Japanese Economy: Analysis and Forecasts, No.128

V-shaped recovery unlikely following the Covid-19 pandemic -Social distancing measures to slow down recovery-

▶ Japan’s 2020 Q1 real GDP growth was an annualized -3.4% QoQ, the second consecutive quarter in negative territory.

▶ We expect an even steeper slump in private consumption in 2020 Q2, due to the government’s state of emergency declaration in April.

▶ As social distancing is expected to continue even after the state of emergency is lifted, a swift (V-shaped) recovery in production and consumption seems rather unlikely.

▶ We have updated our forecast for real GDP growth to -5.6% in FY 2020. After two years of negative growth in FY 2019 and FY 2020, we forecast a positive growth of +2.5% in FY 2021.

▶ We forecast a core CPI inflation of -0.4% in FY 2020, and +0.4% in FY 2021. This forecast reflects stagnant domestic and external demand, as well as the combined impact of the decline in gasoline prices, the government’s free childcare program, and the partial or complete elimination of tertiary education fees announced in April this year, which will all exert substantial deflationary pressure.