Japan’s Q4 GDP drop may be bigger than initial estimates
October’s sales tax hike and coronavirus outbreak fuel fears of recession in the current quarter
Japan’s economy may have suffered a deeper contraction than initially thought in the December quarter on an expected downgrade to business spending figures, as the coronavirus outbreak fuelled fears of recession in the current quarter.
Any downward revision in final gross domestic product (GDP) due on Monday could dash hopes for a domestic-led recovery in the export-reliant economy, with the October’s sales tax hike hurting private consumption.
The expected downgrade and the spectre of a technical recession — defined as two straight quarters of contraction — could pile pressure on the government and the central bank to deploy further stimulus even as policy options dwindle.
Revised GDP data probably showed Japan’s economy - the world’s third largest - contracted at an annualised rate of 6.6%, versus a preliminary estimate of 6.3%, due to a downward revision to capital spending, the poll of 16 economists showed.
That would translate into a quarterly contraction of 1.7%, worse than a 1.6% decline seen in the preliminary data issued last month, according to the poll.
“The impact from the coronavirus outbreak curbs service sector consumption and weighs on inbound tourism and exports of goods,” said Kentaro Arita, an economist at Mizuho Research Institute.
“If it’s prolonged, that could trigger an increase in unemployment and bankruptcies, which will prolong a recession,” he added.
GDP’S capital spending constituent likely dropped 4.3% quarter-on-quarter in the October-December period, the poll showed. That compared with the preliminary estimate of a 3.7% drop.
business spending has been a bright spot in Japan’s otherwise fragile economy and led by investment in technology to cope with labour shortages, but analysts see the momentum waning due to the coronavirus’ damaging hit to Chinese and global economies.
“We’re expecting a 0.5% quarter-on-quarter contraction this quarter so the economy is probably now in recession,” said Marcel Thieliant, Senior Japan Economist at Capital Economics.
“(BOJ) Governor Kuroda will likely want to play his part in a global monetary policy response by the major developed world central banks.”
Thieliant expects the BOJ to cut its short-term policy rate to -0.2% at its March 18-19 meeting and for the government to adopt a supplementary budget as big as 5 trillion yen ($47.25 billion).
Separate data due on Wednesday will likely show the corporate goods price index grew 1.0% year-on-year in February, the Reuters poll found. On the month, the index probably fell 0.3% in February.
Japanese homes extended their frugal spell for a fourth straight month in January as an earlier sales tax hike and a warmer winter kept wallets shut, adding to headaches for firms as they struggle with the growing hit to business from the coronavirus.
The world’s third-largest economy is trying to cushion the blow to output and exports from the global health crisis, which threatens to tip it into its first recession in nearly five years.
Household spending fell 3.9% in January from a year earlier, government data showed on Friday, largely in line with a median forecast for a 4.0% decline.
That marked the longest stretch of contraction since a five-month run to June 2018, a government official said.
The gloomy data suggests households were tightening their purse strings even before the coronavirus forced many retail outlets to close their doors in February and March as shoppers stayed at home. “The reduction in going outside is likely to have a big impact, especially on spending related to services,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
The coronavirus crisis now threatens to spoil chances of the domestic-led recovery many policymakers had hoped for after the economy shrank at its fastest pace in nearly six years in the past quarter.
In central Tokyo’s exclusive Aoyama district, some of the fashion and hairdressing shops are already seeing strains from the virus outbreak.
Clothing store manager Sayaka Nishi said her shop selling cotton dresses hand-woven in India is seeing noticeably fewer patrons, while foreign shoppers have fallen by as much as 90%.
“Customers aren’t buying clothes that they would want to wear right now. My worry is about unsold items, such as spring coats,” she said.
Florist Toshiyuki Fukano has seen sales drop by as much as a fifth from before the outbreak, partly due to order cancellations for concerts and weddings.
“The street has gotten really quiet,” he said. Household consumption had already been under pressure in recent months, after the government in October pushed ahead with the country’s first sales tax rise since April 2014.