Japan suffers record economic contraction due to Covid-19

World's third-largest economy shrank by an annualised 27.8% in the second quarter, official data shows

Commercial and residential buildings stand at dusk in Chiba, Japan, on Saturday, Aug. 15, 2020. Japan’s economy shrank last quarter by the most in data going back to 1955 as shoppers stayed home and factory production lines were idled amid a virus-triggered state of emergency and lockdowns in the country’s major export markets. Photographer: Bloomberg/Toru Hanai
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Japan suffered its biggest economic contraction on record in the second quarter as the coronavirus pandemic hit consumption and exports, mounting pressure on policymakers to take bolder action to prevent a deeper recession.

The third straight quarter of declines knocked the size of real gross domestic product to decade-low levels, wiping out the benefits brought by Prime Minister Shinzo Abe's "Abenomics" stimulus policies that were introduced in late 2012.

While the economy is emerging from the doldrums after movement restrictions were lifted in late May, many analysts expect any rebound in the current quarter to be modest as a renewed rise in infections keeps consumers' purse strings tight.

"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 world's third-largest economy shrank by an annualised 27.8 per cent in April to June, government data showed on Monday, marking the biggest decline since comparable data became available in 1980 and slightly bigger than a median market forecast for a 27.2 per cent drop.

While the contraction was smaller than a 32.9 per cent decrease in the US, it was much bigger than a 17.8 per cent fall Japan suffered in the first quarter of 2009, a few months after the collapse of Lehman Brothers jolted global financial markets.

The size of Japan's real GDP shrank to 485 trillion yen (Dh16.7tn), the lowest since the April to June period in 2011, when Japan was still suffering from two decades of deflation and economic stagnation.

Japanese shares fell on Monday by the most in two weeks and yields on most government bonds fell on the weak GDP data.

Elsewhere in the region, Thailand reported its biggest economic decline since the Asian financial crisis of 1998.

Underlying Japan's dismal reading was private consumption, which fell by a record 8.2 per cent as movement restrictions to prevent the spread of the virus kept consumers at home.

External demand – or exports minus imports – shaved a record 3 percentage points off GDP, as overseas shipments declined by 18.5 per cent, with car exports hit particularly hard.

Falling global vehicle sales have hurt car makers such as Mazda and Nissan, among the biggest drivers of Japan's economy, and their parts' suppliers.

Capital expenditure declined by 1.5 per cent in the second quarter, less than a median market forecast for a 4.2 per cent fall, as solid software investment made up for weak spending in other sectors.

Economy Minister Yasutoshi Nishimura conceded that the GDP readings were "pretty severe", but pointed to some bright spots such as a recent pickup in consumption.

"We hope to do our utmost to push Japan's economy, which likely bottomed out in April and May, back to a recovery path driven by domestic demand," he said.

However, some analysts issued a warning that companies could cut jobs and spending if a resurgence in infections and soft global demand continue to hurt their profits.

Renewed US-China tension may also weigh on the fragile recovery. About 90 per cent of economists surveyed by Reuters expect the conflict to affect Japan's economy.

"Demand for business investment is expected to fall due to worsening corporate profits and risk of the coronavirus spreading," said Saisuke Sakai, senior economist at Mizuho Research institute.

"There is a chance economic activity may stagnate if major nations adopt lockdown measures again, or Japan reissues a state of emergency," he said.

Japan has unveiled fiscal and monetary stimulus packages to cushion the blow from the pandemic, which hit an economy already reeling from last year's sales tax increase and the US-China trade war.

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