Japanese economy in 2021 should be better thanks to exports and supportive policies

After exiting the recession in the third quarter of Q3, as a consequence of the pandemic, the Japanese economy has merely moved back to the level where Abenomics started in 2013. On that basis, the critical question for 2021 is what could be the growth drivers and how sustainable the recovery might be.

The economic recovery in 2021 is likely to be led by exports of goods rather than tourism, on the back of stronger demand from the US and Europe. The inventory cycle is anticipated to make further progress pushing the recovery.

However, because of the low operating rate, the further drop in profitability and high economic uncertainty, companies are anticipated to be cautious in expanding investment next year. Furthermore, the rise in the unemployment rate is expected to further weaken the structurally subdued wage growth, which would contain the recovery in private consumption.

As regards monetary and fiscal policies, the government and the BoJ are expected to keep their supportive tone. The government is organizing a stimulus package focusing on wage subsidies and supports to the household sector, which could amount to JPY 40 tr (about 7% of GDP). The BoJ, in turn, is expected to extend the program to purchase corporate bonds and commercial papers to the end of 2021. Such lax stance may come with an unintended consequence, namely the rapid appreciation of the yen, which could push the BoJ to temporarily allow the 10-year JGB yield to temporarily decline to around -0.3% by purchasing additional JGBs.

All in all, the Japanese economy seems to be back to square one growth wise but with much more debt and a much bigger balance sheet for the BoJ. 2021 will be better but the recovery is technical and not structural.

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