As we have been mentioning in our previous posts, the end of 2019 was a chaotic period. Brexit happened, leaving the United Kingdom and the European Union facing several backlash effects. Besides, some of the countries of the Eurozone are facing a decrease in their economies. With respect to Asia, Coronavirus and the trade war between China and the US is impacting not only China but many countries that have business with both or one of them. With the greatest economies collapsing, seeing that the Japanese economy is facing contraction is not a surprise.
In case you do not know, the economy of Japan is a highly developed free-market economy. It is also the third-largest in the world by nominal GDP. It is even greater than the economy of Germany, the greatest in Europe. Besides, Japan is the world’s second-largest developed economy and it is estimated to have a GDP per capita of around $38,490. It is a lot of money but, still, the country is facing a hard season of contraction. Below you will understand why this is happening now and why.
Understand the Japanese economy and its contraction
According to economists, the culprit of the contraction in the Japanese economy is a sudden decrease in consumer activity after a sales tax raise. The loss is significant: at least 3.8 % of contraction is estimated. Actually, this seems to be the worst fall for the Japanese market since 2014’s second quarter. Back there, a prior rise in taxes provoked the country’s economy to decrease by 7.4%.
As we mentioned in one of our previous posts, Coronavirus has the power of impacting more than the health of people. According to specialists, the new disease could postpone or even hinder the estimate for a fragile recovery for the beginning of the year. Taking this dramatic view into consideration, many economists are predicting that the percentage of contraction will be worst than the one with 3.8%. For Hiroshi Miyazaki, an economist at Mitsubishi UFJ Morgan Securities, Japan should expect a 7.5% drop.
We cannot stress enough how trade deals and relationships between countries may strengthen or weaken their economies. While some economists are hopeful, thinking that the country will be able to escape a recession, many are also revisiting their projections. There is a concern that the burden of the disease in China is going to affect exports. This is something that is predicted to affect countries like the US as well. What will happen is unknown, but there are good chances that the Japanese economy will take a while to recover.