GDP will soon be back at pre-virus path

The strong rise in output in Q4 2020 to just 1.2% below Q4 2019 levels bolsters our view that Japan’s economy will be back to the level it reached before the tax hike and close to its pre-virus path by mid-2022. Daily virus cases have plummeted over the past month and the vaccination programme which kicked off this week will reduce the potential for future waves of infections and deaths once most of the vulnerable have been vaccinated around three months from now. As such, the economy should shrug of a soft Q1 as spending on services recovers. And while there are downside risks from new virus waves and new variants more resistant to vaccines, there are also upside risks to our above-consensus forecasts. The household savings rate surged last year, averaging around 11%. That’s the highest it’s been since the 1990s and we expect it to remain elevated over our forecast horizon. But there’s the possibility that households release pent-up demand and run down their accumulated savings faster than we’re expecting. As such, there’s a small chance that GDP could temporarily rise above its pre-virus path.