CFO Insights 2020 April

​A combination of soft consumer demand, weak sentiment, the coronavirus outbreak, and global trade troubles has decelerated the economy, and there appears to be little the government can do currently.

Even before the coronavirus started to disrupt Japanese manufacturing supply chains, Japan’s economy had faltered following the imposition of a higher national sales tax in October 2019. Specifically, the government reported that, in the fourth quarter of 2019, real GDP fell at an annualized rate of 6.3 percent from the previous quarter. This was the steepest decline since 2014, which is when the last increase in the national sales tax took place. In October 2019, the tax was increased from 8 percent to 10 percent, and consumer spending had surged in anticipation of the increase. In the fourth quarter, consequently, consumer spending fell at a rate of 11.1 percent. Business investment fell at a rate of 14.1 percent. Exports, however, only declined at a rate of 0.4 percent, likely due to the impact of the US-China trade dispute. One indication that the economy is decelerating is that the labor market is loosening—the jobs-to-applications ratio fell in January to 1.49, the lowest since May 2017.

In Japan, the manufacturing Purchasing Managers’ Index (PMI) for February declined to 47.6, the lowest since 2014, reflecting a sharp decline in manufacturing activity. In addition, the services PMI declined sharply from 51.0 in January to 46.7 in February. This level indicates a rapid decline in services activity. The economy was already facing significant headwinds even before the coronavirus crisis. Yet, as Markit indicated in its commentary, “the coronavirus outbreak has hit tourism particularly hard in Japan, a key source of demand for services.” Markit suggested that the latest PMI readings mean that the economy may not grow at all in the first quarter. The weak PMIs for February follow improved numbers in January. This indicates that, without the coronavirus crisis, the Japanese economy was likely rebounding as the year began. Markit commented that the January PMIs suggested a “domestic-led recovery,” with consumer spending driving continued growth in the services sector. In addition, it noted that demand in the semiconductor sector was picking up, fueling an improvement in manufacturing. It also noted an improvement in manufacturing sentiment in the wake of the US-China phase-one trade deal and reduced tensions with South Korea.

Coronavirus

Before the coronavirus, there had been a widespread expectation that real GDP would rebound in the first quarter of this year. However, the outbreak indeed led to uncertainty that affected manufacturing supply chains. As a result, it is possible that GDP could contract again in the first quarter, thereby placing Japan in a recession. A government spokesman said that the government is prepared to spend from its reserve fund in order to offset the negative impact of the virus on supply chains and inbound tourist expenditures.

Meanwhile, the government has ordered local schools to remain closed until mid-April. This action is meant to quell the spread of the coronavirus. This action will likely create some degree of disruption for parents as they seek alternative childcare. Prime Minister Abe said, “We need to place top priority on the health and safety of our children and take measures to stem the risk of many children and teachers becoming infected through gathering for long hours every day.” This action follows cancellation of major public events, including concerts and sporting events.

Japanese consumers

Household spending fell sharply in December from a year earlier. This was the third consecutive monthly fall. Evidently, the consumer side of the Japanese economy is weakening at a time when the industrial side has already been hurt by the global economic slowdown and the US-China trade dispute. Moreover, it is likely to experience stress emanating from the disruptive effects of the coronavirus. Household spending had declined sharply in October following implementation of a higher national sales tax. However, the continued decline in November and December 2019 is concerning. In December, spending fell 4.8 percent from a year earlier. This included a 13.3 percent decline in spending on furniture, 11.1 percent for clothing, and 17.4 percent for housing.

Meanwhile, retail sales fell 0.4 percent in January versus a year earlier. This was the fourth consecutive month of declining retail sales, although the January figure was actually relatively modest compared to recent months.

Industry

Japan’s industrial sector continues to decline. In January, industrial production was down 2.5 percent from a year earlier. Output has declined in 10 of the last 12 months, although it was up 0.8 percent from December to January. That was due to a big increase in automotive production. However, it might be the case that production declined in February given the disruption to global supply chains stemming from the coronavirus outbreak.

Pensions

Prime Minister Abe said that, in addition to recent tax increases, the government plans to take other steps to sustain the country’s pension system. These will include encouraging people to work longer, requiring pensioners to pay a larger share of their medical costs, and encouraging people to be less reliant on the government pension system for their living costs. The tax increase that took effect last year will be used, in part, to fund an increase in childcare support, thereby encouraging more women to participate in the workforce. The aim is to boost the ratio of workers to retirees. This is essential given that roughly a third of Japan’s population is over 65 and the birth rate remains at a record low.

Related links

• Original Link ( Deloitte Insights on March 20,  2020 )
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