Japan's recovery resumes

1 Jul 2021 Written by:Mansoor Mohi-uddin (Chief Economist Bank of Singapore)

Japan’s economy has struggled in the first half of 2021 with successive virus waves leading to new lockdowns before the Tokyo Olympics start.

  • Japan’s economy has struggled in the first half of 2021 with successive virus waves leading to new ‘State of Emergency’ lockdowns ahead of this summer’s Tokyo Olympics.
  • But Japan’s important Tankan survey of business confidence released today shows the economy is set to resume its recovery in the second half of the year led by manufacturing.
  • Manufacturers report business conditions improving despite semiconductor shortages while sentiment in Japan’s services sector has turned positive for the first time in a year.
  • The Tankan survey thus reinforces our view that Japan’s GDP will grow by a firm 3% this year but still lag the US, China, Eurozone and UK.

Japan’s economy has struggled in the first half of 2021 with successive virus waves leading to new lockdowns before the Tokyo Olympics start. In the first quarter of 2021, GDP fell by -1.0% quarter-on-quarter and we forecast in the second quarter of 2021, GDP will barely grow in quarter-on-quarter terms.


Source: Bank of Singapore, Bloomberg

The uncertain outlook and Japan’s slow start to vaccinations has held back consumption. In April retail sales fell by -4.6% month-on-month and in May by -0.4% month-on-month. Semiconductor shortages have also hurt Japan’s important car sector causing industrial production to fall by -5.9% month-on-month in May.

The first chart shows Japan’s composite PMI (the purchasing manager index is a measure of firms’ confidence) has only once been in expansionary territory above 50.0 since the pandemic began.


Source: Bank of Singapore, Bloomberg

Similarly, the first chart shows Japan’s Economy Watchers’ Survey plunged in January and April as new lockdowns were imposed this year. Today’s release of the second quarter 2021 Tankan survey of business confidence is thus important. The second chart shows the quarterly survey is a key indicator as it tracks Japan’s GDP growth closely.

The Tankan survey shows the economy is set to resume its recovery in the second half of 2021 led by manufacturing. In the second quarter of 2021, large manufacturers reported a sharp improvement in business conditions. The balance of firms seeing favourable activity rose from 5% points in the first quarter of 2021 to 14% points in the second quarter of 2021 owing to strong foreign demand for Japan’s tech exports and capital goods. For the third quarter of 2021, large manufacturers were similarly optimistic. The balance of firms expecting a better outlook for the new quarter as 13% points despite semiconductor shortages. In contrast, large non-manufacturers were less optimistic in the second quarter of 2021 given the impact of lockdowns on services. But sentiment in Japan’s services sector still turned positive for the first time since the pandemic began in the first quarter of 2020.

The Tankan survey thus reinforces our view that Japan’s GDP will rebound in the second half of 2021 as vaccinations speed up. The quarter-on-quarter terms. For 2021, we forecast Japan’s GDP will rise by 3% in total. But its growth will lag the US, China, Eurozone and UK.

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