During the fourth quarter of 2019, after the VAT rate was increased from 8 to 10% and following typhoon Hagibis, annualised quarterly GDP shrank by 6.3%, vs -7.4% in 2014 following the previous VAT rate hike from 5 to 8% (chart 1). Household consumption ( 11%) and corporate investments (-14%) were hit particularly hard. Given the sharp fall in activity, carry-over growth for 2020 is -1%.
Already weakened, the Japanese economy is also faced with the consequences of the coronavirus epidemic. Income from tourism will be heavily impacted. Nine of the 31 million tourists in 2019 were from China (chart 2) and their spending represents around 0.3% of Japanese GDP. The impact of this factor alone will reduce annualised Q1 growth by 0.8%. This forecast does not take into account the likely downturn in tourism from other countries, however. Furthermore, China and Japan have close trading links. Japan imports intermediary goods and services from China representing 1.9% of its GDP. The longer the quarantine measures in China last, the higher the risk of the supply chain breaking down. Meanwhile, exports from Japan to China may also be seriously disrupted. Given that intermediary product exports represent 2.5% of GDP, it is easy to imagine the impact on the Japanese economy. More generally, trading with the rest of Asia may also be seriously disrupted.
Of course, if the coronavirus epidemic is rapidly brought under control, the impact on the Japanese economy will be only temporary and business activity may recover in the spring. We nonetheless believe that full year 2020 Japanese growth is unlikely to be positive.
Sources : Refinitiv Datastream, Candriam
Sources : Refinitiv Datastream, Candriam