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The Japanese economy has shrunk more than expected due to the virus in Business and Economic News

The Japanese economy has shrunk more than expected in the first quarter as the slow spread of vaccines and new COVID-19 infections have impacted consumer spending, fueling fears of a double-digit recession.

The economy fell 5.1 percent year-on-year in the first quarter, more than the projected 4.6 percent contraction and a 11.6% jump in the previous quarter, government data showed on Tuesday.

The decline was mainly due to a 1.4 per cent drop in private consumption, as the state of emergency kept residents at home in response to the pandemic and led to spending on clothes and canteens.

Capital spending also fell sharply and export growth slowed sharply, a sign that the world’s third-largest economy is struggling to get drivers out of trouble.

The sad readings and the widespread spread of emergencies have increased Japan’s risk of shrinking again in the current quarter and a return to a recession, some analysts say the recession is defined as a straight two-quarter.

“The global chip shortage has led to a significant slowdown in exports, also dragging down capital expenditures,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “Consumption is likely to remain stagnant and increase the risk of an economic contraction in the current quarter.”

As Prime Minister Yoshihide Suga’s administration struggles to accelerate the spread of vaccines and have virus cases, using a pre-determined approach that seeks to limit damage to the economy, it added three other prefectures last week to the state of emergency, putting about half the economy under somewhat tighter cuts than winter. Restaurants and bars in many large cities are urging them to stop serving alcohol not only because it closes early.

The non-completion of the restrictions by the end of May, as planned, could also increase concerns about the organization of the Tokyo Olympics. The cancellation of the games would deal another blow to the economy and increase the likelihood that Suga will lead the long list of short-lived prime ministers. The country will hold national elections in early fall.

Surprise drop

The larger-than-expected contraction reflected a 1.4 per cent drop in capital spending as companies cut spending on machinery and car equipment, confusing expectations of 1.1 per cent growth in the market.

Exports, which rose 2.3 percent in the rebound in global demand for cars and electronics, slowed the pace of growth significantly from 11.7 percent in the previous quarter, a worrying sign of the economy still growing due to weak domestic demand.

Domestic demand was down 1.1 percentage points on gross domestic product (GDP) and net exports were down 0.2 points, data showed.

“The weak domestic demand shows that the harmful effects of coronavirus have not been shaken at all,” said Takeshi Minami Norinchukin, chief economist at the Research Institute.

The data showed that despite strong monetary and fiscal boosts, the Japanese economy recorded a record 4.6% in the year ended March.

Fiscal spending is not enough

“Certainly fiscal money will be thrown at this issue to soften the blow, even after doing so, it’s hard to see that as more than a pretty marginal impact,” ING analysts wrote in a research note, and expect the economy to shrink again in the current quarter. “It seems that the Bank of Japan is now out of new ideas to stimulate policy, so we don’t anticipate anything new other than expanding existing measures.”

Economy Minister Yasutoshi Nishimura mainly blamed the weak GDP read on the brink of tackling the pandemic, adding that it still had “potential” for economic recovery.

“It is true that service spending will remain under pressure in April and June. But exports and production will be able to stimulate foreign growth,” he told reporters.

The Japanese economy expanded for two consecutive quarters after the worst post-war trend occurred in April-June last year as a result of the initial success of the pandemic.




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