Japan’s economy shrinks in first quarter as expected

The world's third largest economy may have contracted as much as 20% in the second quarter, the most since 1955

A pedestrian wearing a protective face mask walks past an empty alley in the Setagaya district of Tokyo. Japan’s economy shrank at the same pace as previously estimated, according to revised data thatShow more

Japan’s economy shrank at the same pace as previously estimated in the first quarter, according to a further revision of data that continued to show the country was in a recession before the pandemic took its heaviest toll.

Gross domestic product shrank an annualised 2.2 per cent in the first quarter compared with the final three months of 2019, the Cabinet Office reported Monday, with business investment showing more resilience than expected.

Economists had forecast a 2.8 per cent contraction following a rare finance ministry move to update capital spending data last week after initial survey results were deemed insufficient given a low response rate from companies dealing with the pandemic.

An official at the Cabinet Office said the smaller-than-expected capex revision shows that the sampling issues had already been partly accounted for in the prior GDP estimate.

“What I’m seeing now is that capital investment is holding up better than I had expected,” said Masaki Kuwahara, an economist at Nomura Securities. “Companies have to invest in research and development and information technology in order to deal with the coronavirus. We see a big drop in machinery investment, but long-term investments like R&D haven’t fallen much.”

Monday’s backward-looking data comes before another growth report due mid-month that’s forecast to show Japan’s economy shrank by more than 20 per cent in the second quarter, the most in records going back to 1955.

Recent gains in retail sales and industrial production suggest growth began to rebound after a nationwide state of emergency was ended in late May, but analysts caution the recovery is fragile. Widening virus outbreaks in the US and other key markets darken the trade outlook and rising case numbers in Japan’s biggest cities threaten jobs and consumer spending at home.

Prime Minister Shinzo Abe already faces spiraling budget deficits after pledging about $2 trillion (Dh7.34tn) in stimulus, but an anemic recovery could force his administration to spend more. The government last week said it now sees no chance of balancing the budget before the year ending in March 2030.

“Japan’s economy probably headed into the coronavirus crisis in worse shape than the second reading on 1Q GDP indicated — pointing to an even weaker trajectory for 2020,” said Bloomberg economist Yuki Masujima.

Growth in business investment was revised down to 1.7 per cent from an earlier estimate of 1.9 per cent.

On a non-annualised basis, the economy shrank 0.6 per cent in the three months through March, compared with the fourth quarter of 2019.

In nominal terms, GDP grew 0.5 per cent in the first quarter, matching the earlier estimate.