The Japanese economy shrank more than expected in the first quarter, as the slow deployment of vaccines and new COVID-19 infections affected consumer spending, leading to the country’s fear of to a double-dip recession.
The economy fell 5.1 percent year-on-year in the first quarter, more than the contraction forecast of 4.6 percent and after a jump of 11.6 percent in the previous quarter, they went show government data on Tuesday.
The decline was mainly due to a 1.4 percent drop in private consumption, as the state’s emergency braking to combat the pandemic kept residents at home and affected spending on clothing and dining.
Capital spending also fell unexpectedly and export growth slowed sharply, a sign that the world’s third-largest economy is struggling to get drivers out of business.
Some analysts say the sad reading and frequent extension of the emergency strips have increased the risk that Japan may shrink again in the current quarter and return to recession, defined as two consecutive quarters of recession.
“The global shortage of chips led to a marked slowdown in exports, which also affected capital expenditure,” said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities. “Consumption is likely to remain stagnant, which will increase the risk of an economic contraction in the current quarter.”
As the administration of Prime Minister Yoshihide Suga struggles to speed up the launch of vaccines and contain cases of viruses through a predetermined approach that seeks to limit damage to the economy, last week it added three more prefectures to the latest state of emergency, placing about half of the economy under somewhat tighter restrictions than those of winter. Restaurants and bars in many large cities are now being asked to refrain from serving alcohol in addition to closing soon.
If the restrictions were not lifted by the end of May, as planned, concerns about the staging of the Tokyo Olympics could also increase. The cancellation of the Games would mean another blow to the economy and increase the likelihood that Suga will be destined for a long list of short-lived prime ministers. The country is scheduled to hold national elections in early fall.
Surprise drop
The larger-than-expected contraction also reflected a surprise 1.4% in capital spending, as companies reduced spending on equipment for machinery and cars, confusing market expectations of a increase of 1.1%.
Although exports grew by 2.3 percent thanks to a rise in global demand for cars and electronics, the pace of growth slowed sharply compared to the 11.7 percent increase in previous quarter, a worrying sign for an economy that is still holding up due to weak domestic demand.
Domestic demand fell 1.1% of gross domestic product (GDP), while net exports fell by 0.2 points, according to the data.
“The fact that domestic demand is weak shows that the adverse effects of coronavirus have not been shaken at all,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.
Despite a significant monetary and fiscal stimulus, the Japanese economy fell a record 4.6 percent in the fiscal year ending March, according to the data.
Tax spending is not enough
“There will certainly be tax money that will be poured on this issue to soften the blow, although after so long, it is difficult to see this having a more than marginal effect,” ING analysts wrote in a note. research, they added that they expect the economy to shrink again in the current quarter. “And the Bank of Japan seems to be out of new policy stimulus ideas right now, so we don’t anticipate anything new other than expanding existing measures.”
Economy Minister Yasutoshi Nishimura blamed the weak reading of GDP on the limits to combat the pandemic, adding that the economy still had “potential” for recovery.
“It is true that spending on services will continue to be pressured in April and June. But exports and production will benefit from a recovery in growth abroad,” he told reporters.
The Japanese economy expanded for two consecutive quarters after the worst postwar fall in April and June last year due to the initial success of the pandemic.
