Japan shrinks: Coronavirus sends economy into record contraction

Coronavirus lockdowns hammered spending in the second quarter, with a rise in new infections keeping shoppers wary.

Japan economy [Bloomberg]
Private consumption, which accounts for more than half of Japan's economy, plunged 8.2 percent for the quarter, as lockdown measures to prevent the spread of the virus kept consumers at home [File: Kentaro Takahashi/Bloomberg]

Japan was hit by its biggest economic contraction on record in the second quarter as the coronavirus pandemic crushed business and consumer spending, keeping policymakers under pressure for bolder action to prevent the recession from deepening.

While the world’s third-largest economy is emerging from the doldrums after lockdowns were lifted in late May, many analysts expect any rebound in July-September growth to be modest as a renewed rise in infections keeps consumers’ purse-strings tight.

Gross domestic product (GDP) shrank by an annualised 27.8 percent in April-June from the previous quarter, according to government data released on Monday, marking the biggest decline since comparable figures became available.

It was the third straight quarter of contraction, pushing the country further into recession, and slightly bigger than the median market forecast for a 27.2 percent drop.

Japan economy chart [Bloomberg]

“The big decline can be explained by the decrease in consumption and exports,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“I expect growth to turn positive in the July-September quarter. But globally, the rebound is sluggish everywhere except for China.”

The Nikkei 225 share index fell 0.69 percent to 23,127.75 by 02:07 GMT following the release of the GDP data, with healthcare and telecommunications shares pacing the decline. The broader Topix was down 0.4 percent.

Spending slowdown

Private consumption, which accounts for more than half of Japan’s economy, plunged 8.2 percent for the quarter, as lockdown measures to prevent the spread of the virus kept consumers at home.

The drop, which exceeded analysts’ forecast of a 7.1 percent fall, was the biggest quarterly decline on record.

Capital expenditure – money spent on new equipment, land or buildings – declined 1.5 percent in the second quarter, less than a median market forecast for a 4.2 percent fall.

External demand – or exports minus imports – shaved a record three percentage points off GDP, as the pandemic dampened global demand, the data showed.

Japan has deployed aggressive fiscal and monetary stimulus measures to cushion the blow from the pandemic, which hit an economy already reeling from last year’s sales tax rise and the United States-China trade war.

While the economy has re-opened after the government lifted a state of emergency in late May, a worrying resurgence in infections clouds the outlook for business and household spending.

But some analysts say Japan could emerge from the crisis in better shape than other economies.

“Given its strong corporate balance sheets, generous credit guarantee scheme and low reliance on tourism, we think that Japan will recover more quickly than most anticipate,” Marcel Thieliant, senior Japan economist at research firm Capital Economics, said in a research note sent to Al Jazeera.

Capital Economics estimated that Japan’s economy will rebound in the third quarter, growing by 4.5 percent and continue to recover into next year, posting a 3.5 percent expansion in 2021.

Source: Al Jazeera, News Agencies