New cases not exploding but economic hit still huge

A second wave of virus cases driven by rising infections in Tokyo and Osaka has triggered a major shift in economic behaviour. And while new cases in the two lynchpins of the Japanese economy have stabilised in recent days, yesterday’s declaration of a nationwide state of emergency until 6th May suggests economic activity will remain extremely subdued over the coming weeks. Outside the seven prefectures previously under a state of emergency, many were already self-isolating at home and many retail businesses had closed or cut their operating hours. The state of emergency gives local authorities the power to request businesses to close and to urge citizens to work from home. And the experience from Tokyo – where commuters were down 60% this week relative to January – is that most will heed such a request. Based on our assumption of spending on retail and transport collapsing, and activity in the tourism sector slowing to a trickle, we are forecasting a 12% q/q fall in GDP in Q2.