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Due to the slow introduction of vaccines and new COVID-19 infections that have hit consumer spending, Japan’s economy contracted more than expected in the first quarter, which has increased concerns that the country may fall into a double-dip recession.
Data released by the government on Tuesday showed that the annualized rate of economic growth fell 5.1% in the first quarter, which was higher than the expected contraction rate of 4.6% and increased by 11.6% in the previous quarter.
The decline was mainly due to a 1.4% drop in private consumption, as emergency containment in response to the pandemic kept residents at home and reduced spending on clothing and dining out.
Capital expenditures have also unexpectedly dropped, and export growth has slowed sharply, which indicates that the world’s third-largest economy is working hard to pull it out of the downturn.
Some analysts said that the poor reading situation and the expansion of the emergency containment state exacerbated the risk that Japan may contract again in the current quarter and slide into a recession, which is defined as two consecutive quarters of recession.
Yoyamasa Maruyama, chief market economist at SMBC Nikko Securities, said: “The global chip shortage has caused a significant slowdown in exports and also dragged down capital expenditure.” “Consumption may stagnate, increasing the risk of economic contraction this quarter.”
As Prime Minister Yoshihide Suyoshi’s government tried to use predetermined methods to limit its damage to the economy in order to speed up the rollout of vaccines and control virus cases, it added three more states in the latest state of emergency last week, bringing approximately Half of the economy is in an economic state. The restrictions are stricter than those in winter. Nowadays, restaurants and bars in many large cities are required to not provide alcohol in addition to opening early.
Failure to end the restrictions at the end of May as planned may also increase people’s concerns about the holding of the Tokyo Olympics. The cancellation of the Olympics will deal another blow to the economy and increase the possibility of entrusting Suga to the long-serving premier prime minister. The country is scheduled to hold a national election in early autumn.
Surprise drop
The larger-than-expected contraction also reflects an unexpected drop of 1.4% in capital expenditures due to the company’s reduced expenditure on equipment used in machinery and automobiles, which is confused with the market’s expected increase of 1.1%.
Although the rebound in global demand for automobiles and electronic products increased exports by 2.3%, the growth rate has fallen sharply from 11.7% in the previous quarter. This is a worrying sign that the economy is still supported by weak domestic demand.
The data shows that domestic demand has reduced GDP by 1.1 percentage points, while net exports have fallen by 0.2 percentage points.
Takeshi Minami, chief economist of the Norinchukin Institute, said: “The weak domestic demand shows that the adverse effects of the coronavirus have not been eliminated at all.”
Data shows that despite substantial monetary and fiscal stimulus measures, the Japanese economy fell by a record 4.6% in the fiscal year ending in March.
Insufficient fiscal expenditure
ING analysts wrote in a research report: “There is no doubt that financial funds will be invested on this issue to mitigate the blow. Although many things have been done, it is difficult to see that this impact exceeds the marginal effect.” The economy shrank again this quarter. “Moreover, the Bank of Japan currently does not seem to have a new policy stimulus concept. Therefore, apart from expanding existing measures, we do not expect them to bring any new changes.”
Economy Minister Yoshitoshi Nishimura blamed the weak GDP on containment measures to contain the pandemic, adding that the economy still has “potential for recovery.”
“Indeed, service spending from April to June may still be under pressure. But exports and output will benefit from the recovery of overseas growth.” He told reporters.
Due to the initial blow of the pandemic, the Japanese economy experienced two consecutive quarters of growth after experiencing its worst post-war recession from April to June last year.
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