TOKYO – Japan’s economy shrank by 7.8 percent in the second quarter, putting its worst performance on record as the economic activity of the corandavirus pandemic ground approached in April and May.
The nosedive in output over a three-month period – an annual decline of 27.8 percent – was the third straight quarter of contraction for Japan, the world’s third largest economy after the United States and China. It came on top of a 0.6 percent decline in the first quarter of 2020, as an annual decline of 2.2 percent, the country’s government said on Monday.
Already weakened by a tax increase, slowdown in China’s demand and a series of natural disasters last fall, Japan’s economy became the first among major countries to officially fall into recession when the pandemic hit, leaving exports to the tourism sector. submerged the land and effectively destroyed it.
“The overall impact of the pandemic on the economy up to this point is almost the same as the 2008 financial crisis,” said Michinori Naruse, an economist at the Japan Research Institute.
But with the financial crisis, “things were slowly getting worse,” he said. “This time, they’ve become bad at the same time.”
The slowdown in Japan, while crippled, was not as serious as the 9.5 percent drop by the United States in the second quarter, which spurred nearly five years of growth. Britain, whose economy has taken the hardest hit from the pandemic in Europe, went even worse, with the government reporting a staggering 20.4 percent quarterly decline last week.
And there are signs that the worst pain in Japan may be over. The country recovered most of its economic damage in April and May, when Prime Minister Shinzo Abe declared a national emergency in an effort to control a slow but steady rise in coronavirus infections.
While Japan never went with complete lockdown – the authorities do not have the legal power to force people to stay at home – economic activity dropped even more significantly as workers and consumers chose to stay in it.
But late in the second quarter, the feeling began to be felt of the full effects of an economic stimulus package worth about 40 percent of the country’s gross domestic product, including cash handouts and zero-interest loans.
The incentive helped keep unemployment and bankruptcies low. And even though companies ran out of millions of workers, government subsidies, combined with a super-tight labor market, would ensure that workers would have a job to return to when emergency care was lifted.
“We had a big hit in April and May, but the economy slowed in May, and in June we actually had a pretty big rebound,” said Izumi Devalier, Japan’s chief economist at Bank of America Merrill Lynch.
That handball was largely driven by the end of the country’s national emergency response in late May, when workers began to be able to return to offices and consumers back to shops, supported by government subsidy checks.
“We had this kind of mechanical refurbishment in June because people started going out and spending again,” Ms. Devalier said, adding that “cash expenditures basically hit from late May to June, so exactly when the economy reopened, people were spending cash. “
That translates into a sharp increase in retail sales in June. Industrial production and exports were also up. And the country’s unemployment rate actually dropped, dropping one-tenth of a percentage point to 2.8 percent in the same month, according to government data.
These numbers are reason to believe that, despite the grim quarterly report, “Japan will come out of this better than most people think,” said Nicholas Smith, a Japanese analyst at CLSA, an investment group.
Japanese companies are cash rich, he said, adding that their “pillow will be very, very useful” as the country rides the pandemic.
What’s more, “banks have a lot of dry powder” and “there’s no problem getting a loan if you need it.”
Whether Japan is able to take advantage of these factors will depend in part on how it treats the virus. From mid-August, the signals are mixed.
So far, the country has suffered the least from the pandemic. It has reported just over 1,100 deaths from the virus, much lower than its peer economies.
In June, the national government, led by low virus numbers, launched a campaign to encourage domestic travel in hopes of boosting local tourism and the economy of morbid service.
But infections began to rise again in July, accelerating growth rapidly in the run-up to the previous national emergency solution and provoking widespread criticism from the government for reducing its control measures prematurely.
Even as business numbers have increased, Mr Abe said in early August that the country’s economy could not afford a second national emergency and that he would do everything possible to prevent one.
Still, the governors of Okinawa and the central Japanese prefecture of Aichi have declared on their own necessity, putting pressure on the central government to act. In Tokyo, which regularly reports more than 200 new cases a day in the past month, the government has asked restaurants and bars to close at 10 p.m.
That has made consumers nervous and “stopped the improvement in service spending” that was seen in June, said Ms. Devalier of Bank of America Merrill Lynch. She added that “handball in the third quarter risks being quite weak.”
“Businesses and consumers have the ability to withstand short-term shocks,” she said, “but the longer we stay below normal, the longer we stay below normal, there will be second-order effects that lead to an even slower recovery. “
This is bad news for most Japanese companies, which expect profits to fall by as much as 36 percent in the fiscal year ending March next year, according to an analysis of the projections of income-listed companies conducted by the Japanese financial paper Nikkei Shimbun.
Even under the best case scenario, the road to good economic health is likely to be a long one, said Taro Saito, an economist at the NLI Research Institute.
While the uncertainty surrounding the virus makes it difficult to predict the future, he said it would take at least three years for Japan’s economy to return to pre-pandemic levels.
“We may have come from the worst period,” he said, “but we are still a long way from the so-called normal.”
Hisako Ueno contributed reporting.
