Instant View: Japan's economy shrinks at record pace as pandemic hits spending

Japan suffered its biggest economic contraction on record in the second quarter as the coronavirus pandemic crushed business and consumer spending, keeping policymakers under pressure for bolder action to prevent the recession deepening.

Gross domestic product (GDP) shrank an annualised 27.8% in April-June, government data showed on Monday, marking the biggest decline since comparable data became available in 1980. It was the third straight quarter of contraction and a bigger decline than a median market forecast for a 27.2% drop.

Here’s how analysts have reacted to the data:

SAISUKE SAKAI, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE

“Main points for the GDP data are consumer spending and exports. The state of emergency prompted people to refrain from going out and lockdown measures in foreign countries hit the nation’s consumer spending and exports.”

“The pace of the fall in capital spending wasn’t big but demand for business investment is expected to fall due to worsening corporate profits and risk of the coronavirus spreading.”

“We expect the economy will mark a double-digit growth in July-September but it will be merely a rebound from losses in April-June and the level will unlikely be strong.”

“There is a chance economic activities may stagnate again if major nations adopt lockdown measures again and Japan re-issue a state of emergency.”

AYAKO SERA, MARKET STRATEGIST, SUMITOMO MITSUI TRUST BANK

“It is concerning that net exports were rather weak. China’s GDP was relatively strong in April-June, but despite that overseas demand was this weak in Japan and its imports have not decreased very much.”

“Going forward, I think it will become harder for the yen to strengthen,” she said, warning that the sharp decline in external demand could mean that the risk of the yen crashing may warrant more attention on the long-term.

TAKUMI TSUNODA, SENIOR ECONOMIST, SHINKIN CENTRAL BANK RESEARCH

“Although the drop was big, there has been a recovery trend since June, but in July novel coronavirus infections took off again, making households cautious about spending again.”

“While capital expenditure wasn’t as bad as expected in the second quarter, it’s hard to see it picking up from here. There are strong concerns about the future among businesses so I think a trend of putting off investment plans will continue.”

“Unless exports pick up, activity in domestic production isn’t going to recover, so things will depend on whether the global economy will recover or not.”

ATSUSHI TAKEDA, CHIEF ECONOMIST, ITOCHU ECONOMIC RESEARCH INSTITUTE

“The data was largely in line with expectations. Deterioration in global economic demand, significant falls in consumer spending and inbound demand were main factors behind the economic contraction in April-June.”

“Capital spending showed resilience in January-March and April-June but there is a chance capex will worsen in the current quarter as there will be some time lag to appear the impact from the coronavirus outbreak.”

“The economy is expected to rebound in July-September but it won’t be strong enough to recoup losses made in the second quarter. The economy may regain about a half of what it lost in Aril-June”

“Sentiment remained subdued as the coronavirus infection is rising...We can’t deny a risk that the economy may hit a second bottom this year depending on the situation of the coronavirus infection.”

TAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH INSTITUTE

“My impression is that consumption was quite bad. I think the big decline of this time can be explained by the decrease in consumption and exports.”

“Since the decline was this big, a rebound has begun from June onwards in line with the lifting of the state of emergency, so I expect growth will turn positive in the July-September quarter. But globally the rebound is sluggish everywhere except for China.”

“Consumption is likely to rebound but in contrast to that a deterioration in capital expenditure will become more widespread. (...) It’s hard for corporate activity to pick up and I don’t think it will return to it’s previous level.”

“Even if consumption rebounds, capital expenditure is likely to remain on a weak trend in the second half of the fiscal year.”

MARCEL THIELIANT, SENIOR JAPAN ECONOMIST, CAPITAL ECONOMICS

“While the country is in the midst of a second wave of COVID-19, the healthcare system isn’t overwhelmed yet and new infections have started to decline again. Given its strong corporate balance sheets, generous credit guarantee scheme and low reliance on tourism, we think that Japan will recover more quickly than most anticipate. We’ve pencilled in a 4.5% q/q rebound in Q3 GDP and expect the economy to expand by 3.5% in 2021, well above the consensus of 2.6%.”