The government's scenario for economic recovery is being undermined, mainly due to the collapse of a cycle in which personal consumption and capital investment were making up for declining exports.
According to preliminary estimates, Japan's real gross domestic product dropped significantly more than market expectations in the fourth quarter of 2019. If the epidemic involving the novel coronavirus is prolonged, negative growth could continue in the first quarter of 2020.
Weak fundamentals
"I thought the peaks and troughs would both be smaller compared to the previous consumption tax hike, but now I have the impression that the troughs are deeper and slightly longer. It's natural for consumers to feel the need to protect their livelihoods," Akira Kimbara, an executive officer of Isetan Mitsukoshi Holdings Ltd., said at a press conference for financial results held on Jan. 31.
Sales of luxury products have slowed at Isetan Mitsukoshi Holdings due to the consumption tax hike last autumn, and sales of winter clothes have been sluggish because of the warm weather.
The latest figures were expected to reflect a decline in private consumption as a reaction to last-minute demand before the consumption tax hike. What went beyond market expectations was the impact on consumption from disasters involving heavy rain, including typhoons, and from the mild winter.
Consumption of semi-durable goods such as clothes fell by 6.2 percent, while durable goods such as automobiles and home appliances declined by 12.8 percent from the previous quarter.
Personal consumption declined by 2.9 percent in the fourth quarter of 2019. This was less the 4.8 percent drop seen in the second quarter of 2014, just after the consumption tax hike was raised from 5 percent to 8 percent.
The government took various measures to keep the gap between peaks and troughs small and ease the burden of the tax hike. These included the introduction of a reduced tax rate on products such as food and beverages, excluding alcohol and eating out, and a point reward program for cashless payments at small and mid-sized stores.
Sales at convenience stores, where cashless payments are popular, have remained strong following the consumption tax hike, and the Japan Franchise Association said average spending per customer had risen thanks to the point reward program and other factors.
Many government officials therefore believe that the decline in personal consumption stems from temporary factors such as disasters involving heavy rain. "The impact of the tax hike is fading," a senior Cabinet Office official said.
Threat from coronavirus
From here on, the focus of the domestic economy will shift to developments in the first quarter of 2020. The economy is still strongly expected to remain on an uptrend, but it is unclear how the spread of infections with the coronavirus will develop going forward, prompting concern over a slowdown of corporate production activities and personal consumption.
For the first quarter of 2020, the government forecasts the economy will turn around and grow, as the effects of the consumption tax hike on personal consumption are expected to ease and personal consumption is likely to recover. In addition, there is no change to the view that capital investment will be strong due to such factors as a recovery in semiconductor demand.
However, if the novel coronavirus epidemic is prolonged, it will inevitably deal a blow to the Japanese economy.
The Japanese economy is expected to be affected in several ways. One is the decreasing number of tourists from China. According to the Japan National Tourism Organization, about 30 percent of tourists visiting Japan came from China in 2019. A decrease in the number of Chinese tourists could negatively affect hotels, services and other industries.
The second is declining exports due to the slowdown of the Chinese economy. According to the Finance Ministry's trade statistics, exports to China accounted for about 20 percent of total exports in 2019, the second-largest percentage following the United States. Products with high export values are thought likely to be affected, such as general machinery, electronic equipment and transportation equipment.
Furthermore, plants in China have suspended operations as a result of the spreading coronavirus and Chinese government measures to prevent infection. This has begun affecting the supply of components and other products for Japanese companies.
In Japan, an increasing number of people have been confirmed to be infected. Therefore there are fears that personal consumption will be limited in the future due to cancellations of events and more people refraining from going out.
The NLI Research Institute forecasts that in the first quarter of 2020, Japan's real GDP will see a decline in the annualized 1%-range from the previous quarter. "The amount of decline could expand due to a decrease in the number of tourists from countries other than China, as well as cancellations of domestic events and more people refraining from going out," said Taro Saito, an executive research fellow of the institute.
Read more from The Japan News at https://japannews.yomiuri.co.jp/
