Japan Double-Dip Recession Risk Looms With New Virus Emergency

A new state of emergency in Japan could trigger a double-dip recession if the tougher restrictions fail to curb infections or if they are prolonged, according to economists.

Tokyo and three other prefectures that roughly account for a third of the economy are set to enter the state of emergency from Sunday, little more than a month after an earlier emergency was finally lifted in the capital. That has dashed hopes for a swift recovery of the economy fueled by improving exports and a revival of domestic demand.

“Forget a V-shaped recovery,” economists led by Keiji Kanda at Daiwa Institute of Research wrote in a report. “The April to June quarter could see another three months of negative growth.”

Japan Double-Dip Recession Risk Looms With New Virus Emergency

So far economists are still expecting the economy to eke out growth this quarter as they scramble to revise their forecasts, having previously projected a firm rebound. But that outlook could quickly head further south if the emergency orders are extended beyond the currently planned May 11.

Daiwa’s Kanda calculates that the emergency call in the four prefectures will slice 600 billion yen ($5.56 billion) off the economy in a month. If the orders are expanded nationwide, the hit will amount to 1.6 trillion yen, he wrote.

While the damage will still be smaller than the record blow during the second quarter of 2020 when the economy tanked 29% on an annualized basis, containing the outbreak is all the more imperative this time -- with the Olympic Games just three months away.

Former Finance Minister Jun Azumi said in an interview this week that Japan needs to consider scrapping the Tokyo Olympics and that speeding up the country’s inoculation drive was its best economic policy now.

The upcoming virus restrictions will be tougher compared to earlier this year, especially for entertainment sectors.

“The entertainment and hospitality sectors will get hit harder than in the first three months of the year,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, who sees a 4 percentage point hit to annualized growth this quarter from the emergency. “The key is how much things will drop in May, and how much we can recover in June.”

The slow pace of Japan’s vaccine program is also clouding the nation’s recovery outlook.

Economist Shunsuke Kobayashi at Mizuho Securities Co. wrote in a report Friday that without a ramp up in the vaccine roll out, it could take until fiscal year 2022 for a proper recovery to get underway.

©2021 Bloomberg L.P.

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