Japan's economy in 'severe situation' due to COVID-19, government states in monthly report

The government downgraded its key assessment of Japan's economy on Thursday, saying it was in a "severe situation" as the COVID-19 pandemic continues to wreak havoc domestically and globally.

In its monthly report for March, the Cabinet Office did not use the expression "recovering" to describe the domestic economic situation for the first time in over six years.

"The Japanese economy is in a severe situation, extremely depressed by the novel coronavirus," it said, while revising down its views on seven of the 11 main categories including private consumption and business investment.

"We are aware that the moderate recovery trend has clearly turned around and (the economy) has entered a downward phase," said Yasutoshi Nishimura, minister in charge of economic and fiscal policy, at a news conference after the Cabinet approved the report.

Previously, since July 2013, the report had adopted expressions such as the Japanese economy being "on the way to recovery" or "recovering." In February, the government said the economy was "recovering at a moderate pace, while increased weakness mainly among manufacturers is continuing, as exports remain in a weak tone."

The government last revised its assessment downward in December.

"Initially, we especially saw the downward pressure caused by the virus outbreak on consumer spending, but since around February, it has appeared on the supply side, too," a government official told reporters.

"We can't know whether the impact of the virus outbreak will be only temporary, so we can hardly predict when the situation will change," he added.

The official noted that the pace and impact of the economic deterioration are almost at the same level as those seen after the massive 2011 earthquake and tsunami that hit Tohoku, and the 2008 global financial crisis.

Looking forward, the report predicted the severe situation would continue and warned of "further downside risks" to the domestic and global economy, as well as "the effects of fluctuations" in financial markets across the world.

In the report, the government gave a bleaker assessment of the situation surrounding private consumption for the first time in about three years as the virus pandemic, first identified late last year in the central Chinese city of Wuhan, has forced many events to be canceled, with people increasingly unlikely to go out.

Supply chains have been disrupted, mainly due to the suspension of economic activities in China and other regions. That prompted the government to downgrade corporate profits and business sentiment, saying they were "in a weak tone" and "deteriorating," respectively.

Assessments of other categories — such as public investment, imports and the employment situation — were also grim, while those of exports, industrial production and the expected number of bankruptcies remained unchanged, the report said.

Japan's economy shrank an annualized real 7.1 percent in the October to December period as the sales tax increase in October dented consumer spending.

The virus could cause the nation's economy to further contract in the January to March period and send it into a technical recession, defined as at least two consecutive quarters of declining gross domestic product.