nd ar - 公益社団法人日本経済研究センター jcer

The Japan Center for Economic Research (JCER), Japan's leading think tank, forecasts Japan’s economy from 2020 to 2035.

1

Japan Center for Economic Research

The 47th Medium-Term Economic Forecast (Tentative Revision) July,2020

Tatsuo Kobayashi (Principal Economist)

Sumio Saruyama (Lead Economist)

Katsuaki Ochiai (Specially Appointed Fellow)

Economy before and after the Coronavirus Crisis

- Real GDP level will fall by 2% due to rapid expansion of debt

- Prolonged virus outbreak and intensified international friction will result in

“nightmare scenario”

Summary

The Japan Center for Economic Research (JCER) has revised its medium-term economic

forecast on how the trajectory of economic growth will change with the coronavirus crisis. It was

compared with the previous forecast released in March (chart 1). On June 19, restrictions on domestic

economic activity were completely lifted. However, can it return to the economy prior to the Covid-

19 pandemic? A “nightmare scenario” was also considered in which a prolonged outbreak and

intensified political and economic conflict between the United States (US) and China leads to deep

global recession. In the baseline scenario, real GDP has been revised downward by about 2%

compared to the previous forecast, but in the case of the nightmare scenario, it will fall by nearly 8%,

and will constantly remain in negative growth from fiscal year (FY)１ 2029. Preventing a widespread

second wave of Covid-19, developing therapeutic drugs/ vaccines, and establishing a system for

international cooperation to mitigate and/or eliminate political and economic conflicts will be needed

in order to avoid global depression.

Chart 1 Negative growth from FY 2029 onward in Nightmare Scenario

(Note) Forecasted by JCER for FY 2020 and beyond

(Source) National Accounts

１The period of the fiscal year (FY) is from April to next March.

553.5

541.2

510.4

460

480

500

520

540

560

2000 2005 2010 2015 2020 2025 2030 2035

Previous Forecast

Updated Baseline Scenario

Nightmare Scenario

Real GDPTr. Yen

Growth paths lowered

-6

-5

-4

-3

-2

-1

0

19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

ProlongedLockdown

Heavier Debt,Firms & Govt

Reduced Inbound

Worse GlobalEconomy

NightmareScenario

Decomposition of reduction in GDP

Relative to Baseline, %

Year

2

The 47th Medium Term Economic Forecast

July,2020

1. Baseline scenario: Real GDP in FY 2035, 2.2% worse than the previous

forecast (1) Economy will not return to 2018 Pre-Covid levels until FY 2024

The baseline scenario assumes that the coronavirus crisis will end in FY 2020 in Japan, the

Tokyo Olympics will be held as scheduled, and international travel to and from other countries will

gradually be eased. Still, the level of real GDP in FY 2035 will fall by 2.2% from the previous forecast.

The economy will not return to 2018 Pre-Covid levels until FY 2024. The lost income will be about

230 trillion yen from FY 2020 to FY 2035. The potential GDP will also drop by more than 2% in FY

2035. Various measures taken to control the outbreak will result in public and private debt to increase

sharply and capital spending to weaken, so the decrease in capital stock will push down potential GDP

(chart 2).

Chart 2 Real GDP, 2.2% lower than expected before the Coronavirus Crisis



Behind the weak recovery in real GDP, which fell by 6.8% in FY 2020, is the weakness of

overseas economies, especially in Europe and the United States (US). In particular, the US has

suffered a severe virus outbreak and it will take some time before the restrictions on economic activity

are completely lifted. In addition, China, which is said to have controlled the spread of Covid, is

affected by the stagnation of Western economies. Moreover, China is not only in conflict with the

United States in terms of trade but also with dealing with the pandemic. For this reason, it is believed

that the growth of the global economy will not easily return to its original growth trajectory (chart 3).

The GDP level in 2035 will be 2.2% worse in the US and 2% in China. Crude oil depreciation is a

plus for Japan, but such favorable conditions will not last long. Taking world inflation into

consideration, it is assumed that oil prices will reach 110 dollars / barrel in 2035.

▲2.2

-10

-5

0

5

10

15

350

400

450

500

550

600

2000 2005 2010 2015 2020 2025 2030 2035

Deviation, right axis

Updated Baseline

Previous Forecast

Real GDPTr. Yen %

▲2.2

-10

-5

0

5

10

15

350

400

450

500

550

600

2000 2005 2010 2015 2020 2025 2030 2035


Updated Baseline

Previous Forecast

Potential GDPTr. Yen %

F Y

3


July,2020

Chart 3 Global economy also revised downward by 2%


(Source) IMF

(2) Government debt outstanding will increase to 270% of nominal GDP

In response to the coronavirus crisis, the government will provide SMEs and freelancers with

subsidies for sustaining businesses of up to 2 million yen, up to 6 million yen in rent subsidies, and

100,000 yen cash handouts to all residents in Japan. Therefore, in FY 2020, the government approved

primary and secondary supplementary budgets exceeding 50 trillion yen. All financial resources will

be covered by the issuance of government bonds. As a result, government debt will exceed 1.4

quadrillion yen in FY 2035, and the nominal GDP ratio will reach 270% (chart 4).

Chart 4 Japan’s government debt will exceed 1,400 trillion yen in FY 2035


(Source) National Accounts, Central Government Debt "Outstanding Government Bonds and Borrowings",

White Paper on Local Public Finance

In the baseline scenario, it is assumed that from FY 2025 to 2050, an annual income tax

increase of 1.6 trillion yen will be used for the redemption of government bonds, following the

reconstruction funding method of the Great East Japan earthquake. However, it may also be covered

it by increasing the value-added tax (VAT) rate. According to calculations based on our

macroeconomic model, the impact on the macroeconomy was not significantly different between the

income tax increase and the value-added tax increase. However, there is debate over whether high-

80

100

120

140

160

2015 2020 2025 2030 2035

Previous Forecast

Updated Baseline

Nightmare Scenario

▲2.0

▲26.8

-30

-20

-10

0

2015 2020 2025 2030 2035

Updated Baseline

Nightmare Scenario

Relative to Previous Forecast, %

Downward Deviation

World GDP in 2019=100

Faltering World Economy

Year

23

271

0

20

40

60

80

100

120

0

50

100

150

200

250

300

2000 2005 2010 2015 2020 2025 2030 2035


Updated Baseline

Previous Forecast

Government Debt OutstandingsPercent of Nominal GDP, % % point

End of fiscal year

4


July,2020

income earners should pay more for financial measures to deal with the Covid crisis, or whether it

should be widely paid by the entire population.

Corporates debt will also surge sharply. To secure operating funds, it is assumed that debt

would increase by 50 trillion yen and cash and deposits would decrease by 20 trillion yen (chart 5).

From FY 2022 onward, capital spending will be sluggish because priority will be given to lowering

the debt ratio that increased in FY 2020 and FY 2021. Nominal capital spending will not return to

2018 pre-coronavirus crisis levels until FY 2035. Sluggish capital spending will lead to the pushing

down of potential GDP shown in Chart 2.

Chart 5 Sluggishness of investment caused by priority given to lowering the debt ratio


(Source) National Accounts, Financial Statements Statistics of Corporations by Industry

(3) The rate of decline in per capita personal consumption will be larger than that of real

GDP

Due to the slump in the macroeconomy, the compensation of employees per person and real

consumption will also become sluggish. As companies prioritize debt repayment, the compensation

of employees will be restrained, and personal consumption will weaken by 3.0% compared to the

previous forecast. This is 0.8 points larger than the decline in real GDP. In addition, the decline in real

GDP per worker (≒labor productivity) in FY 2035 will be 0.6%. The real consumption per person

will be affected by the annual income tax increase of 1.6 trillion yen from FY 2025 onward as a

financial source for coronavirus measures. Furthermore, the business behavior of companies

prioritizing debt repayment will also adversely affect personal consumption through the compensation

of employees (Chart 6).

40

50

60

70

80

90

100

110

1990 2000 2010 2020 2030

Nominal Private Non-residential Investment

Tr.Yen

FY0

100

200

300

400

500

600

700

1990 2000 2010 2020 2030

＋50

（2020-21）

Debt Outstanding of Private Firms

Tr.Yen

0

50

100

150

200

250

300

350

1990 2000 2010 2020 2030

-20(2020-22)

Cash and Deposit Outstanding of Private

FirmsTr.Yen

15

20

25

30

35

40

45

50

1990 2000 2010 2020 2030

Debt Ratio of Private Firms

Percent of Firm'sAsset

5


July,2020

Chart 6 Decline in consumption larger than that of real GDP



The unemployment rate is expected to remain in the range of 3.0~3.5% in FY 2020 due to

measures such as employment adjustment subsidies taken by the government. However, it is estimated

that the unemployment rate will reach 9%, when hidden unemployment due to suspension of business

operations and shortened working hours is taken into consideration. Hidden unemployment will

gradually disappear as the economy recovers, but overemployment will remain for more than five

years (chart 7).

Chart 7 Unemployment rate including hidden unemployment will reach 9%

(Source) Labour Force Survey, Monthly Labour Survey

(4) Even if a rapid rebound in foreign visitors occurs, pre-Covid levels will only be achieved

in FY 2028

According to the announcement of Japan National Tourist Organization (JNTO), the number of

foreign visitors to Japan dropped to 2,900 in April and 1,700 in May 2020, from an annualized rate of

30 million people before the coronavirus crisis. Although there are movements to lift travel

restrictions with some countries, new restrictions for foreign visitors are being considered such as

mandatory PCR testing and a ban on the usage of public transport. Visitor flows to Japan in FY 2020

are unlikely to recover rapidly, considering the virus outbreaks in Europe, the US and Asia, and will

46

48

50

52

54

56

2000 2010 2020 2030

Updated Baseline

Previous Forecast

Labor share(%)

▲ 3.0

-10

0

10

20

30

2.00

2.25

2.50

2.75

3.00

2000 2010 2020 2030

百

(FY)

Deviation(right axis)

Updated Baseline

Previous Forecast

Real Private Consumption per capita(Million Yen)

(%)

▲ 0.6

-10

0

10

20

30

7.0

7.5

8.0

8.5

9.0

2000 2010 2020 2030

百 Deviation(right axis)

Updated Baseline

Previous Forecast

Real GDP per worker(Million Yen)

(%)

0

2

4

6

8

10

2005 2010 2015 2020 2025 2030 2035

Unemployment Rate

incl. hidden unemployment

(%)

FYForecast

6


July,2020

be close to zero. In the baseline scenario, it is assumed that the coronavirus outbreak will be contained

in FY 2020, and that inbound tourism demand will return in FY 2021, boosted by the Tokyo Olympics.

It is assumed that from FY 2022 onward, tourists from East Asia such as China and South Korea will

increase at the same rate as when the so-called "explosive shopping spree" phenomenon was widely

observed (FY 2012 to 2018). As a result, in FY 2028, there will be more than 31 million visitors,

reaching the 2018 pre-coronavirus crisis levels. Even in FY 2035, it will be difficult to achieve the

government goal of 60 million annual visitors (2030) (chart 8).

Chart 8 Foreign visitors down by 16 million in FY 2035 even with rapid rebound

(Note) Nominal consumption of foreign visitors to Japan per capita increases by 2% every year

(Source) Japan Tourism Statistics, National Accounts

2. Nightmare scenario: Fear of Global Depression

In the US, South America, Southern Asia, etc., the spread of the first wave of the coronavirus,

not to mention the second wave, has not been brought under control. Prevention of an outbreak a

necessary condition for full-scale economic activity and recovery, and international cooperation is

essential. However, the US, where the spread of the virus has yet to be contained, is blaming China

for its responsibility. With the trade friction from last year, the Trump Administration’s “America First”

policy intensified. The US has threatened to cut funding for international organizations such as WHO

over coronavirus and WTO over trade. In December 2019, JCER published its long-term economic

forecast " 2060 Digital & Global Economy " and warned that Trump's policy would cause the world

to split into regional blocs and the "nightmare scenario" may trigger the Great Depression. The

nightmare scenario (the worst case scenario) in the 47th Medium Term Forecast has started to look

increasingly likely. Japan's potential growth rate will turn negative in the 2020s. Real GDP will also

fall into negative growth by the end of the 2020s (chart 9).

▲16

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-40

-20

0

20

40

60

80

2000 2005 2010 2015 2020 2025 2030 2035

Deviation

Updated Baseline

Previous Forecast

Million persons

Inbound Foreign Visitors

FY

-3.7

10.1

13.9

-5

0

5

10

15

2000 2005 2010 2015 2020 2025 2030 2035

Deviation

updated Baseline

Previous Forecast

Tr. Yen

Their Expenditures in Japan

in current prices

7


July,2020

Chart 9 Japan’s economy will not recover to pre-coronavirus levels



(1) Fear of second and third waves at home and abroad - Global growth rate will fall to 1%

range

In the nightmare scenario, it is assumed that the second and third waves will arrive across the

globe, and it will take time to develop a vaccine and make it widely available. The positive rate was

about 0.1% in the antibodies test conducted in Tokyo by the Ministry of Health, Labor and Welfare.

In New York, where nearly 400,000 people have been infected and the death toll has exceeded 30,000,

a little over 10% tested positive for Covid antibodies. Herd immunity cannot be achieved in Japan as

the large part of the population have not yet been affected by the virus. After the First World War, the

Spanish Flu affected 40% of the population and ended after the third wave (chart 10), but by that time

nearly 400,000 people had died. It is considered impossible for society to accept such consequences

in Japan today. If vaccine development takes time, virus outbreaks will be prolonged and economic

activities will be restricted and eased repeatedly.

Chart 10 Spanish flu epidemic spread in three waves

(Source) Ministry of Home Affairs

Covid-19 is continuing its spread across the world (chart 11). The Trump administration

claims that the US pandemic occurred because “China hid information about the infection and did not

▲5.7

-10

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10

20

30

420

460

500

540

580

2000 2005 2010 2015 2020 2025 2030 2035


Baseline

Nightmare Scenario

Real GDP in 2011 pricesTr.Yen

▲3.0

-5

0

5

10

15

420

460

500

540

580

2000 2005 2010 2015 2020 2025 2030 2035


Baseline

Nightmare Scenario

Tr.Yen

Potential GDP(%)

FY

(%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0

5

10

15

20

25

August 1918

to July 1919

August 1919

to July 1920

August 1920

to July 1921

(%)(Million Persons)

Cases

Mortality, right axis

0

10

20

30

40

August 1918

to July 1919

August 1919

to July 1920

August 1920

to July 1921

(%) Morbidity

Declined to 1/10 of the previous wave

8


July,2020

cooperate.” This has resulted in serious conflicts with the Chinese government. The Trump

administration has also threatened to withdraw the US from the WHO, because China is too influential.

Some states have restarted their economic activities before the outbreak is over, raising the risk of

another outbreak. It seems impossible to achieve international cooperation in an attempt to control

the pandemic.

Chart 11 Global outbreak of the Covid-19 pandemic

(Source) The number of infected people was aggregated by Nikkei based on data from countries and data from

WHO and Johns Hopkins University.

It is also possible that trade friction will intensify due to the coronavirus conflict. The WTO, a

dispute arbitration institution, is already unable to get US cooperation to fill the Appellate Body

vacancies. The WTO is supposed to be able to deal with trade disputes in a two-stage process, but the

process has not been opened due to lack of a senior committee.

Considering this situation, it is assumed that the global economic growth rate would be 1%

worse than the baseline scenario (chart 12). From 2028 onward, the world growth rate will fall short

of 2% (in which case a global recession will occur) and reach 1%. Intensified friction may cause the

world to split into regional blocs. The global economy will shrink by almost 30%, and in the 2030s,

the US will be overtaken by China in terms of economic size.

Chart 12 Global economy will shrink by almost 30% due to intensified international friction

(Source) IMF, Global growth rate is calculated by weighted average by PPP-converted GDP of each country

0

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4

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12

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16

18

2020/2/1 2020/3/1 2020/4/1 2020/5/1 2020/6/1

(Million Persons) Daily confirmed new cases (7-day moving average)

Europe

North America

Asia

Central and South America

Others

2020/6/28

80

100

120

140

160

2015 2020 2025 2030 2035

Previous Forecast

Updated Baseline

Nightmare Scenario

▲2.0

▲26.8

-30

-20

-10

0

2015 2020 2025 2030 2035

Updated Baseline

Nightmare Scenario

Relative to Previous Forecast, %

Downward Deviation

World GDP in 2019=100

Faltering World Economy

Year

9


July,2020

(2) Government debt to nominal GDP ratio to reach 320%, over 1.5 quadrillion yen

Due to the prolonged outbreak (second and third waves expected) in Japan and overseas, in

the nightmare scenario, it is assumed that in addition to the coronavirus relief "financial expenditure

of 40 trillion yen" in FY 2020, a supplementary budget of 30 trillion yen will be prepared in FY 2021.

Government debt will expand from the current 1 quadrillion yen to 1.5 quadrillion yen in FY 2035.

The government debt to nominal GDP ratio will also be 320%. In the nightmare scenario, it will

implement a tax increase (1.6 trillion yen as baseline) of 2.8 trillion yen from FY 2025 on the

redemption of JGBs issued for coronavirus measures totaling 70 trillion yen in FYs 2020 and 2021.

Even so, the expansion of debt will not stop. If government debt grows at this pace, there is a risk of

financial failure by FY 2035 (chart 13).

Chart 13 Concerns about financial failure


(Source) National Accounts, Central Government Debt "Outstanding Government Bonds and Borrowings",

White Paper on Local Public Finance

Private-sector debt will increase by 50 trillion yen in FY 2021 compared to the baseline

scenario due to securing working capital, etc. It is easy to imagine that debt repayment will be given

higher priority, and capital spending will be reduced by 13 trillion yen (about 15%) from the baseline

scenario in FY 2035. The decrease in capital stock will cause growth to fall to a negative level. Even

if efforts are made to reduce debt at the expense of investment, the debt ratio for FY 2035 will only

return to the level of FY 2020 (i.e. it cannot be suppressed to the level before coronavirus crisis.)

Chart 14)

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2000 2005 2010 2015 2020 2025 2030 2035


Baseline

Nightmare Scenario

Government Debt Outstanding

Percent of Nominal GDP % point

FY

10


July,2020

Chart 14 The debt ratio cannot by suppressed to pre-Covid levels


(Source) National Accounts, Financial Statements Statistics of Corporations by Industry

(3) Foreign visitors to Japan will fall to 10 million, back to levels before the “explosive

shopping spree” phenomenon

A prolonged outbreak will have a grave effect on foreign visitors to Japan. If second and third

waves of the outbreak occur, it will not be possible for Tokyo to hold the Olympics in summer 2021,

crushing hopes to bring back tourists. If vaccine development cannot be carried out for the time being,

Japan will require mandatory PCR testing on arrival, which will be a big hurdle for foreigners

travelling to Japan. Also, in China and other countries, Covid contact tracing applications are widely

used, but without such applications, Japan will be avoided as a tourist destination. A prolonged

coronavirus outbreak will shy away tourists from Japan, especially from Asia. Japan is facing

challenges in digitization and improvement of the medical system. With the global economy in a

serious recession, inbound foreign visitors will only return to 2010 levels before the start of the

"explosive shopping spree" phenomenon, and the unit consumption of visitors to Japan will remain

flat (2% increase every year in the baseline scenario). The consumption of foreign visitors in Japan in

FY 2035 will shrink to 1/10 compared to the previous forecast (chart 15).

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2000 2010 2020 2030

Baseline

Nightmare

Nominal Private Non-

residential Investment

Tr.Yen

FY0

100

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300

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500

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700

2000 2010 2020 2030

Baseline

Nightmare

Debt Outstanding of

Private Firms

Tr.Yen

0

50

100

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350

2000 2010 2020 2030

Baseline

Nightmare

Tr.Yen

Cash and Deposit

Outstanding of Private

Firms

15

20

25

30

35

40

45

50

2000 2010 2020 2030

Baseline

Nightmare

Percent of Firm's Asset

Debt Ratio of Private

Firms

11


July,2020

Chart 15 Japan’s devastating tourism industry post-Covid

(Note) Nominal Consumption of Foreign visitors to Japan per capita will be flat by FY 2035

(Source) Japan Tourism Statistics, National Accounts

(4) Complete deflationary economy, and hidden unemployment rate of 7%

In the nightmare scenario, the economy is expected to revert to full deflation. The decline in

corporate profits is reflected in wages, which will be reduced by 17% in FY 2035 compared to the

baseline scenario. Wages will continue to decline, far from what they were before the coronavirus

crisis. Consumer prices (CPI) will continue to decline as wages fall. The CPI will decrease by more

than 10% from before the coronavirus crisis (FY 2019) to FY 2035. This will result in a deflationary

spiral (Chart 16).

Chart 16 Consumer prices and wages continue to decline

(Source) Labour Force Survey, Monthly Labour Survey, CPI

The effects of the deflationary economy will also affect unemployment. As the second and

third waves of the pandemic hit the country, the unemployment rate including hidden unemployment

(e.g. suspension of business operations) for FY 2020 and 2021 will exceed 10% before gradually

declining, but overemployment will not be resolved. The unemployment rate including hidden

unemployment will reach 7.6% in FY 2035 (chart 17). The forecast assumes that companies will

48

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11

0

10

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30

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70

2000 2005 2010 2015 2020 2025 2030 2035

Updated Baseline

Previous Forecast

Nightmare Scenario10.1

13.9

1.4

0

5

10

15

2000 2005 2010 2015 2020 2025 2030 2035

Updated Baseline

Previous Forecast

Nightmare Scenario

Tr. Yen

Their Expenditures in Japan

in current pricesMillion persons

Inbound Foreign Visitors

FY

▲16.9

4

3

-20

0

20

40

60

80

2.5

3.0

3.5

4.0

4.5

5.0

2000 2005 2010 2015 2020 2025 2030 2035

百


Baseline

Nightmare Scenario

Wages per Employee

Million Yen %

▲0.9

0.6

▲0.3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

2000 2005 2010 2015 2020 2025 2030 2035


Baseline

Nightmare Scenario

%, Y/Y % point

Consumer Prices (excl. taxes)

FY

12


July,2020

maintain Japanese-style employment (life-time employment) and that the government will continue

to adopt a policy that allows "Unemployment within companies" to prevent actual unemployment. In

reality, it will be difficult to maintain Japanese-style employment under the deflationary spiral for 15

years and to continue the employment maintenance policy, and there is a high possibility that mass

unemployment will surface.

Chart 17 Unemployment rate including hidden unemployment due to suspension of business

operations and shortened working hours will exceed 7% in FY 2035

(Source) Labour Force Survey, Monthly Labour Survey

For inquiries regarding this paper, please contact Tatsuo Kobayashi of the JCER Economic

Research Department at t.kobayashi {at mark} jcer.or.jp. (* Please change {at mark} to @ )

© 2020exceed Japan Center for Economic Research (JCER)

Nikkei Inc. Bldg. 11F 1-3-7 Otemachi, Chiyoda-ku, Tokyo 100-8066, Japan

0

2

4

6

8

10

12

2005 2010 2015 2020 2025 2030 2035

Unemployment Rate

incl. hidden unemployment

%

FYForecast

nd ar - 公益社団法人 日本経済研究センター jcer

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nd ar - 公益社団法人日本経済研究センター jcer