Japan braces for worst post-war economic slump

TOKYO: Japan’s economy braced for its worst postwar slump even as first-quarter gross domestic product (GDP) contracted less than initially thought, as the coronavirus crisis slams the brakes on global growth and raises pressure on Tokyo to cushion the blow to business and consumers.

Banks are doing their bit to help, as lending rose at the fastest annual pace on record in May, a sign companies were tapping loans to meet immediate funding needs to survive slumping sales from the pandemic.

While United States and European policymakers have shifted from crisis-response to efforts to prop up growth, Japan is struggling to do so, as it continues to focus on preventing a second wave of infections.

In an interview with Reuters, Economy Minister Yasutoshi Nishimura said Japan should primarily focus on back-stopping faltering businesses, suggesting the central bank should avoid pushing interest rates deeper into negative territory.

“We’re not at a stage yet where we want to stimulate consumption and encourage people to travel a lot. Efforts to stimulate consumption should wait a bit more,” he said, when asked whether the Bank of Japan (BOJ) should take steps to boost demand, such as deepening negative interest rates.

The world’s third-largest economy shrank an annualised 2.2% in January-march, revised data showed yesterday, less than the 3.4% contraction indicated in a preliminary reading, as capital expenditure fared better than expected. Analysts had tipped a 2.1% contraction.

But few analysts were hopeful about the outlook for the year since capital spending data used to calculate the revised figures lacked enough response – most struggling firms appear not to have participated in the survey – and will be updated in July.

On the whole, yesterday’s revised GDP estimate confirmed Japan had slipped into recession – defined as two straight quarters of contraction – for the first time in 4½ years, even before lockdown steps to contain the virus were put in place in April.

“The upward revision to first-quarter GDP displayed in the revised estimate is cold comfort, given that output is plummeting this quarter,” said Tom Learmouth, economist at Capital Economics.

Senior economist at Oxford Economics, Stefan Angrick, concurred: “With the bulk of the impact from the coronavirus pandemic to be felt in the second quarter, the outlook for 2020 thus remains extremely challenging.”

A series of recent data including exports, factory output and jobs figures suggested Japan is facing its worst postwar slump in the current quarter, a period when Prime Minister Shinzo Abe announced a state of emergency requesting citizens to stay home and businesses to close.

Although the emergency was lifted in late May, the economy is expected to recover only moderately in the coming months, underlining the pandemic’s sweeping impact.

A Cabinet Office survey on Monday showed Japan’s services sector sentiment improved last month, but the outbreak continued to weigh on firms’ business confidence.

The surge in bank lending, shown in BOJ data also released on the day, suggested companies were being forced to hoard cash just to stay afloat - and that the worst is yet to come.

The head of Japan’s ANA Holdings Inc said the airline will cut unprofitable international routes to cope with the hit from the pandemic, according to the Asahi newspaper.

Tokyo policymakers are moving fast to stop the bleeding. Japan’s parliament will begin deliberating a second supplementary budget to fund part of a fresh US$1.1 trillion stimulus package that includes loan schemes and a framework to inject capital into struggling firms. The BOJ eased monetary policy for two straight months in April, focusing on steps to ease corporate funding strains.

The central bank will scrutinise at its rate review next week whether additional steps are needed. But it is seen maintaining its projection of a moderate economic recovery in the latter half of the year, sources said.