Japan: Weakened Pre-COVID Economy Turns in Record Setting Q2 2020

(22 August 2020) Japan's economic performance in Q2 2020 was the worst ever since Tokyo started publishing GDP data. The world's third largest economy reported a 7.8 percent QoQ decrease compared to 'only' a 4.8 percent drop during the global financial crisis. While a rough quarter for Japan, it was still a less severe economic contraction that faced by the United Kingdom (down 20.4 percent) and the United States (down 9.5 percent) where COVID measures forced broad sweeping constraints on normal economic activity that Japan has avoided.

• On an annualized basis*, Japan's economy shrank 27.8 percent, a better performance still than the United States, which set its own record with an annualized decrease of 32.9 percent in Q2.
• Private consumption, which accounts for more than 50 percent of Japan's GDP, fell 8.2 percent QoQ while gross fixed capital formation declined by less than a percent.
• As was the case elsewhere globally during Q2, Japan's exports succumbed to weak global demand and decreased 18.5 percent QoQ; imports declined only marginally (0.54 percent).

Japan entered the COVID period with an economy struggling with high tax rates, soaring national debt, rising costs for elder care, and a shrinking consumer market as well as absorbing a continuing series of economic shocks from natural disasters, notably including the Tōhoku earthquake and tsunami of 2011. Seeking to brace its domestic economy while awaiting the recovery of global demand, tourism, and general economic activity, the government and financial system have taken a multi-pronged approach to manage through COVID:

• Stimulus package. The government announced a fiscal stimulus package of $2.1 trillion, about 40 percent of GDP.
• Adjusted monetary policy. The Bank of Japan eased monetary policy through unlimited purchases of government bonds, real estate investment trusts, corporate bonds, and indirect lending programs.

Note: Annualized GDP reflects what would happen if the Q2 GDP growth rate continued for a whole year. It is calculated as [(current quarter GDP/ Previous quarter GDP)^4-1]*100.