Japan’s Economic Slide, Yen Gains Fuel Virus Slump Fears
Japan’s GDP shrank an annualized 7.1% from the previous quarter in the three months through December.
(Bloomberg) -- Japan’s biggest contraction in more than five years and a sharp rise in the yen added to escalating concerns among policy makers about the ability of the world’s third-largest economy to fight off the impact of the coronavirus and a crash in oil prices.
During a day in which markets were battered by a steady stream of bad news, senior government officials emphasized the need for continued coordination with other nations to address a shared global problem. Currency officials also warned against excessive foreign exchange moves after the yen jumped to its highest level in more than three years.
Revised data showed Japan’s gross domestic product shrank faster than first thought in the last quarter, contracting at an annualized pace of 7.1% as a tax hike walloped consumption and businesses cut capital spending at the fastest pace since the global financial crisis.
The worse-than-expected data showed that the economy was already in a highly fragile state when the virus started to knock back exports, supply chains, tourists and shoppers. With the prospects for a near-term recovery already set back by the epidemic, the emerging oil price war threatens to further complicate the outlook, putting further pressure on policy makers to respond.
Prime Minister Shinzo Abe expressed his worries Monday about the impact of the virus on the tourism industry and factory production lines. He is expected to flesh out new emergency measures Tuesday, having unveiled interest-free loans for small businesses at the weekend, but it’s unclear what can be done to stoke growth amid an epidemic that’s keeping shoppers and workers home.
The government is likely reluctant to put together large-scale stimulus measures together so soon after a 13.2 trillion yen ($129 billion) package announced in December. But the longer the economy looks set to stay in reverse, the more likely Abe will have to respond. On Monday, Abe’s tax chief, Akira Amari, called for an extra budget in the spring.
Looking at the bigger global picture, Finance Minister Taro Aso said a coordinated global response was needed to address what is becoming a shared economic crisis.
“What we can do with monetary measures is getting very limited, so we should take fiscal action,” he told parliament. “The global economy will be affected if nations don’t keep action coordinated, and I think we have to collaborate on policy, including fiscal measures.”
Yen’s Relentless March Toward 100 Heaps Pressure Onto BOJ
For the Bank of Japan, whose policy ammunition is getting depleted, the options are limited. BOJ Governor Haruhiko Kuroda issued an emergency statement last week, trying to calm markets with a greater willingness to buy more assets. But with the yen at one point reaching 101.57 against the dollar on Monday, the central bank may be forced to consider bigger action, even a cutting of its negative interest rate.
“This is turning into a different kind of a tough economic environment,” said economist Masaaki Kanno at Sony Financial Holdings, adding that fear among consumers is now the big hurdle. “I’m not sure if the economy will recover in the second quarter, either.”
As recently as the start of the year, the economy was still forecast to rebound from its largely tax-triggered slump early in 2020, but the coronavirus has snuffed out that hope. A growing number of analysts see both the economy shrinking more than 2% again this quarter and over the span of 2020.
The breakdown in talks on oil production between OPEC and Russia is another source of deep concern, unsettling markets that were already jittery. A crash in oil prices will put strong downward pressure on inflation across the globe if it endures. But the more immediate concern is the sharp jump in the yen.
Economists surveyed by Bloomberg see the 100 yen mark against the dollar as a line in the sand for the BOJ to lower its negative rate. The central bank meets next week to decide on policy.
Japan’s top currency official Yoshiki Takeuchi, speaking after an emergency meeting with officials from the central bank and the financial regulator, said he was watching foreign exchange markets with a greater sense of urgency. Overly volatile moves in currency markets were undesirable, he said, using coded language that’s usually meant to try to tamp down yen appreciation.
Takeuchi declined to say whether the government had already intervened in the market.
What Bloomberg’s Economist Says
“Falling U.S. yields and high safe haven demand from coronavirus fears and falling oil prices are behind the yen’s surge to the strongest in more than three years, a development that increases the possibility of additional easing by the Bank of Japan at the next board meeting on March 18-19.”
Yuki Masujima, economist
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--With assistance from Tomoko Sato, Yoshiaki Nohara, Emi Urabe and Yuko Takeo.
To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Jason Clenfield
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