Japan's economy slumps more than expected as Covid-19 hits consumption

TOKYO, May 18 ― Japan's economy shrank more than expected in the first quarter as the slow vaccine rollout and a resurgence in Covid-19 infections hit consumption, reinforcing expectations the country will lag major trading partners in emerging from the pandemic.

Extended state of emergency curbs are likely to keep any recovery in the current quarter modest, analysts say, adding to challenges for policymakers seeking to pull Japan out of the doldrums.

“With the medical situation still worsening and the vaccine rollout too slow, it will take until the end of the year for output to return to pre-virus levels,” said Marcel Thieliant, senior Japan economist at Capital Economics.

The world's third-largest economy shrank an annualised 5.1 per cent in the first quarter, more than a median market forecast for a 4.6 per cent contraction and following an 11.6 per cent jump in the previous quarter, government data showed today.

The decline was mainly due to a 1.4 per cent drop in private consumption as state of emergency curbs to combat the pandemic hit spending for clothing and dine-outs, the data showed.

But the bigger-than-expected contraction also reflected a surprise 1.4 per cent drop in capital expenditure, which confounded market expectations for a 1.1 per cent increase as companies scaled back spending on equipment for machinery and cars.

While exports grew 2.3 per cent thanks to a rebound in global demand for cars and electronics, the pace of increase slowed sharply from the previous quarter's 11.7 per cent gain in a worrying sign for an economy still reeling from weak domestic demand.

Domestic demand knocked 1.1 per cent point off gross domestic product (GDP), while net exports shaved off 0.2 point, the data showed.

“That domestic demand is weak shows the adverse effects from the coronavirus haven't been shaken off at all,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“There's no service and inbound spending currently, so it can't be helped that there will be a reliance on foreign demand.”

Japan's economy expanded for two straight quarters after its worst postwar slump in April-June last year due to the initial hit from the pandemic.

The export-driven recovery came to a standstill as consumption took a hit from a spike in new virus strains that forced the government to re-impose curbs just 10 weeks before the Tokyo Olympic Games. ― Reuters