Tough start doesn't necessarily mean a bad year for Japan Tough start doesn't necessarily mean a bad year for Japan https://stage-fii.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png https://stage-fii.federatedinvestors.com/daf\images\insights\article\tokyo-shopping-small.jpg February 24 2020 February 24 2020

Tough start doesn't necessarily mean a bad year for Japan

Virus fallout adds to temporary hits the economy already is taking from October's tax hike.
Published February 24 2020
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Expectations that Japan might put last October’s consumption tax hike behind it and start the new year on an upswing are falling victim to the coronavirus. Not only has the outbreak slashed demand from China, one of the largest customers for Japanese manufacturers, it also has crossed the waters into Japan. Amid a growing number of COVID-19 cases, Tokyo’s metropolitan government late last week canceled or postponed major indoor events for three weeks, cutting into hopes consumers may pick up their spending again as the tax impact fades.

Japanese exports to China already were down 7.6% last year, primarily due to slower growth in China over fallout from the U.S.-China trade war. It was thought trade might begin to normalize again following mid-January’s mini-truce—China and the U.S. are its two-largest export partners, accounting for roughly 20% of exports each. But now China’s economy essentially is at a standstill, and it’s not clear how fast it will be able to ramp back up once the epidemic ends. About a third of 1,000 Chinese companies surveyed a week ago by the research firm China Beige Book remained closed, and roughly another third said they were operating remotely.

As if the trade situation wasn’t bad enough, Japan’s tourism industry also is under pressure. Beyond global exports, the world’s third-largest economy is very dependent on Chinese tourists—more than 30 million visit each year, far and away the most of any country. And these Chinese tourists spend a lot of money in Japan—on clothes, makeup and other consumer items, not to mention on hotels, restaurants and entertainment. Isetan Mitsukoshi Holdings, a large Tokyo department store company, reported year-over-year sales fell 20% during the recent Chinese Lunar New Year holiday, and the downtrend has continued as the Chinese stay away. Hotels are reporting more than 400,000 cancellations for March.

Any way they’re sliced, the data suggest first-quarter growth in Japan likely will be weak, and may tip into a technical recession, i.e., two consecutive quarters of GDP contraction. Last year’s fourth quarter contracted at a sharp 6.3% annual rate after consumption plunged when the national sales tax jumped to 10% from 8% on Oct. 1. Nearly two-thirds through the first quarter, the negative consequences from the virus epidemic are still mounting. But if we look past the next few months, and assume the virus ultimately is controlled, there are reasons to be hopeful. For one, to soften the sting from the tax hike, Japan’s government in December unveiled a $120 billion stimulus package aimed at consumption and infrastructure investments. Then in just a few more months, Tokyo will host the 2020 Summer Olympics. It’s estimated the games will pump $300 billion into Japan’s economy.

So the message is this: Yes, the virus didn’t help an already tough situation in Japan. But the longer-term story for 2020 could still have a happy ending for the country.

Tags International/Global . Equity . Volatility . Markets/Economy .
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