Japan Sees Record Economic Slump With Recovery Hinging on Virus

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Japan posted a record economic contraction in the second quarter, with recovery prospects now hinging on how quickly an uptick in virus infections can be contained.

The world’s third-largest economy contracted an annualized 27.8% in the three months through June from the previous quarter as a state of emergency and lockdowns in the country’s major export markets hammered consumer spending, production and exports.

Until the pandemic, the economy’s worst single quarter for data back to 1955 was during the global financial crisis, when gross domestic product shrank around 18%. Now, after three straight quarters of contraction the economy has shrunk back to its size after the 2011 tsunami and nuclear disaster.

While more recent monthly figures show signs of a recovery in retail sales and factory output, the nascent recovery will lose momentum if the number of infections prompts the government to re-tighten limits on economic activity. The size and form of possible additional government measures are also dependent on the trajectory of the virus.

“If we just go back to the way we used to live, infections will rise,” said economy minister Yasutoshi Nishimura, calling on people and companies to think about ways to prevent transmission of the virus while at the same time increasing economic activity.

Nishimura said the government would do all it could to protect jobs and livelihoods and defended the administration’s efforts to support the economy, pointing out that other major countries had suffered more. Still, he said it was possible the government would re-introduce a state of emergency if infections jump.

The figures showed:

• Private consumption fell an annualized 28.9% from the previous quarter, accounting for almost 60% of the slide in GDP.
• Business investment dropped 5.8%, faring much better than analysts expected.
• Net exports of goods and services subtracted 3 percentage points from GDP, on a non-annualized basis.

As deep as Japan’s recession has been, it has still fared better than other major economies that have been hit harder by the pandemic and have struggled more to contain it. In the U.S., where the virus rages on, GDP shrank by nearly a third last quarter. The European Union’s economy contracted by 39% and the U.K.’s by almost 60%, also on an annualized basis.

Japan’s death toll of just over 1,100 is still tiny compared with the U.S. and some other countries, but a recent jump in new infections -- with another 645 confirmed in the capital over the weekend and total cases now topping 56,000 nationwide -- shows it is still too early to discard fears over the outbreak re-escalating.

Japan’s Economy Seen Taking Four Years to Regain Lost Ground

Provided there is no return to a state of emergency, analysts see the economy growing about 12.7% this quarter and then slowing after that. One prominent Japanese think tank says Japan’s GDP isn’t likely to return to its pre-pandemic size until the year ending March 2025.

Government Help

Still, massive government stimulus worth about $2 trillion, including cash handouts, worker-retention subsidies and loan guarantees for businesses, have helped prevent a surge in bankruptcies or the jobless rate.

While the support should assist the economy’s recovery over the coming months, economists still expect the government to unleash more help, either drawing on reserves set aside for extra measures or with an additional extra budget.

“While it may not be large in scale, the government may put together a third extra budget by the end of this year or early next year. Still it’s difficult to focus on demand revitalization at this point,” said Harumi Taguchi at IHS Markit. “The emphasis must first be placed on keeping businesses afloat if increases in infections aren’t contained.”

What Bloomberg’s Economist Says

“A flicker of hope was evident in a relatively mild drop in private capex -- a sign that the powerful policy support from the government and central bank curbed some damage. We expect GDP to rebound to growth in 3Q. That said, downside risks are growing significantly as another wave of Covid-19 infections in Japan threatens to impede the recovery.”

--Yuki Masujima, economist

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