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TOKYO: Japan’s economy sank deeper into its worst post-war contraction in the second quarter as COVID-19 shook businesses more than initially thought, underscoring the daunting task facing the new prime minister to avoid a more pronounced recession.
Other data puts that challenge in perspective, with household spending and wages falling in July as the growing impact of the pandemic kept consumption fragile even after lockdown measures were lifted in May.
The world’s third-largest economy contracted an annualized 28.1 percent between April and June, more than a preliminary reading of a 27.8 percent contraction, revised gross domestic product data showed on Tuesday (8 September), suffering its worst postwar contraction.
The data will put the new prime minister, who will be elected in a race for the ruling party leadership on September 14, under pressure to take bolder economic support measures.
Chief Cabinet Secretary Yoshihide Suga, the frontrunner to become the next prime minister, has signaled his willingness to boost spending if he leads the country.
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“The future risk is that the effect of measures taken so far, such as payments to households, will wear off,” said Koichi Fujishiro, an economist at the Dai-ichi Life Research Institute.
“If COVID-19 weighs heavily on wages, the new administration could take additional steps to help households.”
So far, the government has introduced a US $ 2 trillion stimulus package, in addition to an enhanced Bank of Japan (BOJ) easing program.
Japan recently experienced a renewed increase in infections, but has escaped the kind of heavy casualties seen in Western countries. Total infections stood at 72,321 as of Monday, with 1,380 deaths compared to a global tally of more than 27 million cases and more than 888,000 deaths.
The main culprit for Tuesday’s GDP downward revision was a 4.7 percent drop in capital spending, much larger than a preliminary 1.5 percent drop, suggesting that the pandemic was affecting broader sectors of the economy.
“We cannot expect capital spending to strengthen much going forward. Companies will not increase spending when the outlook is so uncertain,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
Japan’s economy has shown some signs of life after suffering three consecutive quarters of contraction, and industrial production rose in July at the fastest pace on record thanks to the recovery in demand for cars.
However, separate data on Tuesday suggested that any recovery will likely be modest, as household spending fell 7.6 percent more than expected in July year-on-year, while real wages declined for the fifth month in a row, which points to increased pressure on the consumer. spending.
WIDE IMPACT
The health crisis has devastated a wide range of industries, with firms such as automaker Honda Motor forecasting a 68 percent decline in annual operating profit and cosmetics firm Shiseido expecting a net loss for the full year as the pandemic hit cosmetics sales.
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The new batch of data will be one of the factors the BOJ will look at in its rate review next week, when it is expected to keep the currency setup unchanged.
Analysts polled by Reuters in August said they expect the economy to contract 5.6% in the current fiscal year through next March and grow just 3.3% the following year, compared to the BOJ forecast published in July, a 4.7% contraction. and a growth of 3.3 percent in the same periods.
The central bank eased monetary policy twice this year, including by creating a loan facility to pump money into small businesses with liquidity problems, complementing two large packages of government spending.
Many analysts expect the BOJ to refrain from increasing stimulus for now, as measures to stimulate demand could make people move more freely to stores and risk spreading the virus.
The global and domestic business climate has many observers from Japan predicting a long and bumpy road to return the economy to pre-coronavirus levels.
“It will probably take a long time for the economy to normalize and return to pre-pandemic levels,” said Yoshiki Shinke, chief economist at the Dai-ichi Life Research Institute.
