Japan’s economy shrinks more than feared amid Covid-19 emergency

TOKYO (BLOOMBERG) – Japan’s recovery stalled last quarter, with the economy shrinking more than analysts expected, as renewed restrictions to contain the coronavirus hit shoppers and discouraged business investment, while government outlays fell on the suspension of a travel-promotion campaign.

Gross domestic product (GDP) shrank an annualised 5.1 per cent from the prior quarter in the three months through March, ending a two-quarter streak of double-digit growth, the Cabinet Office reported on Tuesday (May 18). Economists had forecast an overall contraction of 4.5 per cent.

The worse-than-expected result comes at a critical time for Prime Minister Yoshihide Suga’s government as it struggles to contain Covid-19 cases with a targeted approach that limits the damage to the economy and a slow vaccine roll-out.

The drop in businesses investment, which was unexpected, suggests companies may be more cautious about the outlook than previously thought. Still, shoppers did not pull back as much as economists feared, which may signal a reservoir of underlying demand that could help power the recovery ahead.

“Consumption didn’t fall much, which means efforts to contain the virus are not having much of an impact,” said economist Hiroaki Muto at Sumitomo Life Insurance. “Companies are hesitant to invest with the outlook uncertain.”

Prospects depends largely on whether Mr Suga can lift a third virus emergency by the end of May, as planned. Three more prefectures joined the emergency at the weekend, bringing about half of the economy under restrictions that are slightly stricter than the ones called in winter, but still much less draconian than Europe’s lockdowns.

Japan has had far fewer virus deaths than other G-7 economies, but a slow vaccine roll-out has limited its tools for fighting the outbreak and getting the economy back into gear. So far, only about 3 per cent of the population has received even a single dose.

Still, strong exports and industrial production continue to provide a bedrock of support to the economy, even though a rise in imports caused the trade-component of the GDP to go negative in the first quarter.

“Looking ahead to Q2, we see GDP resuming a slow pace of growth, assuming the latest state of emergency ends at the end of May as planned,” said Bloomberg’s economist Yuki Masujima. 

“Beyond that, the strength of the recovery will depend on how quickly vaccinations proceed and whether the Tokyo Olympics are held.”

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