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Japan braces for worst postwar slump as pandemic tips economy into recession

Economic IndicatorsMay 18, 2020 03:35AM ET
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2/2 © Reuters. FILE PHOTO: Japan's economy has been seriously disrupted by the coronavirus outbreak and restrictions imposed to curb its spread 2/2

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) - Japan's economy slipped into recession for the first time in 4-1/2 years in the last quarter, putting the nation on course for its deepest postwar slump as the coronavirus crisis ravages businesses and consumers.

Monday's first-quarter GDP data underlined the broadening impact of the outbreak, with exports plunging the most since the devastating March 2011 earthquake as global lockdowns and supply chain disruptions hit shipments of Japanese goods.

Analysts warn of an even bleaker picture for the current quarter as consumption crumbled after the government in April requested citizens to stay home and businesses to close, intensifying the challenge for policymakers battling a once-in-a-century pandemic.

"It's near certainty the economy suffered an even deeper decline in the current quarter," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. "Japan has entered a full-blown recession."

The world's third-largest economy contracted an annualised 3.4% in the first quarter, preliminary official gross domestic product (GDP) data showed, less than a median market forecast for a 4.6% drop.

The slump came on top of an even steeper 7.3% fall in the October-December period, with the consecutive quarters of contraction meeting the technical definition of a recession. Japan last suffered recession in the second half of 2015.

The coronavirus, which first emerged in China late last year, has ravaged the global economy as many nations went into strict lockdowns to curb the outbreak that has so far killed over 310,000 people worldwide. The pandemic has been massively disruptive on supply chains and businesses, particularly in trade-reliant nations such as Japan.

Indeed, the fallout of the virus on corporate Japan was telling with exports diving 6.0% in the first quarter, the biggest decline since April-June 2011.

"Exports to China began to fall in February, followed by a wave of slumping shipments to Europe and the United States," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Exports were also hurt by slumping inbound tourism," which counts as a drop in non-residents' purchases of Japanese services, he said.

DEEPER SLUMP, SLOWER RECOVERY

The shakeout in global trade was underlined in recent March data, with exports shrinking the most in nearly four years due to plunging U.S.-bound shipments.

Even the nation's major globe-trotting manufacturers weren't spared the pandemic's sweeping impact.

Toyota Motor Corp (T:7203) has said it will cut domestic vehicle production by 122,000 units in June and expects an 80% drop in full-year operating profit.

The gloom in Japan is expected to deepen over coming months.

Analysts polled by Reuters estimate Japan's economy will shrink an annualised 22.0% in the current quarter, which would be a record decline, with pressure on output intensifying after Prime Minister Shinzo Abe in April declared a nationwide state of emergency amid the widening pandemic.

The emergency was lifted for most regions on Thursday, but remained in effect for some big cities including Tokyo. Japan has so far reported 16,337 coronavirus cases and 756 deaths.

Private consumption, which accounts for more than half of Japan's $5 trillion economy, slipped 0.7% in January-March, less than a market forecast for a 1.6% drop, as robust demand for daily necessities partially offset the impact on services spending.

All the same, it marked the second straight quarter of decline, as households endured the double-whammy of the coronavirus and a sales tax hike to 10% from 8% in October last year.

Capital expenditure fell 0.5% in the first quarter after plummeting 4.8% in October-December last year, the GDP data showed, suggesting that uncertainty over the outlook is discouraging companies from boosting spending.

Taken together, domestic demand knocked 0.7 percentage point off GDP growth, while external demand shed 0.2 point.

All of this has put a strain on the labour market. The jobless rate in March rose to its highest in a year, while job availability slipped to a more than three-year low.

The government has already announced a record $1.1 trillion stimulus package, and the Bank of Japan expanded stimulus for the second straight month in April. Abe has pledged a second supplementary budget later this month to fund fresh spending measures to cushion the economic blow from the outbreak.

Still, many analysts warn that government support will come too little, too late.

"As always in Japan, the implementation is very slow. It will take the later half of the second quarter (and) the third quarter" for government stimulus to kick in, said Martin Schulz, chief economist at Fujitsu.

"The recovery will be slower than many are hoping for ... To recover from this crisis, it will take about two years at least."

Japan braces for worst postwar slump as pandemic tips economy into recession
 

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Comments (7)
ChinaWuhanVirus CWV
ChinaWuhanVirus CWV May 18, 2020 6:37AM ET
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Japan should send any financial damages they have from the china virus next door to the CCP in Beijing to pay.
Tre Hsi
Tre Hsi May 18, 2020 6:37AM ET
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sure why not, it's not like Japan caused any damage to other Asia countries in the past, or at least they can apply the George W logic (no *****attack in US under my watch since 9-11) and say since 1945
Jeff Kim
Jeff Kim May 18, 2020 1:51AM ET
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They’ve been in recession since mid-90s. This is what happens when you pump money to sustain zombie companies.
trevor hron
trevor hron May 17, 2020 10:04PM ET
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The writing is on the wall. Mass recessions/depressions coming worldwide. You cant shut in 60% of the economy and expect to come out the other side unscathed. A 80% loss in profit for Toyota is huge. Just imagine what Ford, Dodge and Chevy will be. We are only seeing the outer bands of this mass destruction storm as it brews.
Notvery Goodathis
Peteymcletey May 17, 2020 9:03PM ET
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Nikkei will probably end positive...
Sergio Marin
Sergio Marin May 17, 2020 8:50PM ET
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Whole world will experience the same... Wait for it..
john richards
john richards May 17, 2020 8:41PM ET
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Will this finally be the week that the always wrong leftists figure out that the market leads the economy and not the other way around. ftr Japan is a template for where everyone is heading.  15percent of the budget is interest, slow or no growth and it took decades for the Nikeii to make new highs after the 80's meltdown. That is where too much debt, too much central control leaves a nation.
Tyler Dunlap
Tyler Dunlap May 17, 2020 8:31PM ET
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We are going to act like this is some catastrophic event when it happened 4.5 years ago?
 
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