Japan has just fallen into recession and much worse could be coming

Japan has just fallen into recession and much worse could be coming

The world’s third largest economy shrank 0.9% in the January-March period from the previous quarter, according to government data released Monday. Although slightly better than the 1.2% drop forecast in a Refinitiv analyst survey, it is still the second consecutive quarter of decline – meaning Japan has now entered a recession.

The drop was more dramatic, a 3.4% drop when measured as an annualized rate.

The Japanese economy was already in trouble before the outbreak: economic activity contracted at the end of last year when the country absorbed an increase in sales taxes and struggling with the consequences of typhoon Hagibis, a powerful storm that hit the country last fall.

And although the virus began to weigh on the country in early 2020, analysts warn that Japan’s first quarter does not capture the full effect of the pandemic.

“The sharp drop in production in the first quarter suggests that the spread of the virus has already dealt a severe blow to economic activity in March,” wrote Tom Learmouth, Japanese economist at Capital Economics, in a research note Monday. He said that “much worse” will come in the second quarter, forecasting a 12% drop on a quarterly basis.

Private consumption, which contributes to over half of Japan’s economy, fell by 0.7%, and this was before the government declared a state of emergency which led to the closure of restaurants and shops nationwide.

“This is just the tip of the iceberg,” said Learmouth. “April and May will have been much worse.”

Exports, which represent 16% of the Japanese economy, decreased by 6% in the quarter, as goods destined for the country’s main trading partners remained stagnant. It has been the sharpest contraction for that sector since 2011, when a major earthquake and tsunami hit the country.
The Japanese government, meanwhile, has already announced a about $ 1 trillion stimulus package to protect the economy from the fallout from the pandemic. This equates to around 20% of Japan’s annual production. Shinzo Abe’s administration is likely to announce further measures before the end of the month.
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