Japan — Fiscal, meteorological and viral setbacks risk recession

The world's third-largest economy shrank 1.8% in the fourth quarter of 2019, as the economy grappled with a sales tax increase and the aftermath of Typhoon Hagibis. Despite a US$120 billion stimulus package (2.3% of GDP) announced in December, COVID-19 now threatens a second quarter of negative growth—spelling technical recession for Australia’s second largest export market. Japan is tightly integrated into Asian manufacturing supply chains that have been disrupted by Chinese factory shutdowns, while travel restrictions and lower global demand will curb inbound tourism and exports. The Japan Manufacturing Purchasing Managers’ Index slipped again in February, remaining below the 50 threshold that separates contraction from expansion for the 10th straight month. Further, while the majority of investment for the Olympic games has already occurred, the additional boost to consumer sentiment, spending and tourism from hosting the games in July and August will now be delayed.

Australia exported A$62 billion to Japan last financial year, or 13% of total goods and services exports. Exports of natural gas, coal and iron ore comprised almost three quarters of this total, with Japan also forming an important market for agricultural products including beef, cheese, sugar and wheat. Even excluding the outbreak of COVID-19, overall energy demand in Japan is expected to weaken, due to subdued economic growth, increased energy efficiency, and a slow rise in nuclear and renewable energy use. The longer the pandemic disrupts global production and demand, the greater the knock to Japan’s economy and Australian exporters.