The Journal The Authority on Global Business in Japan

The declaration of a state of emergency in Japan has prompted economists to slash forecasts for three months from April to June.

Analysts from domestic and international banks now all expect an annualized double-digit contraction in the second quarter, before the Japanese economy returns to a pre-crisis level.

J.P. Morgan Securities forecasts the economy will shrink 17 percent in the quarter, BNP Paribas Securities sees a fall of 16 percent, and Dai-ichi Life Research Institute and Meiji Yasuda Research Institute project a contraction of more than 10 percent. Goldman Sachs is the most bearish, anticipating a 25 percent decline.

DEEP DIVE
The partial lockdown looks set to plunge Japan deep into a recession—technically defined as two consecutive quarters of contraction.

The economy shrank 7.1 percent in the fourth quarter of 2019 due to a sales-tax hike in October. And the average first quarter forecast of 34 private-sector economists surveyed by the Japan Center for Economic Research was for a 2.89 percent contraction in real terms.

The seven regions designated as areas of emergency include some of the nation’s largest economic centers: Tokyo, Kanagawa, Osaka, and Fukuoka. Together they account for 46 percent of national gross domestic product.

While trains will keep running and roads will remain open, department stores, movie theaters, and shopping malls are being shuttered. Economists say private consumption will be the biggest casualty as residents of the designated regions will be asked to avoid unnecessary outings and dining out with others.

SHRINKING RETAIL
SMBC Nikko Securities, an investment bank affiliated with Sumitomo Mitsui Financial Group, predicts the economy will shrink at an annualized rate of 14.8 percent in the April–June period from the preceding quarter.

Junichi Makino, the brokerage’s chief economist, said the calculation was made on the assumption that sales in April will essentially fall to zero at restaurants, car dealerships, and appliance, furniture, and clothing retailers.

Makino added that business investment will also slow to a trickle as construction companies are expected to avoid large projects involving many workers, and deliveries of computer equipment will likely wait until offices return to normal.

Exports are expected to fall by around 50 percent, as key export markets—especially the United States—remain largely under lockdown, Makino said.

ROAD BACK
After the monthlong shutdown, a recovery will depend in part on how well the virus is contained but also on how quickly economic measures announced by Prime Minister Shinzo Abe are implemented. Funding for the stimulus program first needs to be approved by parliament.

The government hopes to start handing out cash in May to small businesses and households that have been hit by the shutdown. But Hideo Kumano, chief economist at Dai-ichi Life Research, notes that the number of households eligible for handouts will reach as many as 13 million, a quarter of the nation’s total.

“It will be a huge logistical task,” he said.

The Abe administration is hoping for a V-shaped recovery after the third quarter, but economists predict that the reco­very of private consumption is more likely to be gradual.

“Consumers will start getting tired of staying at home. Once the outbreak becomes contained, they will start spending,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. But he adds that some people, especially elderly, will remain cautious about going out.

Kodama pins his hopes on a quick recovery in the United States, as cases of new infections there flatten.

“If exports to the United States recover,” Kodama said, “then business investment will also revive, as they tend to move together.”