday by the Ministry of Commerce and Industry (Meti).

The International Monetary Fund (IMF) expects Japanese GDP down 5.3% over 2020 as a whole, before growth of 2.3% in 2021, according to its latest forecast in October.

The return of Japanese GDP to its third quarter 2019 levels, before Covid-19 and the increase in VAT in the country, could take up to three years, according to SMBC economist Yoshimasa Maruyama Nikko Securities, quoted by Bloomberg.

In an attempt to prevent the recovery from falling short of breath, Prime Minister Yoshihide Suga asked his ministers last week to floor a supplementary budget to finance a new program of support for the economy.

The Japanese government has already drawn up two gigantic recovery plans this year, which included a flat-rate allowance of 100,000 yen (more than 800 euros) for each resident of the country and support to companies to finance partial unemployment.

Public spending thus increased by 2.2% in the third quarter, contributing significantly to the return of growth.

The new recovery plan should be used in particular to extend the government’s campaign to support the tourism sector since this summer, through direct funding of discounts on stays within the country.

The recent upsurge in the pandemic in Japan, where record numbers of daily cases were recorded last weekend, raises concerns about new restrictions in the archipelago, which may slow down its economic recovery.

However, this new wave will have โ€œlimitedโ€ consequences, says Tom Learmouth of Capital Economics in a note published Monday, stressing that the prospect of the arrival of a Covid-19 vaccine in the first half of 2021 would be an additional factor in growth.