Japan’s economy shrinks at same pace in first quarter as capital expenditures hold up

The economy shrank in the first quarter at the same pace as previously estimated, according to a further revision of data that continued to show Japan was in a recession before the pandemic took its heaviest toll.

Gross domestic product shrank an annualized 2.2 percent in the first quarter compared with the final three months of 2019, the Cabinet Office reported Monday, with business investment showing more resilience than expected.

Economists had forecast a 2.8 percent contraction following a rare Finance Ministry move to update capital spending data last week after initial survey results were deemed insufficient in light of a low response rate from companies dealing with the pandemic.

An official at the Cabinet Office said the smaller-than-expected capex revision shows the sampling issues had already been partly accounted for in the prior GDP estimate.

“What I’m seeing now is that capital investment is holding up better than I had expected,” said Masaki Kuwahara, an economist at Nomura Securities. “Companies have to invest in research and development and information technology in order to deal with the coronavirus. We see a big drop in machinery investment, but long-term investments like R&D haven’t fallen much.”

Monday’s backward-looking data comes before another growth report due mid-month that’s forecast to show Japan’s economy shrank by an annualized 20 percent or more in the second quarter, the most in records going back to 1955. Recent gains in retail sales and industrial production suggest growth began to rebound after a nationwide state of emergency ended in late May, but analysts caution the recovery is fragile.

Widening virus outbreaks in the United States and other key markets darken the trade outlook, and rising case numbers in Japan’s biggest cities threaten jobs and consumer spending at home.

Prime Minister Shinzo Abe already faces spiraling budget deficits after pledging over ¥200 trillion in stimulus, but an anemic recovery could force his administration to spend more. The government last week said it now sees no chance of balancing the budget before the year ending in March 2030.

Growth in business investment was revised down to 1.7 percent from an earlier estimate of 1.9 percent. On a nonannualized basis, the economy shrank 0.6 percent in the quarter ended March, compared with the fourth quarter of 2019. In nominal terms, GDP grew 0.5 percent in the first quarter, matching the earlier estimate.