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Japanese economy contracting by its worst pace ever putting huge pressure on next Japan leader

8 Sep 2020 11:39 AM

Figures released by the Japanese Cabinet Office showed a decrease in gross domestic product of 7.9% in the second quarter of 2020 compared to the previous quarter, which represents a decline of 28.1% on yearly basis and is the largest post-war decline, as the GDP has exceeded its decline 17.8% during the first quarter of 2009 due to the global financial crisis, and this decrease is the third in a row, and it comes as a result of the suspension of activity during the closure period to contain the Covid-19 virus. This underlines the arduous task of the next prime minister after Shinzo Abe's resignation.

The new prime minister will be elected in the ruling party’s leadership race on September 14th. Chief Cabinet Secretary Yoshihide Suga is the front runner, and he has indicated his willingness to increase spending if elected. The government recently unveiled a $ 2 trillion stimulus package to be added to the BoJ's enhanced quantitative easing program.

Personal consumption (which accounts for nearly 60% of Japan's GDP) during the second quarter decreased by 7.9%, as social distancing during the lockdown dealt a heavy blow to consumption in the services sector, including restaurants and travel-related companies, with reduced spending on travel and dining. Food and shopping are overwhelmingly amidst stay-at-home buyers. Foreign demand for Japanese goods also decreased amid worldwide closures due to the epidemic.

Even before the virus spread, the Japanese economy was affected by the trade dispute between the United States and China in addition to the consumption tax hike last year, and the damage to the economy increased with the impact of the epidemic after the declaration of the state of emergency last April.

The decline in consumer spending was also the steepest ever, as it was approved by the 4.8% decline achieved during the second quarter of 2014, following the increase in consumption tax from 5% to 8% in that year. Also, exports of goods and services, including spending by foreign tourists, fell by 18.5%, the biggest decline since the first quarter of 2009, and global demand for cars and auto parts dwindled during the lockdown and the number of visitors decreased due to tightening international travel restrictions.

Private capital spending, another major pillar of domestic demand, also decreased by 1.5%, while private residential investment decreased by 0.2%, amid uncertainty about business expectations. Also, government spending fell to its lowest level in 4 years.

During the last quarter of 2019, the Japanese economy contracted by 7% on an annual basis, affected by the hike in the consumption tax from 8% to 10% in October and the devastating typhoon, and with the beginning of 2020 it shrank by 2.5% as the virus began to spread, and Japan had witnessed a contraction for three consecutive quarters in the period from the last quarter of 2010 until the second quarter of 2011 affected by the weakness of private consumption and the massive earthquake and tsunami that devastated the north-east of the country in March 2011.

The Japanese economy has shown some signs of recovery after three consecutive quarters of contraction, with factory production rising in July at its fastest pace ever thanks to a pickup in auto demand. Nevertheless, household and wage spending data indicated that any recovery would likely be modest, as household spending fell 7.6% more than expected in July, while real wages fell for the fifth consecutive month, indicating further pressure on consumer spending.

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