Japan first-quarter GDP shrank less than expected but deeper recession looms

Japan’s economy shrank less than initially estimated in the first quarter but the broad impact from the coronavirus crisis is still expected to send the country deeper into recession.

A series of recent April data including exports, factory output and jobs figures suggested Japan is facing its worst postwar slump in the current quarter as the outbreak forced people to stay at home and businesses to close globally.

The world’s third-largest economy shrank an annualized 2.2 percent in January to March, revised data showed on Monday, less than the 3.4 percent contraction indicated in a preliminary reading and compared with a median market forecast of a 2.1 percent drop.

The revised data confirmed Japan had slipped into recession for the first time in 4½ years, after a 7.2 percent contraction in October to December, pressured by last year’s sales tax hike and the U.S.-China trade war. Recessions are defined as two straight quarters of contraction.

“The upward revision to Q1 GDP displayed in the revised estimate is cold comfort given that output is plummeting this quarter,” said Tom Learmouth, economist at Capital Economics.

On quarter-on-quarter basis, the economy contracted 0.6 percent in the first quarter compared with an initial reading of a 0.9 percent decline.

Business spending showed gains after the finance ministry’s survey earlier this month, which was used to calculate the revised gross domestic product, drew fewer respondents than usual. Spending is expected to falter in coming months.

Capital spending rose 1.9 percent from the previous quarter, reversing from a preliminary 0.5 percent fall.

Private consumption, which accounts for more than half of Japan’s economy, fell 0.8 percent compared with the preliminary 0.7 percent decline, as solid demand for daily necessities was offset by declines in spending on services.

Net exports — or exports minus imports — subtracted 0.2 percentage point from revised GDP growth, as the coronavirus slammed global demand.

Analysts are forecasting the economy will suffer an annualized contraction of more than 20 percent in April to June as Prime Minister Shinzo Abe announced a state of emergency and requested citizens to stay home and businesses to close to prevent the virus spreading.

Although the emergency was lifted in late May, the economy is expected to recover only moderately in coming months due to the pandemic’s sweeping impact globally and at home.

The Bank of Japan is likely to maintain this month its projection that the economy will gradually recover from the damage in the latter half of this year, sources said.

In an interview, economy minister Yasutoshi Nishimura said Japan should primarily focus on back-stopping struggling businesses, suggesting the central bank should avoid pushing interest rates deeper into negative territory in battling the pandemic.

The BOJ eased monetary policy for two straight months in April, joining government efforts to cushion the blow from the pandemic. The government has compiled two stimulus packages worth a combined ¥240 trillion.

But many analysts expect things to get worse before a firm recovery takes hold.

“Despite the Ministry of Finance and Bank of Japan providing businesses and workers with significant support — GDP won’t return to pre-virus levels any time soon. Across 2020 as a whole, we think Japan’s economy will shrink by 6.5 percent,” Capital Economics’ Learmouth said.