JAPAN: The Japanese economy, already in bad shape at the end of 2019, began in the first quarter of 2020 to suffer the shock of the coronavirus, from which it should continue to suffer.
The recession is back in Japan, which experienced a second straight quarter of contraction in the gross domestic product (GDP) between January and the end of March, as the coronavirus crisis began to strike.
GDP fell 0.9% in the first quarter of 2020 compared to the fourth quarter of 2019, when it had already contracted by 1.9%, according to preliminary data released Monday by the government. It is the first time since 2015 that Japan has fallen into a “technical” recession, defined by a contraction in national wealth over at least two quarters.
Its economy was already in bad shape since the fourth quarter of 2019, due to a two-point increase in VAT since October 1, which weighed on household consumption, and the devastating passage of a powerful typhoon, Hagibis. Activity continued to decline in the first quarter as a result of the coronavirus crisis, which further weakened household consumption (-0.8% over one quarter) and reduced business investment, both in land (-4, 5%) than non-property (-0.5%).
“The worst is yet to come”
The growth in public investment, which was constant in 2019 as the country was preparing to host the Tokyo Olympics (now postponed until next year due to the pandemic), also came to a halt in the first quarter ( -0.4%). Foreign trade was also at half mast, with a 6% contraction in exports, partially offset by a marked drop in imports (-4.9%).
“The worst is yet to come,” said Naoya Oshikubo, an economist at SuMi Trust, in a note before Monday’s publication. He expects a plunge of 10.2% of GDP in the second quarter compared to the first. First-quarter figures “suggest that the spread of the virus already hit economic activity hard in March, expecting much worse in the second quarter,” said Tom Learmouth in a note from Capital Economics released on Monday.
Capital Economics expects a fall of 12% of Japanese GDP in the second quarter compared to the first. The drop in consumption in the first quarter is “only the tip of the iceberg,” with a fall likely to be staggering this spring, said Tom Learmouth. Because the Japanese government declared a state of emergency at the beginning of April in front of the rise of cases of Covid-19 in the archipelago, while the pandemic paralyzed even more Europe and the United States.
The IMF forecasts a 5.2% drop in GDP over the whole year
The state of emergency in Japan does not lead to compulsory confinement but allows regional governors to encourage residents to stay at home as much as possible, and businesses deemed non-essential to temporarily lower the curtain. The device was lifted Thursday, two weeks in advance, in 39 of the 47 prefectures of the country, following a sharp drop in newly identified cases of Covid-19. But it is maintained for the moment in Tokyo and in the other most urbanized and industrialized regions of the country.
To mitigate the shock on businesses and households, the government has drawn a record aid plan of 117 trillion yen (over 1,000 billion euros), including a lump sum allocation of 100,000 yen (over 860 euros) per capita to support consumption. The government is now considering further strengthening this aid plan. As for the Bank of Japan (BoJ), it has considerably boosted its asset repurchases since March, to stabilize the financial system and ensure that the credit mechanism does not come to a halt.
On an annualized basis, Japanese GDP fell 3.4% in the first quarter. In mid-April the Monetary Fund (IMF) predicted a 5.2% fall in Japanese GDP over the whole year, assuming that the economy will recover from the second half. For its part, the BoJ expects a contraction of 3% to 5% of Japanese GDP in the 2020/21 fiscal year, which began on April 1.