Japan’s economy sinks deeper into worst postwar contraction, intensifies challenge for new leader

• Revised Q2 GDP falls annualised 28.1% vs prelim -27.8%
• Fall mainly blamed on capex, which falls 4.7% vs prelim -1.5%
• Household spending, wages sink in sign of COVID-19 pain
• Data suggest rebound in Japan’s economy likely modest

TOKYO: Japan’s economy sank deeper into its worst postwar contraction in the second quarter as the coronavirus jolted businesses more than initially thought, underscoring the daunting task the new prime minister faces in averting a steeper recession.

Other data put that challenge in perspective, with household spending and wages falling in July as the broadening impact of the pandemic kept consumption frail even after lock-down measures were lifted in May.

The world’s third-largest economy shrank an annualised 28.1% in April-June, more than a preliminary reading of a 27.8% contraction, revised gross domestic product (GDP) data showed on Tuesday, suffering its worst postwar contraction.

The record drop roughly matched a median market forecast of a 28.6% contraction in a Reuters poll.

The main culprit behind the revision was a 4.7% drop in capital expenditure, much biggest than a preliminary 1.5% fall, suggesting the COVID-19 pandemic was hitting broader sectors of the economy.

“We can’t expect capital expenditure to strengthen much ahead. Companies won’t boost spending when the outlook is so uncertain,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

The data will put the new prime minister, to be elected in a ruling party leadership race on Sept. 14, under pressure to take bolder economic support measures.

Chief Cabinet Secretary Yashihide Suga, a frontrunner to become next premier, has signalled his readiness to boost spending if he were to lead the country.

Japan recently saw a renewed rise in infections but has been spared the kind of big casualties seen in western countries. Total infections stood at 72,321 as of Monday, with 1,380 deaths versus a global tally of over 27 million cases and more than 888,000 deaths.

Japan’s economy has shown some signs of life after slipping into three straight quarters of contraction, with factory output rising in July at the fastest pace on record due to a rebound in demand for automobiles.

In a sign any recovery will be modest, however, separate data released on Tuesday showed household spending fell a bigger-than-expected 7.6% in July from a year earlier.

Real wages declined for the fifth straight month in July, pointing to possible deeper strains ahead for consumer spending.

BROAD IMPACT

The health crisis has ravaged a broad array of sectors, with firms such as automaker Honda Motor Co forecasting a 68% decrease in annual operating profit and cosmetics firm Shiseido Co expecting a net loss for the full year as the pandemic hit cosmetics sales.

The fresh batch of data will be among factors the Bank of Japan will scrutinise at its rate review next week, when it is widely expected to keep monetary settings unchanged.

Analysts polled by Reuters in August said they expect the economy to shrink 5.6% in the current fiscal year to next March, and grow just 3.3% in the following year, compared with the BOJ’s forecast released in July for a 4.7% contraction and 3.3% growth in the same periods.

The central bank eased monetary policy twice this year including by setting up a lending facility to pump money to cash-strapped small firms, complementing two big government spending packages.

Many analysts expect the BOJ hold off on ramping up stimulus for now as steps to spur demand could get people moving more freely into shops and risk spreading the virus.

“Even though restrictions to economic activity have been relaxed, some of them will remain under the new lifestyle forced upon by the pandemic,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“It will probably take a long time for the economy to normalise and return to levels before the pandemic.”

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