• Reuters, Bloomberg

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The economy shrank more than initially estimated in the second quarter as capital expenditure took a hit from the coronavirus crisis, highlighting the challenge policymakers face in averting a deeper recession.

Other data put that challenge in perspective, with household spending and wages falling in July as the broadening impact of the COVID-19 pandemic kept consumption frail even after lockdown measures were lifted in May.

The world's third-largest economy shrank an annualized 28.1 percent in April-June, more than a preliminary reading of a 27.8 percent contraction, revised gross domestic product data showed Tuesday, suffering its worst postwar contraction.

The record drop roughly matched a median market forecast of a 28.6 percent contraction in a Reuters poll.

The main culprit behind the revision was a 4.7 percent drop in capital expenditure, a much bigger fall than a preliminary 1.5 percent fall, a sign the COVID-19 pandemic was hitting broader sectors of the economy.

Confirmation of Japan’s biggest GDP slide in records going back to 1955 comes as the ruling party prepares to pick a new prime minister following the sudden resignation last month of Shinzo Abe, the country’s longest-serving premier. Abe’s most likely successor, longtime aide Yoshihide Suga, faces the tough balancing act of trying to contain the virus without stifling the economy.

"The next prime minister will have to set coronavirus measures as the first priority,” said economist Masaki Kuwahara at Nomura Securities Co. "The economy should see a double-digit rebound, but the recovery pace will be slow.”

The Bank of Japan is likely to raise its economic assessment at next week’s meeting to indicate that Japan’s slump has bottomed, without expressing optimism about the outlook, people familiar with the matter said. Still, BOJ officials see little need to take further policy action now because financial markets are stable and companies have access to credit, the people said.

Suga, the current chief Cabinet secretary, would be a continuity pick. He wants to stick to the Abenomics path that includes massive monetary stimulus and a flexible spending approach, but would also take more action if needed to save jobs.

Analysts see GDP rebounding about 13 percent this quarter, not enough to make up for three straight quarters of contraction. Bloomberg Economics argues the economy may never regain its pre-pandemic size because the crisis has further delayed critical reforms needed before Japan’s shrinking population causes longer-term declines.

Separate data showed household spending fell 7.6 percent in July compared with a year earlier, more than a median market forecast for a 3.7 percent decline.

Real wages also fell for the fifth straight month in July, other government data showed, pointing to possible deeper strains ahead for consumer spending.

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