July 07, 2020

Downgrading our 2020 outlook for consumption

In May, the recovery of the real consumption activity index was much weaker than expected. The private consumption in Japan did recover in May, but its pace was even weaker than our pessimistic scenario we produced a month ago when we analyzed the April result. Looking at the sub-components of the index, we see that durable goods consumption declined further in May by 0.6% month on month (MoM) on top of the 10.5% MoM decline in April. On a year on year term, May shows a massive 25% decline in durable goods consumption from a year ago. Non-durable goods consumption did recover by 2.9% MoM. The service consumption disappointingly hardly recovered in in May.

Other statistics on private consumption support such weak assessment of private consumption in May. the retail sales of motor vehicles dropped by 35% YoY. In the household survey, “eating out” decreased by 59% YoY and “recreational services” declined by 64% YoY in May. Despite the successive termination of the state of emergency in Japan in May, it seems that people continued to stay away from their consumption activities.  

We have updated our three possible scenarios for the consumption trend in 2020, incorporating the result for May.

1.Optimistic Scenario

This scenario anticipates that the economic activities will gradually reopen assuming the pandemic to remain under control.  By September 2020, the consumption will recover to its level prevailing in January 2020. It will then continue to increase gradually. In this scenario, the real consumption activity index will enjoy a V shape recovery in the July-September quarter with an expansion of 11.2% quarter on quarter. Consumption will continue on a modest recovery in the following quarters. It is gloomy to think that even in this optimistic scenario, the year 2020 sees -6.7% decline the private consumption.

2.Moderate Scenario

In this scenario, the second wave of the pandemic can be avoided. However, we anticipate a slower increase in the consumption, while a “full” V shape recovery will be out of the picture. In the second quarter, consumption will decrease by 12.3% QoQ, increase by 9.3% in the third quarter and increase by 5.4% in the fourth quarter. In total, we expect an overall decrease by 8.3% YoY in 2020.

3.Pessimistic Scenario

In this scenario, people will continue to engage in restrained economic activities throughout 2020, and consumption will only recover toward September to the level of that in March of this year. From October on, we anticipate the second wave of COVID-19 to lead consumption to shrink again. In this situation, individuals would need to stay at home once again and will have to restrain their economic activities. By the end of December, private consumption will decrease to the level of that in April 2020. Such pessimistic scenario leads to a dramatic drop in private consumption by 11.9% YoY for the whole of 2020.


The private consumption in 2020 looks quite gloomy. While we did see some recovery in May, the pace of recovery was weaker than we expected a month ago, and it was somewhat surprising to see private consumption in durable goods to drop further in May. Even in our optimistic scenario, we are looking at nearly 7% decline in private consumption in 2020. In the past 3 decades, the weakest year in private consumption has been 2008 in the midst of the Lehman shock, but even then the damage was as small as 1% decline. The scale of the likely decline in private consumption is truly horrific. In our view, the Japanese government needs to inject some energy into private consumption to prevent Japanese economy from falling into a vicious economic cycle where the temporary weak economic performance leads to job losses, further driving the economy into harder recession. In April, Japan lost more than a million job and May saw hardly any recovery. Looking at the current situation in Tokyo where the infection is on a gradual rise, it is difficult to be optimistic on private consumption in Japan though. We should continue to hope for the best, but be braced for the worst outcome in private consumption in Japan in 2020.   

Report written by:

Guest Economist 

Reiko Chiyoya

Email: reiko.chiyoya@japanmacroadvisors.com