June 11,2020

Optimistic scenario still calls for 5% decline in consumption in 2020

There is an early indication that the Japanese economy is starting to recover in the last few weeks in a V-shape scenario. However, since the trough in April in the private consumption in Japan was so deep, roughly down 20% year on year, even a V shape recovery would leave a serious scar in the private consumption in 2020. We produced 3 scenarios for private consumption growth in 2020, and even our optimistic one calls for 5.5% year on year decline in 2020.
In April, the consumption activity index, which reflects private consumption was marked at 86.0 (-9.4? MoM). This decrease was worse than in March 2011 after the Great East-Japan Earthquake (-8.3% MoM) and that of when the Japan consumption tax increased in October of 2019 (-9.0? MoM). It was also the historical lowest and the largest drop in a single month since the beginning of the recorded statistics of 2003. In addition to this, the Real Service Index decreased by 11.0% whereas Real Non-Durable Goods Index dropped by 6.2%. Under the State of Emergency issued in April as a direct result of the COVID-19 pandemic, the economic activity was broadly restricted due to people needing to stay home. As the situation of the pandemic will continue to be uncertain, it is very difficult to predict the right direction. However, let us look at three possible scenarios for the consumption trend in 2020:
1. Optimistic Scenario
This scenario anticipates that the economic activities will gradually reopen as the pandemic is hopeful to be somewhat controlled until the end of the year. By September of this year, the consumption will recover to its level of that in January. It will then continue to increase gradually. In this scenario, the real consumption activity index will decrease by 7.7% QoQ in the second quarter, while in the third quarter, it will enjoy a V shape recovery with +11.0% QoQ. Continuing on after the third quarter, consumption will gradually increase. In aggregate, we can assume a 5.5% decrease in 2020 YoY.
2. Moderate Scenario
In this scenario, the second wave of the pandemic can be avoided. However, we anticipate a slow increase in the consumption, while a “full” V shape recovery will be out of the picture. In the second quarter, consumption will decrease by 11.9% QoQ, increase by 9.0% in the third quarter and increase by 5.3 in the fourth quarter. In total, we expect an overall decrease by 8.5% YoY.
3. Pessimistic Scenario

In this scenario, people will continue to engage in restrained economic activities, and consumption will only recover to the level of that in March of this year, right before the issuance of the State of Emergency order. Here, we anticipate the second wave of COVID-19 making a presence in Autumn or Winter. In this situation, individuals would need to stay at home once again and will have to restrain their economic activities. We expect a 12.7? decrease in the second quarter, however are predicting a 6.1% recovery in the third quarter. However, this will not be a full recovery. From the second quarter, only about 40% will be recovered. Finally, in the fourth quarter we expect the second wave of COVID-19. Due to the restrain of individual’s consumption activities, consumption will decrease to the level of April (-4.5? QoQ) and we anticipate a dramatical drop in the consumption by 12.6? YoY.


While reviewed the three scenarios of 2020, all anticipate a big decline in private consumption, which will be a significant drop compared to that of the global financial crisis in 2008 (-1.0% YoY in the final estimates). As the private consumption in Japan occupies little under the 60% in its GDP and an important growth driver, a continuous attention should be paid to see the future of the economy.

Reiko Chiyoya

Guest Economist