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Domestic demand, exports pull Japan out of recession

(AFP) A forecast beating expansion in the third quarter helped Japan’s economy exit recession, a harbinger of sustained recovery in the world’s third biggest economy.

But despite the 5.4% surge in expansion, which beat the estimate of 4.4%, it failed to erase entirely the 8.2% quarterly contraction in Q2, revised down from -7.9%, which came on the heels of three consecutive quarters of quarterly declines since the consumption tax hike last October. 

“In spite of relatively moderate waves of Covid-19 at home, the level of GDP remains well below the pre-Covid level. Some of this has to do with unfortunate timing, as the pandemic followed the consumption tax hike last October, resulting in three consecutive quarters of negative growth through 2Q20,” James Lee, HSBC’s Chief Economist for Japan and Korea, said.

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The second quarter shrinkage was the worst figure for Japan since comparable data became available in 1980, exceeding even the brutal impact of the 2008 global financial crisis.

The Q3 growth will be welcome news for Japan’s government, which has avoided the tough lockdown measures seen in some other countries as it tries to balance preventing the spread of coronavirus with protecting the economy.

Economists expect the improvements to continue, although at a slower pace with pent-up demand decelerating and subsequent waves of Covid-19 hitting overseas markets.

“We expect GDP to rebound a further 1.2% q/q this quarter and to reach pre-virus levels – although not pre-sales tax hike levels – in the second half of next year. While the third wave of coronavirus that is now a reality is a downside risk, our current assumption is that it will be contained as the second wave was, with minimal restrictions imposed on economic activity,” Tom Learmouth, Japan Economist at Capital Economics, said.

He said the effects of the stimulus efforts were clear in the latest figures, with a 2.2% quarter-on-quarter rise in public spending reflecting the support measures announced in April and May and boosting GDP growth by 0.5% points.

Fresh stimulus package

Japan’s Prime Minister Yoshihide Suga instructed his ministers last week to draw up a fresh economic stimulus package to help the economy weather the pandemic. This move follows the massive government spending unveiled earlier in the year, including sending approximately $900 in stimulus funds to every adult and child in the country.

Japan’s economy already grappling with stagnation and a hit from a consumption tax hike, has seen a smaller coronavirus outbreak compared to some of the worst-hit countries, with infections approaching 120,000 and deaths at slightly under 2,000.

But Prime Minister Suga last week issued a warning over a recent rise in infections, though he said the government’s campaign to promote domestic tourism would not be halted for now.

Japan imposed a nationwide state of emergency in April as cases spiked, but restrictions were significantly looser than in many countries, with no enforcement mechanism to shutter businesses or keep people at home. 

The emergency was lifted in June, and the government has been reluctant to reintroduce curbs.

“While the third wave of coronavirus that is now a reality is a downside risk, our current assumption is that it will be contained as the second wave was, with minimal restrictions imposed on economic activity,” said Learmouth.

In October, the Bank of Japan lowered its economic growth and inflation forecasts for this fiscal year, but its governor said officials were ready to unveil fresh support measures if needed.

For the year to March 2021, the BoJ expects the economy to shrink 5.5%, against a 4.7% contraction in the July estimate.


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Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai

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