Japan: Economy contraction is on the cards – BNP Paribas

The Japanese economy ended 2019 on a negative note as consumer spending was hit by the VAT hike introduced in October. The start of 2020 looks difficult given the Coronavirus outbreak and the close economic relations between Japan and China, in the opinion of Louis Boisset from BNP Paribas.

Key quotes

“Japan experienced a sharp contraction in GDP in the fourth quarter of 2019. GDP fell by -1.6% (QoQ, non-annualised), its biggest contraction since the - 1.9% fall in the second quarter of 2014.” 

“The Japanese economy suffered from two sizeable shocks in the final quarter of 2019. Having delayed its implementation, the authorities decided at last to increase VAT from 8% to 10% in October 2019. The fourth quarter was also affected by a typhoon which did significant damage to domestic demand.” 

“Consumer spending is seeing a structural slowdown in Japan, with virtually no growth on average since the VAT hike in 2014. This trend was notably related to the downward trend in nominal wages.” 

“The economic weakness in late 2019 is already hitting the trends for 2020, with a negative carry-over growth effect. Given its close relations with China, the effect of the Coronavirus outbreak on Japan could be significant and will have two channels of transmission: trade and tourism. It now looks possible that Japan’s economy will contract this year.”