Japan Country Risk Report & Analysis | Euler Hermes in Singapore

Strong stimulus, slow return to normal

MEDIUM RISK for entreprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD5081.770bn (World ranking 3, World Bank 2019)
Population	126.3mn (World ranking 11, World Bank 2019)
Form of state	Parliamentary government with a Constitutional Monarchy
Head of government	Yoshihide Suga (PM)
Next elections	on or before 22 October 2021, House of Representatives

Robust external position (current account surplus, low public external debt etc.)
JPY considered safe-haven currency
Innovative industries and high-quality products
Large financial surplus of non-financial corporations
Developed country in a dynamic region

Vulnerable to natural disasters
Aging population
Huge public debt and large public deficit
Highly dependent on energy imports

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Weak initial conditions and slow return to normal

The Japanese economy entered the Covid-19 crisis on a soft footing, already on the verge of a technical recession at the end of 2019. Indeed, the consumption tax hike and super typhoon weighed on domestic demand in Q4 2019. Although Japan managed to contain the Covid-19 epidemic without implementing strong confinement measures (compared to other major economies), high-frequency mobility data suggest that the domestic economy was still partly put on pause. That said, the Japanese economy is most likely past its trough. We expect an economic recovery to materialise in H2 2020, as suggested by leading indicators (especially in the services sector) and supported by stimulus measures and the easing of Covid-19-related restrictions domestically and in the rest of the world.

We expect GDP to contract by -5.7% in 2020, after growing at +0.7% in 2019. The recovery going into next year should bring growth in 2021 to +2.2%. Note however that the return-to-normal is likely to be dragged out: quarterly GDP is forecast to come back to pre-Covid-19 levels only by 2023. Furthermore, risks are skewed to the downside, mainly related to developments in the global pandemic. As of July, the resurgence of Covid-19 cases in Japan does not seem to warrant putting in place a state of emergency again. If this situation changes for the worse, the recovery of the economy will be delayed further.

Macro policies: Not shying away from easing, both monetary and fiscal

Inflation is low in Japan (+0.5% on average over the past decade) and there is little chance that it will reach the central bank target (+2%) in the medium term. This is because (i) input prices, such as commodity prices, are weak and (ii) aggregate demand growth is soft. These factors are all the more exacerbated by the Covid-19 economic crisis (inflation forecast at -0.4% in 2020). Against this backdrop, the central bank (Bank of Japan, BoJ) has stepped up its accommodative stance. The annual limit for JGB purchases (which was JPY80tn) has been removed, signalling that the BoJ is ready to make more aggressive purchases if necessary. Financial assistance for companies amounting in total to JPY75tn (1.4% of 2020 GDP) has been put in place. For the remainder of 2020, the BoJ is likely to remain mostly on hold, monitoring the effectiveness of its actions. The financial sector requires close monitoring in the medium run as an extended period of ultra-loose monetary policy could lead to several market distortions (e.g. JGB market, ETF).

Fiscal policy has also been stepped up significantly, despite the structural need for consolidation in theory (public debt at 238% of GDP in 2019, expected to increase to 276% in 2020). By the end of May 2020, two supplementary budgets had been approved by the cabinet, with measures ranging from private-public sector projects to corporate loans and transfers to households. Beyond the very large headline totals announced (around 40% of GDP), we estimate that recovery-focused measures (vs. emergency measures against the Covid-19 shock) amount to 4.6% of GDP.

External position: robust

External indicators are generally robust. The country is a net foreign creditor, with the largest net international investment position surplus in the world in 2019. The current account balance is in surplus (+3.6% of GDP in 2019) and is forecast to remain so in the coming years. On the currency front, the still uncertain global environment means that the JPY, a safe-haven currency, should remain attractive.

Trade structure by destination/origin

(% of total)

Exports	Rank	Imports
United States 20%	1	23.5% China
China 19.1%	2	11.3% United States
Korea, Republic of 6.6%	3	6.3% Australia
Taiwan 6.1%	4	4.1% Korea, Republic of
China, Hong Kong SAR 4.8%	5	3.8% Saudi Arabia

Trade structure by product

(% of total)

Exports	Rank	Imports
Road vehicles 21%	1	21.6% Petroleum, petroleum products and related materials
Machinery and mechanical appliances 19.43%	2	13.7% Electrical machinery, apparatus and appliances, n.e.s.
Electrical machinery and equipment 14.6%	3	9.78% Machinery and mechanical appliances
Non-specified commodities 6.37%	4	3.92% Optical, measuring, precision, medical instruments
Optical, measuring, precision, medical instruments 5.54%	5	3.78% Pharmaceuticals

The payment culture in Japan is excellent with only a minority of invoices remaining unpaid thanks to strong cultural particularities. However, excessive DSO and significant payment disparities may be observed from one sector to another.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

Although domestic courts tend to be fairly efficient in delivering timely decisions, tribunals are time-consuming, expensive and complex. Therefore, conducting well-orchestrated pre-legal collection actions is essential.

Similarly, collecting debt from insolvent debtors is overall a challenging exercise and, even though insolvency proceedings could yield dividends, these would spread over years and generate significant costs.