Travel & Strategy Update: Japan & Asia Macroeconomic Overview

E-commerce consumption

Key Takeaways

  • Asia economic recovery spurred by strong export growth, fiscal & monetary stimulus. Consumer confidence and household spending remain weak, consumers still “over saving”
  • Japan’s economy similarly saw strong recovery in exports, lifting the manufacturing and automobile industries, but consumption, in particular the face-to-face services industry remained weak.
  • Despite worse economic downturn than GFC, Japan has avoided mass layoffs by reducing work hours or making other adjustments, thanks to extensive government subsidies
  • Base of e-commerce users in Japan diversifying rapidly, strong growth amongst seniors

1) Tentative signs of economic recovery across Asia; consumption remains weak

CHINA became the only major economy to avoid a recession, with Q4 2020 GDP climbing 6.5% and full-year 2020 GDP clocking in at 2.3%. Growth was driven by industrial production and exports, in particular medical equipment, as well as fiscal and monetary stimulus. With continued weakness in the job market and higher than usual levels of precautionary savings, personal consumption remained weak, falling an estimated 4%, comparable with the US, while retail sales declined 3.9%. The Chinese government indicated at a December meeting that economic stimuli would gradually be withdrawn over 2021. (Bloomberg, 18/01/21; Bloomberg, 18/01/21)

In SOUTH KOREA, the Bank of Korea is expected to report Q4 2020 growth of 0.8% which would limit annual GDP contraction to 1%, outperforming official forecasts, and the smallest contraction amongst OECD nations in 2020. South Korea’s GDP looks set to overtake Italy’s, whose economy shrunk by an estimated 9% last year. Similar to China, growth was driven by strong demand for exports, in particular semiconductors and tech devices, but service sector employment and household consumption remained weak.(Bloomberg, 25/01/21) Retail sales however grew 5.5% in 2020 thanks to an 18.4 increase in online sales (Korea Herald, 28/01/21).

TAIWAN’s GDP growth outpaced China’s for the first time in 30 years, expanding 2.98% in 2020, helped by its early control of the virus and strong export demand, which contributed an estimated 60% of GDP growth. Thanks to a global demand boom for semiconductors, Taiwan’s eight largest tech companies are on track to announce record or near-record earnings for last year. Most businesses, offices and schools stayed open throughout the year, while domestic travel boomed. (Bloomberg, 28/01/21).

SINGAPORE’s economy contracted by 5.8% in 2020 based on advanced estimates, a slight improvement over official forecasts. Economic activity picked up in Q4 2020 as COVID- related restrictions were eased (Straits Times, 04/01/21) and employment figures returned to pre-pandemic levels by end-2020 (Business Times, 28/01/21).

2) Bank of Japan releases FY 2020 forecasts, expects moderate recovery; continued downward pressure in face-to-face services consumption.

Bank of Japan (“BOJ”) Governor Kuroda struck an optimistic note after their policy board meeting on 21st January, saying that COVID vaccinations are expected to make significant headway in both rich and poor countries by early next year, paving the way for an economic recovery. (Nikkei Asia Review, 21/01/21)

At the same time, the BOJ struck a cautious note that the economic outlook remains
extremely unclear and subject to change depending on the availability and pace of
vaccinations and how well governments can rein in the pandemic.

At the same meeting, the BOJ adjusted Japan’s FY 2020 GDP growth forecast downward by 0.1% to -5.6%, while raising FY 2021 GDP growth outlook by 0.3% to 3.9%. Exports and industrial production continued to post strong numbers thanks to pent-up demand for automobile and automobile-related parts, capital goods and IT-related goods, but household spending and consumption remained weak. In spite of various government measures to directly stimulate spending e.g. the Go To Travel/ Go To Eat campaigns, consumers continued to tighten purse strings, with the household savings rate at 21.8% in April-June 2020 and 11.3% in July-September 2020, compared to an average of 3.2% across 2019 (Nikkei, 29/01/21).

FY 2020 CPI is likely to remain negative despite BOJ’s price stability target of 2% due to the pandemic and the decline in crude oil prices. In the short to medium term, CPI is likely to remain around 0%, with the pandemic and reduced economic activity putting downward pressure on the price of certain goods and services, and there are also supply-side constraints, e.g. social distancing/movement restrictions, and cost increases due to preventive measures against COVID. Other deflationary factors include: energy prices are expected to continue declining to a relatively large degree, reduced demand for CPI items sensitive to economic activity and travel services, reduction in mandatory auto insurance premium and repricing of drugs, as well as lower mobile-phone charges.

Corporate lending has remained mostly accommodating during the pandemic, with firm’s funding costs all at extremely low levels. However, firms’ financial positions remain weak and have not recovered to pre-pandemic levels. Stock prices have improved reflecting positive vaccine development and expectations for additional stimulus in the US and recovery in business performance.

Wages in the short run are expected to be underpinned by base pay increases which were decided prior to the pandemic, but downward pressure will increase as the current deteriorate in business performance and decline in prices takes effect, with some time lag. Wage growth is also expected to slow due to the effects of shorter working hours, but pick up as the economy recovers. Winter bonuses, which typically lag corporate profits by half a year, are also likely to face downward pressure as the significant deterioration of 1H 2020 business performance is factored in.

Unemployment held firm at 2.9% in Dec 2020, but the overall employment picture continued to weaken, with the ratio of job openings to job seekers falling from 1.60x in 2019 to 1.18x in 2020, the worst drop in 45 years, and job losses especially pronounced amongst non- contract workers and in the face-to-face services industry. In Tokyo, the jobs to job seeker ratio fell for the sixth consecutive month to 0.88x. (Nikkei, 29/01/21)

2) Japan’s Pandemic Response vs Europe/US (Source: BOJ Jan 2021 Outlook)

BOJ conducted a comprehensive study of Japan’s economic health during the pandemic in 2020 compared with US/Europe. Japan’s real GDP recovered to similar levels as Europe but lower than the US. The main reason was weaker domestic demand, i.e. private consumption, housing investment and business fixed investment have been relatively weak. This could be partly attributed to Japan’s higher share of seniors as a percentage of total population, and also stronger vigilance against COVID-19. Services consumption, for example, declined by almost the same amount in Japan as compared to US and Europe, despite Japan’s far weaker movement restrictions and public health measures, suggesting that households have voluntarily constrained spending on face-to-face services and social activities (See Charts B1-1, B1-2. Source: BOJ).

While the US and Europe showed a strong recovery in durable goods consumption for Jul- Sep 2020, thought to be related to increased teleworking and e-commerce, Japan saw no such increase. Similarly, business fixed investment rose for US and Europe, but declined for two consecutive quarters in Japan, suggesting that Japanese firms may not have been as active as their European and US counterparts in making digital or teleworking-related investments (see lower rate of teleworking as reflected in Chart B1-9). There may also have been a time lag due to Japan’s machinery investment recovering earlier due to the pick-up in exports and production, supported by strong recovery of exports to China. Exports recovered steadily, without lagging behind the global increase in trade volume. (See Chart B1-7)

BOJ’s study also showed that although the decline in economic activity in FY2020 has been worse than the bursting of the IT bubble and the Great Financial Crisis in 2008, layoffs are actually not substantial. This suggests that fairly large adjustments have been made by firms, e.g. reductions in scheduled hours worked, temporary closures, which have been able to ‘labour hoard’ thanks to extensive government subsidies. (see Chart B3-3) Other positive developments in the labour market include: new job openings in industries where corporate activities have long been constrained by structural labour shortage, e.g. construction, medical, healthcare, welfare, wholesale and retail trade, and there is also initial evidence female workers previously in accommodation industries have moved to medical, healthcare, welfare, wholesale and retail trade.

Private consumption showed a strong pick up through November 2020, but faced downward pressure as the pandemic worsened and with the reinstatement of the State of Emergency in January 2021. Looking at high-frequency data that includes location tracking information and ‘retail and recreation’ mobility trends, which have a high correlation with selective expenditures for services, there has been a sharp decline in mobility, reflecting an overall decline in domestic travel. (see Chart B4-3 and Chart B4-4)

Face-to-face service consumption remained stagnant, but goods consumption growth remained steady, supported by an expansion in online consumption and stay-at-home consumption, despite a decrease in winter bonuses. As seen in Chart B4-5, there is a clear negative correlation between sales of food and beverage in supermarkets and sales in the food and services industry. While demand for dining-out services declined, demand for goods for eating at home increased, and in terms of overall consumption, eases the downward pressure stemming from impact of COVID-19. In fact, looking at credit card transaction data, online consumption of goods shows significant increase since March 2020, in particular the proportion of senior households has been on a clear increasing trend, indicating a diversifying base of e-commerce users (see Chart B4-6).

Download full article with charts here:
PCG Research Strategy Update 2021-02-01