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Feb resilience, second wave of containment measures

Economy proved resilient in latest batch of data

The robustness of the economy displayed in the data released this week is an encouraging sign but there is no doubt that coronavirus disruption will deal a severe economic blow over coming months.

The unemployment rate was unchanged at 2.4% in February and industrial production rose for a third consecutive month. Most encouraging was the 0.7% m/m rise in retail sales which came despite a plunge in department store sales. And it was driven more by strong durables consumption than by stockpiling of food.

But these indicators should be read with caution. First, back in February, the main disruption to activity from the virus stemmed from the lockdown in China. Second, manufacturing and goods sales were always likely to weather disruption caused by the virus better than services, which account for 60% of consumption.

The Tankan survey conducted across March showed a deterioration in business confidence but to nothing like the depths reached during the Global Financial Crisis. It points to a weak but not disastrous 1.5% y/y fall in output in Q1. However, the Tankan index tends to be stickier than other soft data. We expect it to drop much lower this year.

But timely indicators show renewed hit to activity

Indeed, with new infections accelerating in Tokyo, Osaka and Fukuoka, lockdown in those cities is now a possibility. On total cases, Tokyo is the most likely region to impose lockdown. (See Chart 1.)

Chart 1: Total Coronavirus Cases per Million People

Sources: Nikkei, Capital Economics

Even so, there have already been significant changes in behaviour, so whether a lockdown is declared might not matter that much for consumer spending. Concerns about a “second wave” of coronavirus infections have prompted local authorities to implement a second wave of containment measures in recent days. Residents in many cities were requested to stay at home last weekend and many shops didn’t open. And a sharp drop in restaurant goers suggests many heeded the advice. (See Chart 2.) That plunge came after a slight uptick in restaurant reservations in mid-March that had suggested “restraint fatigue” was setting in.

Chart 2: Restaurant Reservations
(Bookings minus Cancellations, 7-day avg., ‘000s)

Source: TableCheck

The number of passengers on the Yamanote line – the aorta of Tokyo’s subway network – fell 70% y/y over the weekend. And a nationwide survey conducted by Nikkei last weekend showed 83% said they were avoiding leaving the house, up from 43% in late-February.

As such, we have revised down our forecast for consumption growth in Q2 from -2% to -5% q/q. However, the spread of the virus is still on a knife edge – or the “edge of edges” as Economy Minister Nishimura put it this week – so the next few days will give some indication as to whether our forecast is too bearish, or indeed too bullish.

The week ahead

A large fiscal stimulus package is set to announced early next week. The most insightful data release is likely to be March’s Economy Watchers survey.

Data Previews

Labour Cash Earnings (Feb.) Tue. 7th Apr.


Time (JST)



Capital Economics

Regular Earnings Official (y/y)





Regular Earnings Old Sample (y/y)





Labour Cash Earnings Official (y/y)08.30(+1.5%)(+0.2%)(+1.3%)
Wage growth to slow

The sharp rise in wage growth in January was down to yet another sampling distortion. Meanwhile, data compiled with a continuous sample of companies, which adjusts for sampling distortions, showed regular wage growth was unchanged at 0.6% y/y in January. (See Chart 3.)

The unemployment rate stayed at 2.4% in February which is consistent with base pay growth of just below 1%. We have pencilled in a slight weakening in regular wage growth from 0.6 to 0.5% y/y in February going by the old sampling method which the Ministry of Labour still publishes.

While we expect bonuses to have taken a hit as companies braced for a virus-led downturn, they typically account for less than 2% of total pay in February so shouldn’t have dragged down total cash earnings too much.

And looking further ahead, we think total wage growth will average -1% y/y this year as corona disruption causes unemployment to spike and falling corporate profits cause bonus payments to drop sharply.

Chart 3: Regular Earnings (% y/y)

Sources: MHLW, Refinitiv, Capital Economics

Machinery Orders (Feb.) Wed. 8th Apr.


Time (JST)



Capital Economics

“Core” Machinery Orders m/m (y/y)


+2.9% (-0.3%)

-2.6% (-3.0%)

-2.0% (-4.5%)

Machinery orders probably fell

“Core” machinery orders rose 2.9% m/m in January. While non-manufacturing orders fell 1.7%, the 4.6% m/m rise in manufacturing orders in January suggests industry was beginning to turn a corner at the start of the year. (See Chart 4.)

To be sure, virus-related disruption was a headwind to business investment in February. But given that other activity indicators and the manufacturing surveys held up well, we are not expecting a sharp fall in machinery orders to have occurred. Moreover, domestic machine tool orders rose in February. We have pencilled in a small fall in “core” orders.

Looking ahead though, global efforts to contain the virus should severely damage non-residential investment, which we expect to fall by 6% this year.

Chart 4: “Core” Machinery Orders (Yen Billion)

Source: Refinitiv

Economic Diary & Forecasts

Upcoming Events and Data Responses



Time (JST)



CE Forecasts*

Mon 6th

No Significant Data Released





Tue 7th

Labour Cash Earnings (Feb.)





Household Spending (Feb.)





Leading Economic Index (Feb., Prov.)





Coincident Index (Feb., Prov.)





Wed 8th

Machinery Orders (Feb.)


+2.9% (-0.3%)

-2.6% (-3.0%)

-2.0% (-4.5%)

Current Account (Feb.)





Current Account Adjusted (Feb.)





Economy Watcher’s Survey Current (Mar.)





Economy Watcher’s Survey Outlook (Mar.)





Thu 9th

Consumer Confidence (Mar.)





Machine Tool Orders (Mar., Prov.)





Fri 10th

Bank Lending Ex-Trusts (Mar.)





PPI (Mar.)


-0.4% (+0.8%)

-0.7% (-0.1%)

-0.7% (-0.1%)

Selected future data releases and events

Mon 13th

M2 Money Supply (Mar.)

Fri 17th

Tertiary Industry Activity Index (Feb.)

Capacity Utilisation (Feb.)

Industrial Production (Feb., Fin.)

*m/m(y/y) unless otherwise stated; Japan is 9 hours ahead of GMT.

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q(%y/y) unless stated


Q1 2020

Q2 2020











Private Consumption







Consumer Prices







Consumer Prices Excl. Tax







Unemployment Rate (%, average)







Policy Rate (%)







Monetary Base, end period (¥ Tr)







10 yr JGB, end period (%)







Nikkei 225, end period







¥/$, end period







¥/Euro, end period







¥/£, end period







Sources: Bloomberg, Thomson Reuters, Capital Economics

Tom Learmouth, Japan Economist,

Tom Learmouth Japan Economist
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