Japan's sinking exports raise risks of prolonged economic downturn at home and overseas

The coronavirus pandemic has led to a global downturn, profoundly affecting the Japanese economy as well. Japan has experienced four consecutive months of double-digit export decreases, and its position as the world’s third-largest economy is being threatened. According to the Ministry of Finance (MOF), the country's exports fell by 28.3% in May, which was the worst downturn since 2009. On a positive note, the contraction was slightly better the next month, at a 26.2% fall. 

One of the main reasons behind the decrease in exports is the lockdown. Since people are being forced to stay home, the demands for car and plane travel have naturally decreased. Shipments to one of Japan’s key markets, the US, have fallen by 46.6%, mainly due to the 63.3% drop in exports of cars, 58.3% decline in car parts, and 56% fall in airplane engines. Exports to the European Union (EU) have also dropped by 28.4%, along with a 15.3% decline in shipments to Asia. 

The Japanese economy is estimated to contract by 5.3% in 2020, but the country may experience a 3.3% bounce in 2021. Although Japan experienced a 7.8% GDP decline from the beginning of the year to June, which was its worst performance on record, it still did better than the other Group of Seven (G7) nations. For example, the UK shrank by 20.4%, Germany by 10.1%, Italy by 12.4%, France by 13.8%, Canada by 12%, and the US contracted by 9.5%.

However, Japan still cannot rest assured, as experts fear that the country could experience a significant economic decline if things continue as they are. To avoid such problems, experts believe Japan needs to continue its economic reforms by reducing trade barriers, attracting more foreign direct investments, increasing labor market flexibility, developing intellectual property, and being more open to immigration. Japan has lost a lot of ground that it had gained during Prime Minister Shinzo Abe's term. His replacement Yoshihide Suga will have a lot on his plate, as he figures out an appropriate pandemic response and tries to revive the Japanese economy while its two largest trading partners, China and the US, are still in the middle of a trade war.

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