Japan’s Export-Dependent Economy Falls Into Recession In First Quarter, Second Quarter May Be Worse

Japan, the world’s third largest economy, has slipped into recession for the first time in five years as the coronavirus pandemic continues unabated.

Japanese gross domestic product shrank by an annualized rate of 3.4% in the first three months of 2020, on the heels of a 6.4% annualized contraction in the last quarter of 2019. (When an economy shrinks two straight quarters it has entered into a technical recession).

Last week, another huge economy, Germany also said it entered into a recession.

While Japan did not order a national lockdown like many major countries have, it issued a state of emergency in April, disrupting business activity. Japan has since lifted the state of emergency in 39 out of its 47 prefectures, but analysts expect the second quarter to show another severe economic decline.

Reuters reported based on analysts’ projections that Japan’s GDP could plunge by as much as 22% in the second quarter – a historic fall.

“We expect the worst is yet to come, with the state of emergency in Japan and the severity of the pandemic among Western nations continuing to derail the Japanese economy,” said Naoya Oshikubo, senior economist at SuMi TRUST.

Oshikubo expects the economy to plummet by 10.2% plunge in the second quarter.

Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, predicted a 6% or 7% GDP shrinkage in the second quarter.

“As to the question of when the economy will pick up, it all depends on the number of [people] infected and when the virus fades out,” Shinke said.

Takeshi Minami, an economist at Norinchukin Research Institute, declared: “There’s no doubt that this [second] quarter has gotten much worse. Companies are struggling to secure funding and that suggests business investment will remain weak and many workers are concerned about their wages.”

Yuki Masujima, an economist at Bloomberg, also expects the economy to suffer in the second quarter and is cautious about prospects thereafter.

“Even if Prime Minister Shinzo Abe lifts the state of emergency by [the end of May], we doubt the economy will pick up until [third quarter], at the earliest -- and even then, the strength would hinge on recoveries in the U.S. and Europe,” Masujima said.

Referring to the first quarter, Oshikubo said: “Personal consumption has been the main casualty of the Covid-19 pandemic as consumer spending has been greatly affected by this due to people staying at home. But uncertainty stemming from the spread of the virus has also hit private capital investment as companies curtail their expenditure programs.”

Indeed, private consumption (which accounts for more than half of the nation’s economy) dropped 0.7% quarter-to-quarter, while household consumption and corporate investment fell by 0.8% and 0.5%, respectively.

The Japanese economy has been particularly hit hard by falling exports – especially at its key auto sector – and by a virtual collapse in tourism. Exports fell by 6% in the first quarter.

“Exports to China began to fall in February, followed by a wave of slumping shipments to Europe and the United States,” said Minami. “Exports were also hurt by slumping inbound tourism.”

The virus has also led to the postponement of the widely anticipated Tokyo 2020 Olympics.

Meanwhile, as in the U.S., the Japanese government has unveiled a massive $1.1 trillion aid package, while the Bank of Japan enlarged its stimulus measures.

On Monday, Economy Minister Yasutoshi Nishimura said the government is seeking to pass a second budget quickly in order to deliver more financial aid to businesses and households.

The Bank of Japan is also expected to offer another lending program for small businesses sometime this week.

“For now, [the government and central bank] have to spend money to prevent job losses and bankruptcies,” said Taro Saito, an economist at NLI Research Institute. “We’re not at a stage where the Bank of Japan can boost demand with monetary easing, and the [Bank of Japan] will focus on corporate financing for now.”

Martin Schulz, chief economist at Fujitsu, warned the government’s stimulus program may be insufficient.

“As always in Japan, the implementation is very slow. It will take the latter half of the second quarter [and] the third quarter [for government stimulus to penetrate into the economy],” he said. “The recovery will be slower than many are hoping for... To recover from this crisis, it will take about two years at least.”

Some analysts fear that the government will have to reassess not only how to mitigate the impact of the virus, but how to manage the economy after the pandemic passes.

“The post-coronavirus world won’t be a return to the pre-corona world,” said Masaki Kuwahara, an economist at Nomura Securities. “There’ll be more need to control risk for contagious diseases. And the changes won’t be limited to just contagious diseases. Various themes of sustainability will also weigh more on people’s minds.”

Japan has reported more than 16,000 confirmed cases of coronavirus and about 740 deaths. Officials fear another surge in cases, particularly in heavily populated Tokyo and urged residents to remain indoors.