That said, the team cited high uncertainty around projections for the first half of 2020, and they see many reasons to be worried. The report added:
So far, markets have largely shrugged off the outbreak, with the Nikkei largely recovering from the losses after the Wuhan lockdown was announced. This reflects the view that disruptions from the outbreak will prove short-lived, which was the case with the 2003 SARS episode. Our base case, too, is that activity will normalize in the second quarter of 2020. … However, we have to admit that we are growing more worried. One of the reasons why we have remained sanguine about the risks of a proper recession taking hold in Japan– one involving cutbacks in jobs and incomes and not just production—is because of the combination of stretched labor markets (driven by population ageing) and structural booms in tourism and construction, among others. These structural factors have helped put a floor on domestic demand, ensuring that spillovers from direct shocks to manufacturing activity over the years (i.e. downturns in the export cycle) don’t derail the service sector expansion.
One further issue to consider about the novel coronavirus’s rising risk to the Japanese economy is that it directly affects both manufacturing and services. The services sector should be able to ultimately absorb the shock if the virus peaks soon as household confidence would bounce back and tourist flows would normalize by the summer. Moreover, the effects of the Tokyo Olympics in July could boost household sentiment and tourism, with an admission that past host cities have seen mixed effects. The team noted:
But the risk scenario is that both household sentiment and tourist flows remain weak even after the outbreak dies down, hitting the services sector and weighing on jobs and wages after the summer. While it’s easier to imagine the threat from a prolonged slump in household sentiment and consumption, the impact of a sustained slowdown in the tourism sector should not be under-estimated: though the direct share of inbound spending in Japan’s GDP is small, it has been growing from a low base and has large spillover effects into domestic activity and employment.
24/7 Wall St. has been more guarded about reporting on “the recession” and has been rather critical about the media’s outright wrong use of imminent recession warnings last year. The caveat is that this is a call for a “technical recession,” which would be far less damaging over the long run than a deeper recession. Another risk is that when things turn negative in the economy, there usually is a fear that the negative trends will stay weak and get worse rather than magically getting better.
The website TradingEconomics shows a −0.9% consensus for Japan’s fourth-quarter reading of 2019 that will come out this weekend. The Bank of America team’s current stance for another drop in the first quarter of 2020 followed by a recovery in the second quarter is where the “technical recession” aspect comes into play. Unfortunately, there is also somewhat of a debate over the two consecutive quarters of negative GDP defining a recession.
On a final note, central banks, particularly Japan, have been going out of their way with asset purchases, negative interest rates, balance sheet expansion and other forms of quantitative easing to avoid a deeper recession that was seen a decade ago. If things start looking too bad, it would be easy to make the case that central bank intervention will be used to try to save the day.
Sponsored: Tips for Investing
A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.