Japan slips into recession, and the worst may be yet to come

Japan’s economy slipped into recession for the first time in four-and-a-half years, putting the nation on course for its deepest post-war slump as the coronavirus crisis ravages businesses and consumers.

Monday’s first-quarter gross domestic product (GDP) data underlined the broadening effect 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 by an annualised 3.4 percent in the first quarter, preliminary official GDP data showed, less than a median market forecast for a 4.6 percent drop.

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

“The fall in output in the first quarter suggests the spread of the virus had already dealt a significant blow to economic activity in March with much worse to come in [the second quarter]. A double-digit fall in GDP is in the pipeline this quarter,” Tom Learmouth, Japan economist at research firm Capital Economics, said in a note sent to Al Jazeera.

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 more than 310,000 people worldwide. The pandemic has disrupted 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 percent in the first quarter, the biggest decline since April-June 2011.

Deeper slump, slower recovery

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

Even the nation’s key globe-trotting manufacturers were not spared the pandemic’s sweeping effect.

Toyota Motor Corp said on Friday it will cut domestic vehicle production by 122,000 units in June due to a lack of demand. The automaker expects an 80 percent drop in full-year operating profit, its lowest in nine years.

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

Analysts polled by Reuters news agency estimate Japan’s economy will shrink by an annualised 22.0 percent in the current quarter, which would be the biggest decline on record, with pressure on output intensifying after Prime Minister Shinzo Abe in April declared a nationwide state of emergency amid a rise in coronavirus infections.

The emergency was lifted for most regions on Thursday, but remained in effect for some big cities including Tokyo.

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

Still, it marked the second straight quarter of declines, as households were hit by the double-whammy of the coronavirus and a sales tax hike to 10 percent from 8 percent in October last year.

Capital expenditure fell 0.5 percent in the first quarter after plummeting 4.8 percent 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 points.

Strain on jobs

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 be too little, and come too late, due to slow implementation of spending plans.

“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.”