Snapshot

Insights

Japan joins recession ranks

In the past few weeks, GDP estimates have shown economies falling like dominoes. Today’s release, showing a 0.9% contraction in its economy, makes Japan the next domino to fall.

This data confirms a recession in the country after a terrible final quarter of last year, when there was a self-induced contraction of 1.9% quarter-on-quarter, driven by the increase in Value-Added-Tax.

This quarter’s fall in growth continued to be driven mainly by the domestic economy, which contributed 0.7pp of the fall, although 0.2pp was the hit from trade.

The extremely poor economic outlook across economies all over the world means that growth estimates are now best looked at in relation to other economies. From this perspective, the fall in growth was less than Asian, US and European counterparts but this is primarily because the Japanese lockdown was yet to take effect.

The weakness does, however, still reflect the virus taking its toll on economic activity. As the virus hit Japan, schools were closed in March and large gatherings were also prohibited. Meanwhile, shutdowns in China (and later, in  US and Europe) hit exports and supply chains. Meanwhile, household consumption, which was already falling due to the rise in VAT, declined further. Given we only had monthly consumption data published to February, this suggests a large decline in March, consistent with a blow to consumer confidence we saw in that month.

Looking back, this quarter will likely be characterised as the start of the Covid-19 recession, coinciding with a VAT-hike-hangover. Looking ahead, we expect to see a large single digit decline in GDP for the second quarter, given the lockdown that occurred through April and May.

Again, we expect Japan to  fare better than developed market counterparts – where we mostly expect double digit declines – reflecting a lower scale of shutdown and strong government support.

Markets continue to look through miserable GDP prints, looking for continued signs of an exit of lockdown and resulting economic recovery.

In this respect, markets should be digesting some positive news for Japan. Last week, lockdown was eased earlier than expected for about half of the economy. This bodes well for a recovery in the third quarter, as households and businesses resume activity.

Despite the help of fiscal stimulus, we expect the recovery to be gradual as lockdown eases slowly and consumers and firms remain cautious.