Japan slips into recession, but worst is yet to come

Japan’s economy sank into a recession last quarter that’s likely to deepen further as households limit spending to essentials and companies cut hiring, investment and production to stay afloat amid the coronavirus pandemic.

Gross domestic product shrank an annualized 3.4 percent in the January-March quarter compared with the previous quarter as exports slid and social distancing crimped consumer spending, Cabinet Office figures showed Monday.

While the result was slightly better than an expected 4.5 percent drop, helped by a downgrade of the previous quarter’s contraction, economists and policymakers agree that worse is in store in the current quarter.

Two consecutive quarters of shrinking GDP confirm that the world’s third-largest economy fell into a recession even before Prime Minister Shinzo Abe declared a national emergency for the pandemic in April. Analysts project a 21.5 percent contraction for the quarter through June, which would be a record for official data going back to 1955.

“There’s no doubt that this quarter has gotten much worse,” said economist Takeshi Minami at Norinchukin Research Institute. “Companies are struggling to secure funding and that suggests business investment will remain weak and many workers are concerned about their wages.”

The crisis has put pressure on policymakers to step up relief and stimulus measures that, at a record ¥117 trillion, already account for more than 20 percent of GDP.

Economy Minister Yasutoshi Nishimura, speaking Monday after the GDP report, said the government is aiming to pass a second extra budget swiftly to get more aid to the economy.

The new money, coming only weeks after the passage of a first supplementary budget, is expected to provide rent support for small businesses and bigger subsidies for firms that don’t fire workers. It will also add to the developed world’s heaviest public debt burden.

The Bank of Japan last month lifted its ceiling on government bond purchases as the government ramps up spending. The BOJ is also expected to introduce another lending program for small companies at an emergency meeting that could be held as early as this week.

Despite the rising sense of crisis, Japan so far appears to be doing less badly than other major economies. The U.S. and Canada are both forecast to shrink more than 25 percent this quarter, while the U.S. contracted 4.8 percent in the quarter ended in March.

In recent days, infection rates have plunged and the government last week lifted its state of emergency for 39 of the 47 prefectures, although Tokyo and other dense economic centers still remain under heavy restrictions.

Until stay-at-home requests are lifted, policymakers won’t be able to spur growth no matter how much money is spent, according to economist Taro Saito at NLI Research Institute.

“For now, they have to spend money to prevent job losses and bankruptcies,” Saito said. “We’re not at a stage where the Bank of Japan can boost demand with monetary easing, and the BOJ will focus on corporate financing for now.”

Policymakers also have little control over the world’s demand for Japanese exports, a main driver of growth that could stay depressed for a long time. Even though key overseas markets are starting to reopen from lockdowns, progress will come in fits and starts, with the risk of new infection waves looming.

Monday’s report showed exports fell 6 percent last quarter on a nonannualized basis, but earnings forecasts from automakers and other manufacturers suggest the decline is likely to steepen. Toyota Motor Corp., the nation’s biggest company, sees profits tumbling 80 percent this fiscal year.

On the domestic side, spending isn’t likely to pickup quickly even after the state of emergency is lifted because of the bleak outlook for corporate profits and wages, according to Norinchukin economist Minami.

Last quarter, private consumption slid 0.7 percent, with worse likely ahead.

Dwindling numbers of tourists whose spending has been a key prop to growth in recent years is another major concern. Spending by visitors slid 42 percent last quarter, according to the Japan Tourism Agency, and the drop is likely to have worsened since.

On a nonannualized basis, the economy shrank 0.9 percent from the previous quarter.