Japan's economy contracts as virus restrictions hit consumption

TOKYO, May 19 (Xinhua) -- Japan's economy declined a real 4.6 percent in fiscal year 2020 from the previous one, as the fallout from the COVID-19 pandemic saw consumption stifled by lockdowns with slumping overseas demand taking a toll on the nation's key export sector.

RECORD ANNUAL DECLINE

The decline in fiscal year 2020 marked the second straight year of decrease, and when adjusted for inflation, it was the largest annual contraction since comparable data became available in 1955, data from the Cabinet Office showed Tuesday.

During the January-March quarter, the government also said that the economy declined 5.1 percent on an annualized basis from the previous three months, which equates to a 1.3 percent contraction on a seasonally adjusted quarterly basis and marked the first decline in three quarters, the government's figures showed.

A second state of emergency between Jan. 8 and March 21 declared by the government to curb the spread of COVID-19, which asked people to work from home, avoid making unnecessary trips outdoors and refrain from dining out especially in the evenings, had squeezed the country's economic activity as economists here believe.

As such, private consumption dropped 1.4 percent, while services, including dining, retreated 2.6 percent. In January-March, sales of durable goods went down 3.1 percent, and sales of semi-durables, which include apparel, fell 3.0 percent.

FUNDAMENTAL WEAKNESS

Along with a drop in consumption and exports, economists, while analyzing the government's data, also noticed a decline in private investment, among other signs of fundamental economic weakness that may well spill over into the second quarter of this year.

"In the details of Japan's deeper-than-expected GDP (gross domestic product) contraction in Q1, there was even more bad news, a surprise drop in private investment and an unexpectedly steep buildup in inventories," said local economist Yuki Masujima.

"These signal weakness in the manufacturing sector, a rare growth driver amid the virus emergency, and add to downside risks to the economy in Q2," Masujima said.

Also factoring into the Q1 contraction was a drop in government consumption following the cancelling of its subsidized "Go To Travel" campaign as well as the pandemic dealing a blow to winter bonuses, economists here said.

"The state of emergency was not the only cause for slow consumption. Weaker winter bonuses were also to blame," said Toru Suehiro, senior economist at Daiwa Securities, noting a year-on-year drop of 8.5 percent for winter bonuses, the biggest decline since a 14.9 percent drop in 2009.

"During the January-March period, government consumption also fell from high levels in the latter half of 2020, during which government consumption had been kept elevated by the 'Go To Travel' campaign. The travel subsidy program was halted before the year-end holiday season amid new coronavirus outbreaks," Suehiro said.

FURTHER CONTRACTION AHEAD

Other countries recovering from the pandemic helped give Japan a boost to some extent as returning demand saw some recovery of Japan's exports in the January-March period, but economists expected a further contraction in the April-June quarter, as the nation has been experiencing its third state of emergency over the coronavirus amid a fourth wave of infections.

Analysts said that the extent of the upcoming contraction would depend on whether the current state of emergency is lifted on time at the end of May, which is the source of some debate as increasing numbers of severely ill COVID-19 patients have been recorded recently amid a rapid spread of highly transmissible virus variants.

"The April-June GDP depends on exports, since consumption will continue to fall and capex will stay flat at best. I think exports will rise, supported by rebounding demand in the United States. If not, Japan could see negative growth again," said Atsushi Takeda, chief economist at the Itochu Research Institute.

Japan's Economy Minister Yasutoshi Nishimura said that the increased demand for Japan's goods and services from other countries recovering from the pandemic would likely limit the depth of the April-June contraction.

"Once the virus situation starts to be more contained and people's activity becomes more normalized, pent-up demand is likely to emerge," the minister said.

"It's true service spending will likely remain under pressure in April-June. But exports and output will benefit from a recovery in overseas growth," he told reporters.

"Japan isn't heading toward a big contraction in the second quarter like last year and economic activity will broaden out as vaccinations proceed," added Nishimura, who is also Japan's minister in charge of anti-virus measures.