Japan recession fears grow as GDP shrinks at 6.3% rate with COVID-19 hit to come

Japan recession fears grow as GDP shrinks at 6.3% rate with COVID-19 hit to come

The economy took another battering from the consumption tax increase in the last quarter, contracting by the most in more than five years and fueling recession concerns as the widening coronavirus outbreak hits activity.

Gross domestic product shrank at an annualized pace of 6.3 percent from the previous quarter in the three months through December, according to a preliminary estimate by the Cabinet Office released Monday.

Economists surveyed had predicted a fall of 3.8 percent, highlighting the adverse impact of the consumption tax increase, weak global demand and typhoon disruption.

The worse than expected outcome showed that some of the government’s confidence in measures to cushion the blow of the tax hike was misplaced.

The result also raises the possibility that with the virus outbreak still spreading, Prime Minister Shinzo Abe may have to consider another round of extra spending to support growth, little more than two months after his most recent stimulus package.

“I’m getting ready for another contraction in Japan’s first quarter. There just aren’t any positive factors to build a positive growth forecast,” said Mari Iwashita, chief market economist at Daiwa Securities Co., highlighting her view that the economy is likely falling into recession.

Iwashita expects the government to form another extra budget once it becomes clear the economy has stayed in a funk in the first quarter.

The Abe administration and the Bank of Japan had expected a smaller impact from the tax hike compared with the experience in 2014, when it buckled the economy by more than 7 percent. The tax increase this time was smaller, foods were exempted and the government deployed a raft of countermeasures aimed at smoothing out fluctuations in demand.

But economists said some of the government’s steps, such as rebates on spending via cashless transactions, had limited impact as they didn’t appeal to an older segment of the population not used to mobile phone payment platforms.

The figures laid bare the vulnerability of domestic consumption to tax hikes, according to Takashi Shiono, an economist at Credit Suisse Group AG.

The latest data showed that private consumption plunged by an annualized 11 percent in the quarter, as households slashed their purchases of cars, cosmetics and domestic appliances. In 2014 the hit was 18 percent.

Businesses also scaled back investment by 14 percent, preferring to wait for signs of a recovery from the tax shock before committing to further spending.

While the initial trade deal between the U.S. and China should have offered a tail wind for investment this quarter, the unexpected virus outbreak may instead amplify caution in the boardrooms of corporate Japan.

“Concern over the virus is only intensifying and the mood of self-restraint is going to spread more broadly. I’m becoming downbeat on Japan’s economy,” Shiono said.

The virus has already stopped the visits of hundreds of thousands of Chinese tourists to Japan at the beginning of the Olympic year, hitting an important source of spending revenue. The longer the outbreak disrupts production and domestic demand in Japan’s biggest trading partner, the more likely Japan’s exporters will suffer and parts supplies may dry up.

Already government officials are hinting that more spending is in the pipeline if a slump looks certain.

“We will keep paying careful attention to the virus’s effect on tourism and the wider economy,” economy minister Yasutoshi Nishimura said in a statement. “According to the level of emergency, we will take necessary steps as needed in a flexible manner, and respond fully.”

Abe unveiled initial measures to counter the impact of the coronavirus last week, but so soon after releasing his economic package in December, he is likely to want to see harder evidence of a recession before mulling another large spending spree.

For its part, the BOJ is also likely to emphasize the need for more data to assess the underlying trend.

“Given the mounting risks to a rebound this quarter from the coronavirus, the government is likely to face growing pressure to add to already-hefty fiscal stimulus in the pipeline. A sharp drop in nominal GDP won’t sit easy with the Bank of Japan,” Yuki Masujima, a Bloomberg economist, said.

On a nonannualized basis, the economy contracted 1.6 percent from the third quarter. Economists predicted a decline of 1 percent.

Business investment fell 3.7 percent, compared with a forecast for a 1.6 percent decline.

Exports fell by 0.1 percent, but a bigger drop in imports helped make the net impact on GDP positive.

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