Japan's economy sinks into a recession and may slide deeper

Gross domestic product contracted an annual 3.4% in the three months through March as exports fell and social distancing crimped consumer spending

People wearing face masks amid concerns over the spread of the COVID-19 coronavirus cross the Shibuya crossing in Tokyo on May 17, 2020.   / AFP / Kazuhiro NOGI
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Japan’s economy sank last quarter into a recession that’s likely to deepen further as households limit spending to essentials and companies cut investment, production and hiring to stay afloat amid the coronavirus pandemic.

Gross domestic product shrank an annualized 3.4 per cent in the three months through March from the previous quarter as exports slid and social distancing crimped consumer spending, Cabinet Office figures showed Monday. While the result was slightly better than an expected 4.5 per cent drop, helped by a downgrade of the previous quarter’s contraction, economists and policy makers agree that worse is in store in the current quarter.

Two consecutive quarters of shrinking GDP confirm that the world’s third-largest economy fell into a recession even before Prime Minister Shinzo Abe’s April declaration of national emergency. Analysts see a 21.5 per cent contraction in the three months through June, a record for official data going back to 1955.

“There’s no doubt that this quarter has gotten much worse,” said economist Takeshi Minami at Norinchukin Research Institute. “Companies are struggling to secure funding and that suggests business investment will remain weak and many workers are concerned about their wages.”

The crisis has put pressure on policy makers to step up stimulus measures that, at a record 117 trillion yen (Dh4tn / $1.1tn), already total more than 20 per cent of GDP.

Economy Minister Yasutoshi Nishimura, speaking Monday after the GDP report, said government is aiming to pass a second extra budget swiftly to get more aid to the economy.

The new money, coming only weeks after the passage of a first supplementary budget, is expected to provide rent support for small businesses and bigger subsidies for firms that don’t fire workers. It will also add to the developed world’s heaviest public debt burden.

The Bank of Japan last month lifted its ceiling on government bond purchases as the government ramps up spending. The BOJ is also expected to introduce another lending program for small companies at an emergency meeting that could come as early as this week.

Despite the rising sense of crisis, Japan so far appears to be doing less badly than other major economies. The US and Canada are both forecast to shrink more than 25 per cent this quarter, while the US contracted 4.8 per cent in the first three months of the year.

In recent days, rates of new virus infections have plunged in Japan and the government last week lifted its state of emergency for 39 of Japan’s 47 prefectures, although Tokyo and other dense economic centers still remain under heavy restrictions.

Until stay-at-home requests are lifted, policy makers won’t be able to spur growth no matter how much money is spent, according to economist Taro Saito at NLI Research Institute.

“For now, they have to spend money to prevent job losses and bankruptcies,” Mr Saito said. “We’re not at a stage where the Bank of Japan can boost demand with monetary easing, and the BOJ will focus on corporate financing for now.”

Japan’s policy makers also have little control over the world’s demand for the country’s exports, a main driver of growth that could stay depressed for a long time. Even though key overseas markets are starting to reopen from lockdowns, progress will come in fits and starts, with the risk of new infection waves looming.

Monday’s report showed exports dropped 6 per cent last quarter on a non-annualized basis, but earnings forecasts from automakers and other manufacturers suggest the decline is likely to steepen. Toyota, Japan’s largest company, sees profits tumbling 80 per cent this fiscal year.

On the domestic side, spending isn’t likely to pickup quickly even after the state of emergency because of the bleak outlook for corporate profits and also wages, according to Norinchukin economist Mr Minami.

Last quarter, private consumption slid 0.7 per cent with worse likely ahead.

Dwindling numbers of foreign tourists, whose spending has been a key prop to growth in recent years, is another major concern. Spending by visitors from overseas slid 42 per cent last quarter, according to the Japan Tourism Agency, and the drop is likely to have worsened since.

On a non-annualized basis, the economy shrank 0.9 per cent from the fourth quarter.

“Looking ahead, our high frequency data dashboard is pointing to more pronounced weakness in the economy in 2Q," Bloomberg economist Yuki Masujima, said. Even if Prime Minister Shinzo Abe lifts the state of emergency by end-May, we doubt the economy will pick up until 3Q, at the earliest -- and even then, the strength would hinge on recoveries in the US and Europe.”