Japan Officially Slides Into Recession – and the Worst Is Yet to Come

Japan has sunk into a recession that’s likely to deepen further as the full force of the coronavirus pandemic hits economies around the globe.

The world’s third-largest economy shrank an annualized 3.4% in the three months through March from the previous quarter as exports slid and social distancing crimped consumer spending, official figures showed Monday, confirming the second-straight quarterly contraction.

Even with a partial lifting of restrictions on economic activity in recent days, other major economies are expected to join Japan in recession in the current quarter as households limit spending to essentials and companies cut investment, production and hiring to stay afloat amid the devastating fallout of the virus.

Policy makers will also need to consider more than just their approaches to restarting their economies, as the pandemic triggers a reassessment of priorities.

“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,” he added, suggesting that societies may now become more tolerant of inefficiency in the economy if it results in more sustainability and safety.

Worse to Come

While Japan’s drop in gross domestic product was slightly better than an expected 4.5% fall, helped by stronger-than-expected consumption and business spending before the pandemic escalated, analysts and policy makers agree that worse is in store in the current quarter.

“There’s no doubt that this quarter has gotten much worse,” said economist Takeshi Minami at Norinchukin Research Institute, noting that Prime Minister Shinzo Abe’s April declaration of a state of emergency and tougher restrictions on activity came in early April. “Companies are struggling to secure funding and that suggests business investment will remain weak and many workers are concerned about their wages.”

Despite the rising sense of crisis, Japan so far appears to be doing less badly than other major economies.

China, where the virus first spread, shrank 9.8% last quarter on a non-annualized basis from the previous three months. That translates into a drop of close to 40% in terms comparable with Japan’s.

The U.S. economy contracted 4.8% in the first three months of the year, but is expected to shrink more than 30% this quarter in annualized terms. Canada is seen shedding more than 40% of GDP.

For Japan, analysts forecast a 21.5% contraction in the three months through June, a record for official data going back to 1955.

More Aid

The crisis has put pressure on policy makers in Tokyo to step up stimulus measures that, at a record 117 trillion yen ($1.1 trillion), already total more than 20% of GDP by the broadest measure.

Economy Minister Yasutoshi Nishimura, speaking Monday after the GDP report, said the government is aiming to pass a second extra budget swiftly to get more aid to businesses and households and warned of the risk of the economic pain deepening even more.

The Bank of Japan last month lifted its ceiling on government bond purchases as the government ramps up spending. The BOJ is also expected to introduce another lending program for small companies at an emergency meeting that could come as early as this week.

In recent days, rates of new virus infections have fallen in Japan and the government last week lifted its state of emergency for 39 of Japan’s 47 prefectures, although Tokyo and other dense economic centers still remain under heavy restrictions.

Until stay-at-home requests are lifted, policy makers won’t be able to spur growth no matter how much money is spent, according to economist Taro Saito at NLI Research Institute.

“For now, they have to spend money to prevent job losses and bankruptcies,” Saito said. “We’re not at a stage where the Bank of Japan can boost demand with monetary easing, and the BOJ will focus on corporate financing for now.”

Export Slide

Japan’s policy makers also have little control over the world’s demand for the country’s exports, a main driver of growth that could stay depressed for a long time. Even though key overseas markets are starting to reopen from lockdowns, progress will come in fits and starts, with the risk of new infection waves looming.

Monday’s report showed exports dropped almost 22% last quarter on an annualized basis, the biggest decline since the 2011 tsunami. Corporate earnings forecasts from automakers and other manufacturers suggest the decline is likely to steepen. Toyota Motor Corp., Japan’s largest company, sees profits tumbling 80% this fiscal year.

–With assistance from Yoshiaki Nohara, Sophie Jackman and Toru Fujioka.