Section 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

131

Section 3
The Japanese Economy: Recent Developments andShort-Term Forecasts
INADA,Yoshihisa; SHIMODA, Mitsuru

20.0Part Ⅱ
Part Ⅲ(1) Recovery in world trade in Q3 will be paused
According to the CPB World Trade Monitor, world trade (in volume terms:
2010=100) declined for the first time in two months in September 2021, by -0.8%
MoM, resulting in a decline of -1.1% QoQ in 2021 Q3. Global trade, which had
been expanding for four consecutive quarters since 2020 Q3, temporarily lost its
upward momentum. In Q3, both advanced economies and emerging economies
saw their trade levels decline, by -0.8% QoQ and -1.8% QoQ, respectively, for the
first time in five quarters (Figure 2-3-1).
Looking at another export statistic, we can see that in Q3 Japan’s machinery orders from overseas increased for the fifth consecutive quarter (+3.2%),
although they slowed somewhat from Q2 (+3.6%). The outlook for Q4 is an in-Part Ⅰ

1. A Retrospective Overview of the Japanese Economy in
FY202015.0

Part Ⅳ

10.0
5.0
-0.8
-1.1
-1.8

0.0
-5.0
-10.0

-20.0

13Q1
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3
17Q4
18Q1
18Q2
18Q3
18Q4
19Q1
19Q2
19Q3
19Q4
20Q1
20Q2
20Q3
20Q4
21Q1
21Q2
21Q3

-15.0

World

Figure 2-3-1

Advanced economies

Dynamics of World Trade

Source: CPB World Trade Monitor, 25 September 2021

Emerging economies

132

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook

crease for the sixth consecutive quarter, by +18.7%. Japan’s capital goods exports
are expected to grow steadily. According to the Global Semiconductor Market
Statistics, global semiconductor sales (3-month moving average) in September
rose +27.6% YoY, the 20th consecutive month of growth. Although somewhat
slowing down from the peak (+30.4% in June), sales are still growing at a highrate amid the global shortage of semiconductors.
(2) Current state of the economy
According to the second advance GDP estimate for 2021 Q3, released on December 8, the real GDP growth rate in Q3 was -0.9% QoQ, or -3.6% if annualized,a downward revision from the first advance estimate (-0.8% QoQ, or -3.0% if annualized) (Table 2-3-1). It should be noted that the second advance estimateshows that the historical peak of the GDP was in 2019 Q2, as opposed to theprevious estimate, which placed the peak of the GDP in 2019 Q3, just before theconsumption tax hike.
2021 Q3 featured the fourth declaration of a state of emergency, and supply
constraints had a strong impact on automobile purchases. As a result, the ecoTable 2-3-1

Annualized
GDP

GDP

Real GDP and its components (demand-side): QoQ % changes
GovernPrivate Private Private
ment
final con- resi- non-res- Private
Public Public
Public final conDomestic PrivateNet
invest- inventory
sumption dential idential inventory
Exports Imports
demand sumption
demand demand
exports
expendi- invest- invest- changes
ment changes
expenditure
ment
ment
ture

GDI

18Q2

1.3

0.3

0.2

0.2

0.1

-3.1

1.1

0.1

0.1

0.1

2.1

0.0

0.1

0.7

0.3

0.1

18Q3

-3.1

-0.8

-0.5

-0.5

-0.2

0.2

-2.7

0.1

-0.1

0.0

-1.3

0.0

-0.3

-1.8

-0.4

-1.1

18Q4

0.1

0.0

0.5

0.5

0.0

1.6

2.0

0.2

0.0

0.5

-1.8

0.0

-0.5

1.4

4.5

-0.2

19Q1

1.6

0.4

0.1

0.0

0.2

2.6

0.3

-0.3

0.2

0.4

2.0

0.0

0.3

-1.9

-3.4

1.0

19Q2

1.7

0.4

0.6

0.4

0.0

1.4

0.2

0.3

0.2

0.9

0.4

0.0

-0.2

0.1

1.1

0.2

19Q3

-0.5

-0.1

0.3

0.1

0.4

0.7

2.3

-0.6

0.2

0.7

1.4

0.0

-0.4

0.2

2.4

0.0

19Q4

-9.2

-2.4

-2.8

-2.9

-3.2

-1.8

-7.0

0.1

0.0

0.1

0.0

0.0

0.5

-0.2

-2.6

-2.4

20Q1

1.2

0.3

0.5

0.5

0.6

-4.9

2.7

0.0

0.0

0.1

-1.0

0.0

-0.2

-4.6

-3.5

0.5

20Q2 -28.5

-8.0

-5.3

-5.5

-8.7

-0.1

-7.0

0.4

0.3

0.4

4.3

0.0

-2.8 -18.1

-1.6

-7.0

20Q3 22.1

5.1

2.6

2.0

5.0

-4.8

-0.4

-0.5

0.6

2.1

1.6

0.0

2.5

8.7

-6.7

5.0

20Q4

9.6

2.3

1.4

1.2

2.3

0.0

1.2

-0.2

0.2

0.8

0.6

0.0

0.9 11.1

5.0

2.3

21Q1

-2.9

-0.7

-0.6

-0.4

-1.1

0.9

0.4

0.1

-0.2

-0.6

-1.5

0.0

-0.1

2.3

3.2

-1.3

21Q2

2.0

0.5

0.7

0.7

0.6

1.0

2.0

0.0

0.0

0.7

-2.6

0.0

-0.2

2.5

3.9

0.0

21Q3

-3.6

-0.9

-0.9

-1.0

-1.3

-1.6

-2.3

0.1

0.1

1.0

-2.0

0.0

0.0

-0.9

-1.0

-1.5

Note: Figures for domestic demand, private demand, private inventory changes, public demand, and net exports
are contributions. Other figures are QoQ changes.
Source: “Second advance quarterly GDP estimate for Q3 2021” by the Cabinet Office.

Part Ⅱ
Part Ⅲnomic performance centering on private consumption was weak.
In terms of the contribution to real GDP growth, domestic demand suppressed growth for the first time in two quarters, by -0.9 %pt QoQ. Therein, public demand contributed by +0.1 %pt, supporting growth for the second consecutive quarter, while private demand contributed a negative -1.0 %pt, suppressing
growth for the first time in two quarters. The headline indicators (private final
consumption expenditure, private housing, and private business equipment)
all fell sharply. External demand (net exports) made a positive contribution for
the first time in three quarters, but it was almost negligible (0.0%pt). While theexports of goods and services declined, the imports of goods and services declined even more, reflecting weak domestic demand. This can be attributed tosupply constraints, including the prolonged state of emergency as well as semiconductor shortages.
Looking at trends in demand components, private final consumption expenditure declined for the first time in two quarters, down -1.3% QoQ. By type,spending on real durable goods, such as passenger cars and household durable
goods, fell for the first time in two quarters, down -16.3% QoQ. Spending on realsemi-durable goods, such as clothing, fell for the first time in two quarters, down
-3.7% QoQ. Real spending on services also fell for the first time in two quarters,
down -0.2% QoQ. On the other hand, spending on non-durable goods, such as
food, increased by +1.1% QoQ for the third consecutive quarter.
Within fixed capital formation, real private housing declined for the firsttime in four quarters, down -1.6% QoQ. Nominal private-sector housing increased by +1.4%, for the third consecutive quarter, but real private-sector housing growth was negative due to a large increase in the private-sector housing deflator (+3.1%) caused by the wood supply shock. Real private-sector investment
in business equipment declined for the first time in four quarters, by -2.3% QoQ.
The contribution of real private-sector inventory change to real GDP growth
was +0.1 %pt QoQ, the third consecutive quarter of positive contribution.
Within real public demand, real government final consumption expenditurerose for the second consecutive quarter, by +1.0% QoQ. Vaccination has boosted
government consumption expenditure (due to increased medical expenditure).
However, real public fixed capital formation declined for the third consecutive
quarter, by -2.0% QoQ.
Real exports of goods and services fell for the first time in five quarters,-0.9% QoQ. Goods exports declined for the first time in five quarters, by -1.2%
QoQ, while services exports increased for the fourth consecutive quarter, by+ 0.6% QoQ. Meanwhile, the real imports of goods and services declined forthe first time in four quarters, by -0.7% QoQ. Therein, goods imports of goods

Part Ⅰ

133

Part Ⅳ

Section 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

134

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook

Table 2-3-2GDP

Adjustment to the COVID-19 pandemic: Real GDP and its
components (demand side, peak=100)
Goods
imports

Services
imports

Private final
consumption
expenditure

Privateinvestment

Government
spending

Goods
exports

Services
exports

19Q2

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

19Q3

99.9

101.5

105.5

100.4

99.3

100.8

100.6

98.8

19Q4

97.5

99.5

100.5

97.2

93.9

101.0

100.3

98.7

20Q1

97.8

95.2

99.9

97.8

94.8

100.9

98.1

85.8

20Q2

89.9

95.6

92.1

89.3

91.2

102.0

79.3

74.0

20Q3

94.5

88.3

88.6

93.8

88.0

104.0

89.0

70.5

20Q4

96.7

94.3

88.0

95.9

87.9

104.8

100.4

73.2

21Q1

96.0

97.5

90.3

94.9

88.9

104.0

102.6

75.1

21Q2

96.5

100.4

96.6

95.4

90.6

104.0

105.0

77.5

21Q3

95.6

99.7

94.7

94.2

89.1

104.4

103.7

78.0

Source: Authors’ calculations based on “the second advance quarterly GDP estimate for Q3 2021” by the
Cabinet Office.

declined by -0.7% QoQ, for the first time in four quarters. Services imports declined for the first time in three quarters, by -2.0% QoQ.
Looking at deflators, the domestic demand deflator rose +0.5% QoQ, for thethird consecutive quarter. Therein, the private final consumption expendituredeflator rose +0.3%, for the first time in two quarters. In terms of external demand deflators, the export deflator for goods and services rose by +2.1% (for thefifth consecutive quarter), and the import deflator rose by +5.6% (for the fifth
consecutive quarter). As the latter exceeded the former, the terms of trade deteriorated for the fifth consecutive quarter. As a result, the GDP deflator remained
negative for the fourth consecutive quarter, -0.1%.
As the terms of trade deteriorated for the fifth consecutive quarter, the real
Gross Domestic Income (GDI), which takes into account changes in gains fromtrade, declined by -1.5% QoQ, or -6.0% if annualized. Nominal GDP declined forthe first time in two quarters to -1.0% QoQ, or -4.1% if annualized.
Assuming that the peak of the real GDP (557.3 trillion JPY in 2019 Q2) is100, the pandemic caused a major bottom in Q2 2020, at 89.9 (501.1 trillion JPY).
Although the GDP recovered for two consecutive quarters in Q3 and Q4 2020,
the recovery temporarily stopped in Q1 2021. While it recovered somewhat in
Q2 2021, it remained stagnant at 95.6 (538.2 trillion JPY) in Q3. With the prolonged declaration of the state of emergency, the current GDP level is still 4.4%
(JPY 24.5 trillion) below the peak (Table 2-3-2).
Looking at the adjustment process by GDP component, only government
spending (104.4) and goods exports (103.7) exceeded their peaks in 2021 Q3.
On the other hand, the recovery in goods imports (99.7), services imports

Section 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

135(94.7), private final consumption expenditure (94.2), and private capital formation (89.1) has been sluggish. In particular, the recovery in services exports(78.0) is lagging by a large margin.

(2) Forecast for real GDP growth: +2.7% in FY2021, +2.6% in
FY2022, and +1.7% in FY2023
We have revised our forecast for the Japanese economy for FY2021-2023, reflecting the second official advance GDP estimate for 2021 Q3, and incorporatingPart Ⅱ
Part ⅢPart Ⅳ(1) Assumption about exogenous variables
According to the Ministry of Land, Infrastructure, Transport and Tourism, public works in September decreased for the third consecutive month on a volume
basis, down -6.9% YoY. The seasonally adjusted figure (APIR estimate) was -2.1%
MoM, a decline for the third consecutive month. As a result, the Q3 change was-2.7% QoQ, the third consecutive quarter decline. Due in part to the effects of thepandemic, the shortage of labor in the construction industry may have becomea supply constraint. It will take until 2022 for the FY2021 supplementary budget,
including disaster recovery and land reinforcement projects, to take effect andfor public works projects to start increasing. As a result, real public fixed capitalformation is forecast to shrink by -3.3% in FY2021, before expanding by +2.4% in
FY2022, and by +2.0% in FY2023.
The vaccination rate has accelerated since May. As a result, real government
spending has increased for two consecutive quarters in Q2 and Q3. Assumingthat the third round of vaccinations will begin in 2022 Q1, we have raised ourforecast for real government spending in FY2021 to +2.7%, and are forecasting
further growth of +1.8% in FY2022 and +0.9% in FY2023.
The most important factor in our assumptions for the overseas environmentis the price of crude oil. Crude oil prices (average of WTI, Dubai, and North Sea
Brent prices per barrel) plummeted to $21.96 in April 2020 due to the rapid slowdown of the global economy and evaporation of demand caused by COVID-19.
Since then, due to economic recovery and sustained crude supply constraints,
the price of crude oil has been on an upward trend, soaring to $82.15 in October
2021, the highest since October 2014 ($86.13). In our current forecast, crude oil
prices are expected to continue to soar through 2021 Q4, but are expected to
decline gradually from 2022 through 2024 Q1. For this reason, we have assumed
a price of 71.9 dollars for FY2021, 73.7 dollars for FY2022, and 69.7 dollars for
FY2023.

Part Ⅰ

2. Forecasts for the Japanese Economy: FY2021-FY2023

136

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook

Table 2-3-3

Forecast summary
Latest forecast(2021/12/20)
2020

2021

2022

2023

▲ 4.5

2.7

2.6

1.7

▲ 4.7

1.7

1.8

1.0

Private final consumption expenditure (%)

▲ 5.5

2.5

2.3

0.8

Private residential investment (%)

▲ 7.8

▲ 0.6

▲ 0.8

1.2

Private non-residential investment (%)

▲ 7.5

1.7

3.4

3.8

Private inventory changes (contribution)

▲ 0.2

0.1

0.1

▲ 0.0
0.3

Real GDP (％)
Private demand (contribution)

Public demand (contirbution)

0.8

0.2

0.5

Government final consumption expenditure (%)

2.5

2.3

1.5

0.9

Public investment expenditure (%)

5.1

▲ 5.7

2.9

1.9

Public inventory changes (contribution)

0.0

▲ 0.0

0.0

▲ 0.0

▲ 0.7

0.9

0.4

0.4

Exports of goods and services (%)▲ 10.5

11.6

4.6

5.5

Imports of goods and services (%)

▲ 6.6

6.3

2.6

3.5

Nominal GDP (%)

▲ 3.9

1.8

3.1

2.2

GDP deflator (%)

0.7

▲ 0.9

0.5

0.4

Domestic corporate price index (%)

▲ 1.4

6.5

2.1

0.7

Core consumer price index (%)

▲ 0.4

0.0

0.9

0.6

Industrial production index (%)

▲ 9.5

6.1

3.5

2.4

New housing starts (%)

▲ 8.1

6.7

▲ 3.2

0.3

Unemployment rate (%)

2.9

2.8

2.8

2.6

Current account balance (JPY trillion)

13.8

External demand (contribution)

16.3

13.2

11.4

% of nominal GDP

3.0

2.4

2.0

2.4

Crude oil price (USD/barrel)

44.1

71.9

73.7

69.7

USD/JPY exchange rate

106.0

112.2

115.2

116.5

USA real GDP (%, calendar year)

▲ 3.4

5.6

4.3

2.6

Note: Percentages are YoY figures, others are annotated.

some new assumptions concerning exogenous variables (fiscal and monetary
policies, and variables related to the global economy). We forecast real GDP
growth rate of +2.7% in FY2021, +2.6% in FY2022, and +1.7% in FY2023 (Table
2-3-3). On a calendar year basis, the growth rates are +1.5% in 2021, +2.7% in
2022, and +2.0% in 2023.
Looking at the contribution to real GDP growth by major component, in
FY2021, the contribution of private demand (+1.7 %pt) and net exports (+0.9%pt) will both turn positive. And public demand will also continue to support theeconomy with +0.2%pt. In FY2022, the contribution of private demand is expect-Section 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts
（%）
4.0

137

2.6

3.0
1.7

2.0
0.8

1.0

0.2

0.0
-1.0

1.7

1.8

2.7
0.9

0.5

0.4

1.0
0.3

0.4

-0.7

-2.0
-3.0

-4.5

-4.0
-4.7
2021

Private demand

Net exports

2023

（FY）

Real GDP growth

Real GDP growth rate and contribution by major component: %.

ed to be +1.8 %pt, that of public demand +0.5 %pt, and that of net exports +0.4%pt.
In FY2023, the contribution of private demand, public demand and net exports
will decline to +1.0%pt, +0.3%pt, and +0.4%pt, respectively. (Figure 2-3-2).
Looking at the content of private demand, in FY2021, real private-sector
final consumption expenditure will contribute to growth by + 1.4 %pt, real private-sector housing by -0.0 %pt, real private non-residential investment by + 0.3%pt, and real private-sector inventory changes by + 0.1 %pt. All components are
expected to make positive contributions, with the exception of private housing
investment. In FY2022, real private final consumption expenditure will contribute by +1.2 %pt, real private housing investment by -0.0 %pt, real private non-residential investment by +0.5 %pt, and real private inventory changes by +0.1 %pt. In
FY2023, real private final consumption expenditure will contribute by +0.4 %pt,
real private housing by +0.0 %pt, real private non-residential investment by +0.6
%pt, and real private inventory changes by -0.0 %pt. With the exception of private
inventory changes, private demand components will contribute positively but
modestly (Figure 2-3-3).
In terms of the quarterly real GDP growth forecast, 2021 Q3 saw the firstnegative growth in two quarters due to the reemergence of COVID-19 (the 5thwave) as well as the fourth declaration of an emergency state. In Q4, the easingof the COVID-19 pandemic is expected to lead to a rapid expansion of private
final consumption expenditure, which will boost the growth rate. The pace ofgrowth will continue to exceed the potential growth rate from 2022 onward, andthe real GDP will exceed its pre-pandemic level (543.3 trillion JPY in 2019 Q4) in
2022 Q1, and its pre-pandemic peak (557.3 trillion JPY in 2019 Q2) in 2023 Q1.

Part Ⅱ

Figure 2-3-2

Public demand

2022

Part Ⅰ

2020

Part Ⅲ-6.0

Part Ⅳ-5.0

138

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook
（%）
3.0
1.4

1.0

0.5

0.3 0.1
-0.2

-1.0

0.0

0.0

2021

2022

1.0
0.1

0.4

0.0

0.6
0.0

-1.2

-2.0

-4.0

1.2

-0.3

0.0

-3.0

1.8

1.7

2.0

-3.0

-5.0

-4.7

-6.0

2020

（FY）

Private residential investment

Private ﬁnal consumption expenditure
Private non-residential investment
Private demand

Figure 2-3-3

2023

Private inventory changes

Contributions to growth by private-demand components: %.

（JPY trillion）
570
560
550
540

557.3
556.6

559.0

545.0
545.8

543.3

530

538.9

520

526.7

537.6

532.8

535.0

Forecast

510
500
490

501.1
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2019

2020

2021

Latest forecast（No. 136）

Forecast No. 134

Figure 2-3-4

2022

2023

2024

Previous forecast（No. 135）

Quarterly GDP: Actual and Forecast (JPY trillion)

Note: Actual figures through Q3 2021, forecast figures thereafter.

Due to the negative growth in 2021 Q3, it will take one quarter longer than we
had previously expected for the GDP to exceed the pre-pandemic peak (Figure
2-3-4).

Part Ⅱ
Part Ⅲ(3) Household sector: forced savings and revenge consumption
According to the Ministry of Internal Affairs and Communications (MIC), theunemployment rate (seasonally adjusted) was 2.8% in September, remaining unchanged for two consecutive months. The number of working people (seasonally adjusted) declined by 280,000 to 66.48 million, shrinking for the second consecutive month. Therein, the number of employed people (seasonally adjusted)
increased by 20,000 to 59.69 million, the first increase in two months, and thenumber of people on administrative leave (due to temporarily closed businesses), jumped to 5.97 million (9.0%, non-adjusted figure) in April 2020. It improved
thereafter, but it remains relatively high at 2.08 million (3.1%) as of September
2021. The unemployment rate has not increased, but that is mostly due to thehigh number of people on administrative leave.
Although the labor market is gradually recovering due to the resumption of
production and policy support, households’ income environment is not improving. As a result, household consumption has been sluggish. According to MIC,
the total consumption index (2020=100, seasonally adjusted), which estimateschanges in total household consumption expenditures, rose +0.8% MoM in realterms in September, logging the first increase in three months. However, on aquarterly basis it fell -1.5% QoQ in Q3, marking the first decline in two quarters.
Private consumption has stagnated due to the three emergency states declared
throughout 2021.
As the latest state of emergency was lifted at the end of September, theflow of people has been recovering, and a sharp recovery in consumer sentiment is expected. As a result, we expect private final consumption expenditure
to rebound in Q4 (see Box: Forced Saving and Revenge Consumption). As aresult, we forecast that real private final consumption expenditure will increaseby +2.5% YoY in FY2021, by +2.3% in FY2022, and by +0.8% in FY2023.

Part Ⅰ

139

Part Ⅳ

Section 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

140

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook

Forced saving and revenge consumption

Box

Based on the quarterly preliminary report on household disposable income
and household savings rate (Q2 2021) by the Cabinet Office, we describe thetrends before the COVID-19 pandemic (Q1 1994 to Q4 2019) and thereafter(Q1 2020 to Q2 2021). First, Figure 2-3-5 (seasonally adjusted, annualized
figures) shows that employment compensation hardly increased before the
COVID-19 pandemic, and that household disposable income (after adjustingfor changes in pension entitlements) increased only by about JPY 10 trillion
before the COVID-19 pandemic.
105.0

360,000
340,000

100.0

320,000
95.0

300,000

90.0

280,000
260,000

85.0

240,000
80.0

220,000

94Q1
94Q3
95Q1
95Q3
96Q1
96Q3
97Q1
97Q3
98Q1
98Q3
99Q1
99Q3
00Q1
00Q3
01Q1
01Q3
02Q1
02Q3
03Q1
03Q3
04Q1
04Q3
05Q1
05Q3
06Q1
06Q3
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
14Q1
14Q3
15Q1
15Q3
16Q1
16Q3
17Q1
17Q3
18Q1
18Q3
19Q1
19Q3
20Q1
20Q3
21Q1

200,000

75.0

Disposable income (left axis, JPY billion)
Employment compensation (left axisa, JPY billions)
Propensity to consume (right axis, %)Figure 2-3-5

Employment compensation, disposable income, and propensity to consume (GDP basis)

Source: Authors’ calculations based on “preliminary figures of household disposable income and household savings rate”, Cabinet Office.

Household final consumption expenditure rose from 262.0 trillion JPY in
1994 Q1 to a peak at the time of the consumption tax hike, but is currently onlyaround 280 trillion JPY. Despite the lack of growth in disposable income, theaverage propensity to consume rose, from an average of 94.8% in 1994-2014 toan average of 99.0% in 2015-2019, while the savings rate fell from 5.2% to 1.0%
during this period. In 2020 Q2, employee compensation decreased by about
JPY 11 trillion QoQ (from JPY 289.8 trillion to JPY 278.9 trillion), but disposable income increased by about JPY 31 trillion QoQ (from JPY 309.2 trillion
to JPY 340.1 trillion), partly due to the effect of the one-off stimulus payment(JPY 100 thousand per person) by the government. The disposable income remained high at JPY 315.2 trillion in 2020 Q3, and then returned to the averagelevel of the year 2019 in 2021 Q2 (JPY 306.0 trillion).
Since the COVID-19 pandemic caused households to miss out on consumption opportunities, they gave up consumption that they would have otherwise been able to realize and saved (forced saving). In fact, the propensity
to consume fell by 16.2 %pt from 94.3% in 2020 Q1 to 78.1% in 2020 Q2. It thenreturned to 92.2% in 2021 Q2, but has yet to recover to the average propensity
to consume in the 2015-2019 period (99.0%).
Assuming that the recent average propensity to consume (2015-2019) of
99.0% is maintained, we estimated disposable income in the absence of the impact of COVID-19 (adjusted for one-off stimulus payment by the government).
We then deducted the actual household final consumption expenditure fromthe estimated disposable income in order to calculate the magnitude of forcedsavings. Our calculations show that forced savings for the five quarters fromQ2 2020 to Q2 2021 amounted to about JPY 27.3 trillion. If the decline in thenumber of COVID-19 infections continues (i.e., if the pandemic comes to anend), we can expect an increase in consumption (“revenge consumption”) of
about JPY 30 trillion thanks to those forced savings (Figure 2-3-6).

Part Ⅰ

141

Part Ⅱ

Section 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

360,000

320,000
Forced saving

300,000
280,000
260,000
240,000
220,000

94Q1
94Q4
95Q3
96Q2
97Q1
97Q4
98Q3
99Q2
00Q1
00Q4
01Q3
02Q2
03Q1
03Q4
04Q3
05Q2
06Q1
06Q4
07Q3
08Q2
09Q1
09Q4
10Q3
11Q2
12Q1
12Q4
13Q3
14Q2
15Q1
15Q4
16Q3
17Q2
18Q1
18Q4
19Q3
20Q2
21Q1

200,000

Household consumption

Household consumption（exclusing pandemic impact）
Disposable income（excluding one-oﬀ stimulus payment）
Disposable income

Figure 2-3-6

Infections and forced saving (JPY billion)

Source: Authors’ calculations based “on preliminary figures of household disposable income and household savings rate”, by the Cabinet Office.
Reference: Box 3 of “Outlook for Economic activity and prices,” April 2021, Bank of Japan.

Part ⅣPart Ⅲ

340,000

142

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook

According to the Ministry of Land, Infrastructure, Transport and Tourism(MLIT), the number of new housing starts in September (seasonally adjusted)fell for the second consecutive month, down -1.2% MoM, marking the third consecutive quarter increase. By type, owner-occupied housing increased by +6.5%
for the third consecutive quarter, while housing for rent and sale declined by-2.1% and -3.8%, respectively, for the first time in three quarters.
Planned construction expenditure (residential + 0.7× combined residential-industrial), a good indicator of GDP-based private housing investment, fell
for the first time in three months in September (seasonally adjusted, APIR estimate), down -6.4% MoM. As a result, although Q3 saw the third consecutive
quarter increase, it was a modest +0.7% QoQ.
Reflecting the current slowdown in planned construction, we forecast thatprivate housing will decline by -0.6% YoY in FY 2021 and -0.8% YoY in FY 2022,
before recovering by +1.2% YoY in FY 2023.
(4) Corporate sector: Downside risk is prolonged production stagnation due to supply constraints
According to the Ministry of Economy, Trade and Industry (METI), the Industrial Production Index (seasonally adjusted: 2015=100, official report) fell for thethird consecutive month in September, down -5.4% MoM. On a quarterly basis,in Q3 the index fell for the first time in five quarters, by -3.7% QoQ (Figure 2-37). In September, METI left its assessment unchanged MoM, stating that theeconomy was at a standstill.
According to the Manufacturing Production Forecast Survey, manufacturing production in October is expected to increase by +6.4% MoM and by +5.7%
in November. If the forecasts are correct, the October-November average willrise by +4.1% from the Q3 average, reaching 97.9. However, it will fail to reach its
pre-pandemic level of 98.0 in 2020 Q1.
According to METI, the index of tertiary industrial activity (seasonaly adjusted: 2015 average = 100) rose for the first time in three months by +0.5%
MoM (August: -1.1% MoM) (Figure 2-3-8). As a result, Q3 saw a decline (-0.8%
YoY) for the third consecutive quarter. The level for the same period (96.0) is
5.2 points lower than the pre-pandemic level (101.2 in Q4 2019). Therein, theface-to-face services index for Q3 was 77.3, down -1.5% QoQ, marking the third
consecutive quarter of decline. The index is 23.1 points lower than its pre-pandemic level (100.4).
The recovery in the production of goods (industrial production) and services (tertiary industry) seems to have come to a halt due to supply constraints
and the prolonged state of emergency. Therefore, we forecast that the industrial

143

Section 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

（%）
12.0

110.0

10.0

105.0

8.0
6.0

100.0

4.0
2.0

95.0

0.0
90.0

-2.0
-4.0

85.0

-6.0
-8.0

80.0

14M01
14M04
14M07
14M10
15M01
15M04
15M07
15M10
16M01
16M04
16M07
16M10
17M01
17M04
17M07
17M10
18M01
18M04
18M07
18M10
19M01
19M04
19M07
19M10
20M01
20M04
20M07
20M10
21M01
21M04
21M07
MoM changes（right axis）

Figure 2-3-7-12.0

Part Ⅰ

-10.0

75.0

Production index（left axis）

Part Ⅱ

Index of Industrial Production

Source: Ministry of Economy, Trade and Industry, “Index of Industrial Production”

100.0

96.0

90.0

77.0

70.0

60.0

Tertiary industry activity index

Figure 2-3-8

21M07

21M04

21M01

20M10

20M07

20M04

20M01

19M10

19M07

19M04

19M01

18M10

18M07

18M04

18M01

17M10

17M07

17M04

17M01

16M10

16M07

16M04

16M01

15M10

15M07

15M04

15M01

14M10

14M07

14M04

14M01

59.3

Face-to-face services index

Face-to-face services vs. the tertiary industry

Source: “Tertiary Industry Activity Index”, Ministry of Economy, Trade and Industry.
Note: The face-to-face service industry index is the weighted average of the indexes for transportation, accommodation, restaurant, food services, entertainment and other lifestyle-related services (2015 average =100).

Part Ⅳ

86.7

80.0

50.0

Part Ⅲ

110.0

144

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook

production index will increase by +6.1% YoY in FY2021, by +3.5% YoY in FY2022
to be, and by +2.4% YoY in FY2023.
According to Financial Statements Statistics of Corporations 2021 Q3, profit for all industries (seasonally adjusted, excluding the financial and insurance
sectors) declined for the first time in five quarters, down -7.4% YoY. Therein,
the manufacturing sector declined for the first time in five quarters, down -8.2%
YoY, and the non-manufacturing sector declined for the second consecutive
quarters, down -6.8% YoY. In Q3, the profits of both the manufacturing and thenon-manufacturing industries were low due to sluggish exports, deteriorating
terms of trade, and the declaration of a fourth state of emergency.
Looking at investment-related indicators, the capital goods shipment index
declined for the second consecutive month in September, down -5.7% MoM. As aresult, the Q3 figure fell for the first time in four quarters, down -2.4% QoQ. Core
machinery orders, a leading indicator of private-sector capital investment (private sector demand excluding ships and electric power), declined -0.0% MoM in
September, the second consecutive monthly decline. As a result, the Cabinet Office left its assessment unchanged from the previous month, stating that the recovery trend has stalled. Q3 machinery orders increased slightly, up +0.7% QoQ,
marking the second consecutive quarterly increase. The outlook for Q4 is for afurther increase of +3.1%. Since the improvement in the corporate earnings environment is slow, our forecast for private non-residential investment in FY2021 is+1.7% YoY, the first increase in three years, but only a modest recovery, followed
by a steady recovery of +3.4% YoY in FY2022 and +3.8% YoY in FY2023.
(5) External sector: Goods trade temporarily stagnant due to supply
constraints
GDP statistics show that in Q3, goods exports declined for the first time in fivequarters, and goods imports fell for the first time in four quarters, reflecting
weak domestic demand. As a result, the expansion of trade in goods (exports
plus imports) came to a temporary halt.
According to the Ministry of Finance the export volume index increased
by +0.0% MoM in October, the first increase in three months. While, the import
volume index decreased by -9.1% MoM, up for the second consecitve month.
Comparing October with the Q3 average, the export volume index declined by-3.8%. The import volume index fell sharply by -8.2%. As a result, the growth
contribution of net exports was positive in October (Figure 2-3-9).
In Q3, the exports of services increased for the fourth consecutive quarter
QoQ. Service imports declined for the first time in three quarters. Service imports and exports remain at low levels, mainly due to the slump in inbound andSection 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

145
15.0

120.0
115.0

10.0

110.0
105.0

5.0

100.0
0.0

95.0
90.0

-5.0

85.0
80.0

-10.0

Part Ⅰ

21M10

21M07

21M04

21M01

20M10

20M07

20M04

20M01

19M10

19M07

19M04

19M01

18M10

18M07

18M04

Export Volume Index

Source: Trade Statistics, Ministry of Financeoutbound tourism.
Taking these factors into account, we forecast that the real exports of goods
and services will increase by +11.6% YoY in FY2021, by +4.6% YoY in FY2022,
and by +5.5% YoY in FY2023. On the other hand, the real imports of goods andservices are expected to increase by +6.3% in FY2021, by +2.6% in FY2022, andby +3.5% in FY2023. As the terms of trade are deteriorating, we expect that thetrade balance will turn into a deficit in 2022 and 2023. The deficit in the services
balance is likely to increase in FY2021 and FY2022, but then it is likely to start
shrinking in FY2023.
On the other hand, since the primary income balance will likely remain
high, the current account balance is projected to remain positive at 13.2 trillion
JPY in FY2021, 11.4 trillion JPY in FY2022, and 13.8 trillion JPY in FY2023.
(6) Price trends: Energy prices rise, but consumer price trend not
expected to increase
According to the Bank of Japan, the domestic corporate goods price index (2015average=100) rose for the 11th consecutive month in October 2021, up +1.2%
MoM. On a YoY basis, the index rose for the eighth consecutive month, by+8.0%. The increase is the largest since January 1981 (+8.1%), and the impact of
the sharp rise in resource prices, especially crude oil, and the depreciation of theJapanese yen is conspicuous.

Part Ⅱ

Export volume（2015=100, left axis）

Part Ⅲ

Figure 2-3-9-15.0Part Ⅳ

MoM % changes（right axis）

18M01

17M10

17M07

17M04

17M01

16M10

16M07

16M04

16M01

15M10

15M07

15M04

15M01

14M10

14M07

14M01

70.0

14M04

75.0

146

Chapter 2 / The Economies of Japan and Kansai: A Retrospective and Outlook

A breakdown shows that the prices of raw materials rose for the eighthconsecutive month in October 2021, up +63.0% from a year earlier. Intermediate
goods prices rose +14.3%, increasing for the eighth consecutive month. Pricesof final goods rose +3.8%, increasing for the eighth consecutive month. Fromthese figures it is clear that there has been no apparent pass-through to final
goods prices.
In JPY terms, the Export Price Index in October 2021 rose for the ninth consecutive month, by +13.7% YoY. The Import Price Index rose for the eighth consecutive month, by +38.0% YoY. This is the highest increase since 1981 (the year
comparable data became available). As a result, the terms of trade index (Export
Price Index/Import Price Index*100) in October was at its lowest level sinceNovember 2014. The October index fell 19.2 points YoY, marking the eighthconsecutive month of deterioration. It was also the sixth consecutive month of
double-digit deterioration.
According to MIC, the National Consumer Price Index (2020 average=100)
rose for the second consecutive month in October 2021, up +0.1% YoY. However,the core index (which excludes fresh food, whose prices fluctuate sharply) declined for the seventh consecutive month (-0.7% YoY).
A breakdown shows that energy prices (petroleum products, electricity, andcity gas) rose +11.3% YoY, increasing for the sixth consecutive month. Their
contribution to the overall index was a positive +0.79%pt. On the other hand,
non-energy prices declined for the eighth consecutive month, falling -0.7% YoY.
Their contribution to the overall index was a negative -0.70%pt. Therein, foodprices (excluding fresh food) rose for the fourth consecutive month (+0.7% YoY,
a contribution of +0.17%pt). Accommodation prices rose for the fifth consecutive
month (+59.1% YoY, a contribution of +0.35%pt), reflecting a rebound from thelarge decline caused by the “Go To” campaign in October last year. Lastly, communication charges (cell phones) declined for the seventh consecutive month(-53.6% YoY, a contribution of -1.47%pt).
As the rate of increase in energy prices accelerated toward the end of 2021,
the core CPI is expected to rise to the upper zero percent range. The core CPI
will accelerate again as the impact of the sharp decline in telecom charges fades
away in FY2022. For some time to come, accommodation and communication
charges will keep disrupting the basic CPI trend, and should therefore be excluded when analyzing the underlying CPI trend. Although the supply-demand
gap is expected to narrow in the future, downward pressure on prices will remain strong, and the upward pressure exerted by non-energy prices (excluding
accommodation and communication) is likely to be weak considering the stagnation of wages. Therefore, we expect that the underlying CPI trend will remainSection 3 / The Japanese Economy: Recent Developments and Short-Term Forecasts

147

weak.
In consideration of the above, our inflation forecast is as follows. The domestic corporate goods price index is projected to increase by +6.5% in FY2021,+2.1% in FY2022, and +0.7% in FY2023. The national CPI core index is forecast
to be 0.0% in FY2021, +0.9% in FY2022, and +0.6% in FY2023. The GDP deflator
is forecast to be -0.9% in FY2021, +0.5% in FY2022, and +0.4% in FY2023 (Figure
2-3-10).
（%）
7.0
6.0

6.5

Part Ⅰ

5.0
4.0
2.1

0.0
-1.0
-2.0

-0.4

0.7

0.5

0.4

2022

2023

0.6

-0.9

-1.4
2020

2021

GDP deﬂator

Figure 2-3-10

0.9
0.0

Part Ⅱ

0.7

1.0

Domestic corporate CPI

Inflation Dynamics (YoY % changes)

Consumer CPI（core）（FY）

Part Ⅲ

2.0

Part Ⅳ

3.0