COVID-19 cases have been increasing at a fast pace in Japan since the government started easing restrictions from the beginning of June, which may hinder the recovery of the country’s economy in the short-term. As a result, GlobalData, a leading data analytics company, has revised down the real GDP growth from -3.1% on 6 April 2020 to -5% on 3 August 2020.

Japan imposed nation-wide state of emergency from 16 April to 6 May, which was later extended till 31 May to contain the virus spread. Since then, travel restrictions were eased, schools were re-opened and restrictions on businesses were lifted.

Gargi Rao, Economic Research Analyst at GlobalData, says: “The easing of restrictions has resulted in a marginally better performance of PMI–manufacturing and services along with some improvement in consumer confidence in June.”

However, the incidence rate of COVID-19 cases per million population rose to an average of 196.7% in July, as compared to 69.6% in April and 126% in May when the restrictions were in place. 

According to GlobalData’s Country Economic Database, the retail trade growth has exhibited a declining trend since October 2019 due to the rise in consumption tax by 2%.

In addition, the COVID-19 pandemic further reduced the overall demand for goods and services and the retail trade contracted at a sharp pace of 14.1% in April 2020. Exports also shrunk at a sharp pace of 19% (YoY) in April and 26.5% (YoY) in May due to travel ban and business closures amid the imposition of the state of emergency. Contraction in the Index of Industrial Production (IIP) also aggravated in the month of April (15.1%, YoY) and May (23%, YoY).

Ms Rao continues: “The easing of restrictions world-wide would generate global and domestic demand in July-September quarter. However, the slight improvement in private consumption is likely to be overshadowed by sudden spikes of new cases, intemperate weather conditions and supply side bottlenecks in Japan.”

Meanwhile, as restrictions were eased some green shoots were visible in the domestic demand with the consumer confidence index posting a 0.3% (MoM) rise in June as compared to 1.25% (MoM) and 0.29% (MoM) decline in April and May, respectively. Manufacturing PMI also exhibited an improvement from 37.4 in May to 39.7 in June.

Ms Rao concludes: “Recovery path of business and other key macroeconomic indicators in short and medium-term remains sluggish if the rise in COVID-19 cases is not arrested. If a second wave of cases emerges it will discourage the business sector to invest which may in turn impact the labor market.”