Mount Fuji, Japan

Japan GDP Q3 2020

Japan: GDP rebounds at multi-year high rate in Q3

According to a comprehensive estimate, GDP increased 22.9% in seasonally-adjusted annualized terms (SAAR) in the third quarter, notably above the 21.4% expansion from the preliminary estimate and contrasting markedly the 29.2% contraction recorded in the second quarter. On an annual basis, economic growth recovered, with GDP contracting 5.7% in Q3 and softening from Q2’s 10.3% fall.

Domestically, the Q3 SAAR result was driven by rocketing private consumption, which grew at the fastest rate since at least 1990: Household spending increased 22.1% in the third quarter, which was above the 20.1% preliminary estimate and contrasted notably the second quarter’s 29.4% contraction. Meanwhile, public spending also grew strongly, surging 11.6% in Q3 (preliminary estimate: +9.3%; Q2: +1.1% SAAR) as sustained fiscal stimulus flowed into the wider economy. However, fixed investment contracted 8.8% in Q3 (preliminary estimate: -11.7%; Q2: -12.2% SAAR) as heightened uncertainty and subdued business sentiment weighed on capital spending.

Externally, exports of goods and services rebounded strongly in the third quarter, growing 31.2% in SAAR terms and marking the best reading since Q3 2011 (preliminary estimate: +31.3%; Q2: -52.8% SAAR). Conversely, imports of goods and services deteriorated, contracting 30.8% in Q3 (preliminary estimate: -33.8%; Q2: +5.5% SAAR). As such, the external sector contributed a substantial 11.5 percentage points to overall growth in Q3, which, although below the preliminary estimate of a 12.2 percentage-point contribution, contrasted markedly with the 11.0 percentage-point subtraction in Q2.

Looking forward, growth is projected to slow significantly in the fourth quarter but remain relatively strong nonetheless. The tightening of restrictions in key export markets such as the U.S. and Europe will likely have a moderating effect on exports, while the surge in infections in the country during November and December—combined with additional restrictions announced during November—will likely weigh on domestic activity in the final stretch of the year. However, the approval of a third stimulus package in early December should temper the slowdown somewhat.

Building on this, Takashi Miwa, chief Japan economist at Nomura, commented:

“The picture we get of Q3 real GDP regaining about 60% of the drop in Q2 is more or less unchanged from the first preliminary estimates. But we think much of this was driven by a one-time release of demand built up under the state of emergency declaration in Japan and during lockdowns overseas. We expect the pace of the economic recovery to become more subdued in Q4 and beyond as an uptick in Covid-19 cases in Japan and abroad suppresses economic activity.”

Regarding the outlook for 2021, Alvin Lew, senior economist at United Overseas Bank, noted:

“The key risks to our outlook continue to be centred around Covid-19 developments. Downside risk is a repeat of (at least) some of the restrictive measures to contain Covid-19, and thus, reinflicting some of the economic damage previously experienced in 2Q. On the other hand, the primary upside risk to the forecasts will be the successful and quick deployment of a vaccine against Covid-19.”

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