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Japan's economy contracted at a record rate in the April-June period from the previous quarter, due to the adverse effects of the coronavirus pandemic, marking the worst decline since comparable data became available.
The Cabinet Office here said in the recording period the economy shrank at an annualized real 27.8 percent from the previous quarter, a plunge not officially seen since 1980, as the global coronavirus pandemic stifled economic activity amid restrictions under a state of emergency.
The preliminary data on gross domestic product translates to a seasonally-adjusted 7.8 percent decrease on a quarterly bases, posting negative growth data for a third straight quarter.
The economy here had already been hobbled by a consumption tax hike from 8 to 10 percent in October last year taking a hefty toll on consumer spending, with the economy shrinking an annualized 7.0 percent in the October-December period and 2.5 percent in the January-March period, economists here highlighted.
As the global pandemic took hold in Japan, the government responded with phased restrictions on business and social activities to curb the spread of the virus beginning on April 7, when a state of emergency was issued for the capital and six other prefectures.
Thereafter, it was expanded to cover the entire nation before being fully lifted on May 25.
The emergency period saw business closures and stay-at-home-requests almost led economic activity to a halt, economists here said, with private consumption, which accounts for more than half of Japan's economy, dropping 8.2 percent from the previous quarter, as households tightened their purse strings while largely staying at home.
However, despite what may seem like an insurmountable challenge for the government to dig its way out of, not only the pandemic-induced economic doldrums, but also from an already recession and inflation-hit economy, Japan's economic revitalization minister Yasutoshi Nishimura sounded an optimistic, yet realistic tone looking ahead.
"The severe outcome was due to the state of emergency. We'll get the economy back on a growth track from rock bottom in April and May, led by domestic demand," Nishimura told a press briefing on the matter Monday, adding that the economy was "artificially stopped so to speak."
"These are tough numbers but they bottomed out in April and May, and we would like to put all our efforts into returning to a growth trajectory," Nishimura added.
Nishimura's stance was echoed by Takeshi Minami, chief economist at Norinchukin Research Institute who explained that firstly, from a broad perspective, Japan's economy in the recording period had been hamstrung by its two main drivers: consumption and exports, but the story does not stop there.
"The big decline can be explained by the decrease in consumption and exports, said Minami, but, "I expect growth to turn positive in the July-September quarter. But globally, the rebound is sluggish everywhere except for China."
Median economists' expectations are for the Japanese economy to stage a rebound in the next quarter, as Minami articulated, albeit a gradual one, based on a comeback that is intertwined with the recovery of other major economies around the world.
Japan has already seen demand increase from its biggest trading partner China, as the world's second-largest economy has swiftly and effectively dealt with the virus' outbreak and the odd flareup thereafter, with many of its vital operations now functioning at pre-pandemic levels.
And while Japan's exports of goods and services took a major hit in the recording period, slumping 18.5 percent as global demand for Japanese automobiles and related parts waned, and spending by foreign tourists also declining considerably as Japan tightened its borders, the figures were not all doom-and-gloom.
Imports in the recording period fell just 0.5 percent, owing to those from China remaining robust, economists have pointed out, with expectations that China's recovery is a harbinger of a broader global recovery from the pandemic.
On this point, however, Japan also needs other major economies to follow suit so life can once again be breathed into its flagging export and consumer-reliant economy.
A breakthrough in international efforts to develop a working vaccine against the COVID-19 would also be a welcome boost to quicken and solidify Japan's widely expected rebound, economists noted.
Experts here have said that the road to recovery for Japan will most likely be a long, methodical one, possibly taking as long as two years before the economy is back to pre-pandemic levels.
But expectations remain high for the economy to bounce back, with economists' forecasts for a more than 10 percent rebound in the July-September period from the current quarter.
"The top priority for the Abe government should be to bring the coronavirus outbreak under control so that normal economic activity can be resumed," Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, was quoted as saying.
Kodama said "helping rebuild industries hit hardest by the pandemic, such as restaurants and tourism, is an urgent task, so is accelerating the digitization of the economy, an area where the pandemic has shown Japan is falling short."
Kodama also proffered that the government may need to rethink its long-term fiscal sustainability plan.
"A long-term fiscal sustainability plan also needs to be formulated after a sharp increase in government deficits," Kodama suggested.
While additional stimulus measures are a must for the government to further help kick-start small and medium-sized sectors that have been particularly hard-hit by the pandemic, the central bank's proactive stance regarding its ultra-loose monetary policy and massive asset purchasing program has helped underpin the economy and support lending, and ensured the stock market hasn't seen a colossal selloff.
In terms of the market's reaction to the record economic contraction Monday, the benchmark Nikkei stock index lost just 0.83 percent from Friday, while the Topix was down just 0.84 percent.
This was a clear sign market players had largely factored in the record economic slump, knowing that things would improve in the next quarter.
Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management Co. said, "The stock market could take some time to catch its breath, because it has already priced in a lot of positive factors."
"I don't expect a big sell off. Countries have been able to balance containing the virus without restricting economic activity," Kichikawa maintained.
As for Japan, this balancing act going forward will involve the phased reopening of Japan's borders, economists have said, pointing to steps already taken by the government to resume flights between countries that have largely dealt with the pandemic.
While entry requirements to Japan and vice versa, thus far, from overseas have been largely restricted to business people, the government is eyeing further opening up its borders to accommodate regular travelers and revive the nation's ailing, yet lucrative tourism industry.
Up until the virus outbreak, Japan's tourism sector had been a steadfast earner for the government's coffers owing to the increased purchasing power of Japan's closest neighbors, as compared to those from the United States and Europe, as official data has consistently showed.
And as global economies begin to pick up the pieces of their own pandemic-linked fallout, Japan will see demand for its goods and services return in stages, which will have a positive effect on capital expenditure and encourage households to slowly start spending again on the luxuries they've gone without since the outbreak, including shopping, dining out and taking overseas vacations.
This however, presupposes the Japanese government will continue its all-out efforts to curb the spread of the COVID-19, as cases have seen a resurgence in the capital and other major urban prefectures since the state of emergency was fully lifted at the end of May.
(ASIA PACIFIC DAILY)
