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As the slow launch of vaccines and new COVID-19 infections hit consumer spending, Japan’s economy contracted more than expected in the first quarter, which increased concerns about the country’s heading to a double-dip recession.
Data released by the government on Tuesday showed that the annualized rate of economic growth fell by 5.1% in the first quarter, which was higher than the expected contraction rate of 4.6% and increased by 11.6% in the previous quarter.
The decline was mainly due to a 1.4% drop in private consumption, as emergency containment in response to the pandemic kept residents at home and reduced spending on clothing and meals.
Capital expenditures have also unexpectedly dropped, and export growth has slowed sharply, marking the world’s third-largest economy working hard to get its drivers out of the downturn.
Some analysts say that poor reading and the expansion of emergency containment have increased the risk that Japan may contract again in the current quarter and slide into a recession, which is defined as a recession for two consecutive quarters.
Yoyamasa Maruyama, chief market economist at SMBC Nikko Securities, said: “The global chip shortage has led to a significant slowdown in exports and also dragged down capital expenditure.” “Consumption may stagnate, increasing the risk of economic contraction this quarter.”
The government of Japanese Prime Minister Nobuki Suga tried to use predetermined methods to limit its damage to the economy, so as to speed up the launch of its vaccines and control virus cases, so last week it added three more states under the latest state of emergency. Put about half of the economy in economic condition. The restrictions are stricter than those in winter. Nowadays, restaurants and bars in many big cities are required to not provide alcohol in addition to opening early.
Failure to end the restrictions at the end of May as planned may also increase concerns about the hosting of the Tokyo Olympics. The cancellation of the Olympics will have another impact on the economy and increase the possibility of Suga being appointed to the long-serving premier prime minister. The country is scheduled to hold a national election in early autumn.
Surprise drop
The larger-than-expected contraction also reflects an unexpected drop in capital expenditures of 1.4%. This is because the company has reduced expenditures on equipment used in machinery and automobiles, which is confused with the market’s expected increase of 1.1%.
Due to the rebound in global demand for automobiles and electronic products, exports increased by 2.3%, but the growth rate fell sharply from 11.7% in the previous quarter. This is a worrying sign that the economy is still shrinking due to weak domestic demand.
Data shows that domestic demand has reduced gross domestic product (GDP) by 1.1 percentage points, while net exports have fallen by 0.2 percentage points.
Takeshi Minami, chief economist of the Norinchukin Institute, said: “The weak domestic demand shows that the adverse effects of the coronavirus have not been eliminated at all.”
The data shows that despite a large number of monetary and fiscal stimulus measures, the Japanese economy fell by a record 4.6% in the fiscal year ending in March.
Insufficient fiscal expenditure
ING analysts wrote in a research report: “There is no doubt that financial funds will be invested on this issue to mitigate the blow. Although a lot has been done, it is difficult to see that this impact exceeds the marginal effect.” The economy shrank again this quarter. “Moreover, the Bank of Japan currently does not seem to have a new policy stimulus concept. Therefore, in addition to expanding existing measures, we do not expect them to bring new changes.”
Economy Minister Yasutoshi Nishimura blamed the weak GDP on containment measures to contain the pandemic, adding that the economy still has “potential” for “recovery.”
“Indeed, service spending from April to June may still be under pressure. But exports and output will benefit from the recovery of overseas growth.” He told reporters.
Due to the initial blow of the pandemic, the Japanese economy experienced two consecutive quarters of growth after experiencing its worst post-war recession from April to June last year.
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