According to data released Tuesday, Japan’s economy shrank by 1.3 percent in the three months to March after the government reimposed coronavirus restrictions in major cities due to an increase in infections.
The drop came after the world’s third-largest economy expanded for two quarters to December, but the growth was halted by a rise in coronavirus cases in the winter.
In addition, the government declared new virus states of emergency in January, advising residents to stay at home and ordering restaurants to close earlier.
The contraction was largely in line with expectations among economists.
“Personal consumption has been particularly hard-hit by the Covid-19 emergency measures,” Naoya Oshikubo, senior economist at SuMi TRUST, said in an analysis issued ahead of the official data.
Private consumption dropped 1.4 percent after two quarters of growth, according to data released by the cabinet office shortly before markets opened, suggesting slower investment in the services sector.
Capital spending, which includes manufacturing, fell 1.4 percent in the third quarter, but analysts said it was just in comparison to a sharp rise in the previous quarter, and that the overall recovery trend was on track.
According to Marcel Thieliant, senior Japan economist at Capital Economics, the decline in private consumption was not as severe as some had predicted.
Downs in non-residential investment and public demand were the two “major disappointments,” he wrote in a note. In the meantime, housing expenditure increased by 1.1 percent.
Although exports increased by 2.3 percent, imports increased by 4.0 percent, “so net trade slowed GDP growth by 0.2 percent-points,” Thieliant added.
Economists predict that the slowdown will worsen, with the government forced to declare a third state of emergency in many parts of the world earlier this month, including economic powerhouses Tokyo and Osaka.
The emergency measures are more severe than in the past, having been extended until the end of May and recently expanded to many other areas.
The Olympics have a ‘limited’ effect.
“The GDP slump will continue in Q2 2021. The third state of emergency introduced in April calls for shorter working hours and longer leave periods than previous ones, and may even be extended further,” wrote Oshikubo.
He believes that whatever happens with this summer’s Tokyo Olympics, which have been postponed due to the pandemic, will have little effect on the economy.
“Even if the Games are cancelled, this won’t come as a surprise and the impact on the economy and the market should be limited.”
Japan’s comparatively slow vaccine rollout further complicates the growth image.
“With the medical situation still worsening and the vaccine rollout too slow, it will take until the end of the year for output to return to pre-virus levels,” Thieliant said.
Despite having a smaller epidemic than many other nations, Japan’s economy contracted for the first time since 2009. The country is still suffering from the impact of the pandemic.
The annual contraction was slightly better than initially predicted, at -4.7 percent, as opposed to the earlier figure of -4.8 percent, according to revised figures released Tuesday.
Around 11,500 people have died as a result of the coronavirus in Japan, which has spared the strict lockdowns that have occurred in other countries.
However, the pandemic has had a significant impact on the economy in a country still struggling with low demand and a multi-year campaign to boost inflation.
Analysts do not expect growth to rebound before the third quarter, while Capital Economics cautioned that given the current virus revival and sluggish vaccination rate, risks to that outlook were skewed to the downside.
A global semiconductor shortage caused by the demand for chips used in personal electronic devices and modern vehicles, according to Oshikubo, is still a possibility.
“We expect choppy waters ahead for manufacturing in the next quarter,” he warned.
SOURCE: THE GUARDIAN