Japan’s economy set to crater by a record in awful quarter

Japan’s pandemic-hit economy shrank last quarter by the most in records going back to 1955, official data is set to show Monday, with a resurgence of the virus threatening to slow a fragile recovery now under way.

Analysts see gross domestic product contracting at an annualized pace of 27 percent in the three months through June. That means the world’s third-largest economy will have declined in size for three straight quarters, hit first by trade wars and a sales tax hike, then by the virus.

The cratering of Japan’s economy follows grim readings from other major countries reeling from the impact of COVID-19. The U.K. contracted 20.4 percent last quarter. The U.S., where the virus still rages on, shrank by nearly a third.

The size of the declines helps explain the massive scale of support rolled out by Japan and other countries to keep companies and households afloat, with more measures expected even though the worst of the economic damage is likely over.

A five-week nationwide state of emergency devastated consumption in the second quarter as people stayed at home and businesses closed, but retail sales and factory output in Japan are already showing signs of recovery.

Still, weak overseas demand for cars and other Japanese exports is likely to continue and there will be no Olympics spending boost from tourists this quarter with the Games postponed.

The biggest factor clouding the outlook is the trajectory of the pandemic itself.

“What happens after this really depends on COVID-19,” said economist Yoshiki Shinke at Dai-Ichi Life Research Institute. “I don’t think the economy will return to pre-pandemic levels anytime soon.”

Japan’s death toll of just over 1,000 is still tiny compared with the U.S. and some other countries, but a recent jump in new infections could weigh on the recovery if people become too fearful to travel, eat out or shop.

A campaign launched last month to reboot domestic travel and spur spending was initially supposed to cover the entire country, but Tokyo ended up excluded after concern grew over the virus’s spread in the capital.

Government measures worth more than 40 percent of GDP, including job-retention subsidies, loan guarantees and cash handouts, have helped prevent a surge in bankruptcies and the official jobless rate, but economists still expect more aid to come in the autumn even if it draws largely on reserves set aside in recent budgets.

“Whether or not the government brings more money from somewhere else,” said Yoshimasa Maruyama, economist at SMBC Nikko Securities Inc., “there’ll definitely be another response package.”