Japan’s next leader could be forced to boost economic stimulus
Latest data show the economy performed even worse in the second quarter than initially estimated.
Japan’s economy sank deeper into its worst post-war contraction in the second quarter as the coronavirus pandemic jolted businesses more than initially thought, underscoring the daunting task the new prime minister faces in averting a steeper recession.
Other data put that challenge in perspective, with household spending and wages falling in July as the impact of the pandemic kept consumption frail even after lockdown measures were lifted in May.
The world’s third-largest economy shrank by an annualised 28.1 percent between April and June, more than a preliminary reading of a 27.8-percent contraction, revised gross domestic product (GDP) data showed on Tuesday.
The data will put the new prime minister, to be elected in a governing party leadership race on September 14, under pressure to take bolder economic support measures. Prime Minister Shinzo Abe announced on August 28 that he is stepping down due to ill health.
Chief Cabinet Secretary Yoshihide Suga, the frontrunner to become the next premier, has signalled his readiness to boost spending if he were to lead the country.
“The risk ahead is that the effect of measures taken so far, such as payouts to households, will peter out,” said Koichi Fujishiro, economist at Dai-ichi Life Research Institute.
“If COVID-19 weighs heavily on wages, the new administration could take additional steps to help households.”
The government has so far unveiled a $2 trillion package of stimulus measures, adding to an enhanced programme from the Bank of Japan (BOJ) to make it easier for commercial banks to lend to businesses and individuals.
Japan recently saw a renewed rise in coronavirus infections but has been spared the kind of large-scale casualty numbers seen in Western countries. Total infections stood at 72,321 as of Monday, with 1,380 deaths versus a global tally of more than 27 million cases and more than 888,000 deaths.
The main culprit behind Tuesday’s downward GDP revision was a 4.7-percent drop in spending by businesses on equipment, land and buildings, much bigger than a preliminary estimate of a 1.5-percent fall, suggesting the pandemic was hitting broader sectors of the economy.
“We can’t expect capital expenditure to strengthen much ahead. Companies won’t boost spending when the outlook is so uncertain,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
Japan’s economy has shown some signs of life after suffering three straight quarters of contraction, with factory output rising in July at the fastest pace on record thanks to rebounding demand for automobiles.
Yet separate data on Tuesday suggested any recovery will likely be modest, as household spending fell a bigger-than-expected 7.6 percent in July year-on-year, while real wages declined for the fifth straight month, pointing to more pressure on consumer spending.
But some analysts say the worst may be over for incomes.
“With far fewer workers on furlough and employment now starting to gradually recover, the big hit to household incomes is probably behind us,” Tom Learmouth, Japan economist at research firm Capital Economics, said in a note sent to Al Jazeera.
Broad impact
The health crisis has ravaged a broad array of sectors, with firms such as automaker Honda Motor Co forecasting a 68-percent decrease in annual operating profit.
Analysts polled by Reuters in August said they expect the economy to shrink by 5.6 percent in the current fiscal year to next March, and grow just 3.3 percent the following year.
The fresh batch of data will be among factors the BOJ will scrutinise at its rate review next week, when it is widely expected to keep monetary settings unchanged.
The central bank eased policy twice this year to pump money to cash-strapped small firms, complementing two big government spending packages.
The BOJ is widely expected to hold off on ramping up monetary stimulus for now as steps to spur demand could get people moving more freely into shops and risk spreading the virus.
The global and domestic business climate has many Japan observers predicting a long and bumpy road to returning the economy to pre-coronavirus levels.
“It will probably take a long time for the economy to normalise and return to levels before the pandemic,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.