Japan’s biggest contraction in more than five years adds to escalating concerns among policymakers about the length of a likely recession in the world’s third-largest economy as the impact of the coronavirus and a plunge in oil prices causes markets to slide and the yen to gain.
Revised data showed gross domestic product shrank faster than first thought in the October-December quarter, contracting at an annualized pace of 7.1 percent as a tax hike walloped consumption amid a global slowdown, and businesses cut capital spending at the fastest pace since the global financial crisis. The preliminary annualized figure was 6.3 percent.
The worse-than-expected data show that the economy was already in a highly fragile state when the virus started to slam exports, supply chains, tourists and shoppers. With sentiment among markets and consumers rapidly deteriorating, the prospect of a turnaround in corporate spending that could help support the economy this quarter seems remote, adding to pressure on policymakers to respond.
Prime Minister Shinzo Abe is expected Tuesday to detail new emergency measures, but it’s unclear what can be done to stoke growth amid an epidemic that’s keeping shoppers and workers home. The government has likely been reluctant to draft major stimulus measures so soon after the ¥13.2 trillion ($129 billion) package announced in December. But the longer the economy looks set to stay in reverse, the more likely Abe will have to respond.
For the Bank of Japan, which has largely depleted its policy ammunition, options are limited. BOJ Gov. Haruhiko Kuroda issued an emergency statement last week, trying to calm markets with a greater willingness to buy more assets. But with the yen strengthening to its highest in over three years, it may be forced to consider bigger action, even a deepening of its negative interest rate.
“The question is becoming how much Japan’s economy contracts this quarter, not whether it contracts,” said economist Yoshiki Shinke at Dai-ichi Life Research Institute. “Lowering taxes or increasing public investment won’t help much, so it’s very difficult to wrestle with this type of economic shock.”
The coronavirus began as a problem for supply chains and exports but has now hit the nation’s households. For consumers, the virus is a double-punch following an October consumption tax hike that made people less willing to shop.
“This is turning into a different kind of a tough economic environment,” said economist Masaaki Kanno at Sony Financial Holdings, adding that fear among consumers is now the big hurdle. “I’m not sure if the economy will recover in the second quarter, either.”
The main reason for the downward revision was a 4.6 drop in business investment that was the sharpest fall since the first quarter of 2009. Private consumption dropped 2.8 percent, with the tax hike, a major typhoon and an unseasonably warm winter also playing a role.
The economy was once forecast to rebound from its largely tax-triggered slump early this year, but the coronavirus has snuffed out that hope. A growing number of analysts see the economy shrinking more than 2 percent again this quarter.
“It’s increasingly looking it won’t be a small contraction, which is a considerable thing, considering how big the contraction was last quarter,” said Shinke at Dai-ichi Life. “It seems monetary policy can’t be effective against the economic implications of this type of epidemic.”
Economists surveyed by Bloomberg see the ¥100 mark against the dollar as a line in the sand for the BOJ to lower its negative rate. The central bank will meet next week to decide on policy. The currency briefly strengthened to around ¥101.5 against the greenback Monday as oil prices plunged after a breakdown in talks between OPEC and Russia.
Finance Ministry officials had already ramped up their level of alertness on the yen Monday morning. A ministry official said there were some nervous market movements, adding the government was watching markets with a sense of urgency.