Japan’s economy shrank by a record 7.8 per cent in the second quarter of 2020 as it outperformed the US and Europe but lagged behind neighbouring South Korea and Taiwan in its response to coronavirus.
The figure, which equates to a 27.8 per cent decline at an annualised pace, exposes the consequences of a nationwide state of emergency over Covid-19 in April and May, which put much of the economy into a voluntary lockdown.
Japan’s performance relative to other advanced countries highlights how the effectiveness of a country’s coronavirus response affects the economy, with Japan forced to close schools but able to avoid the strict lockdowns used in Europe.
Masamichi Adachi, an economist at UBS in Tokyo, said the second quarter figures were “devastating but already known from the monthly data”. Analysts expect a big rebound across the globe in the third quarter as countries reopen.
Mr Adachi said the crucial question was what would happen with Covid-19 this autumn. “The real challenge is the coming months — Q4 not Q3 — and what policymakers are going to do as they go into next year,” he said.
It was the third consecutive quarter of decline in Japan’s gross domestic product. The economy began to contract after a rise in consumption tax from 8 to 10 per cent last autumn.
The second-quarter decline in Japan’s GDP was comparable to a 9.5 per cent fall in the US during the same period, or a 10.1 per cent drop in Germany. It was less severe than the drop of more than 20 per cent in the UK, which was late to act but then imposed a severe lockdown.
However, Japan did worse than neighbouring South Korea, where output fell 3.3 per cent in the second quarter, or Taiwan, where GDP was down just 0.7 per cent. Both countries managed to control the virus without extensive lockdowns, allowing their economies to function more normally.
A fall in private consumption accounted for 4.8 percentage points of the decline in Japan’s GDP as the state of emergency reduced spending in shops and restaurants, while a large drop in exports accounted for the remaining 3 percentage points.
Business investment was surprisingly strong, however, and contributed just 0.2 percentage points to the overall decline in output. That figure is often revised in updates to the data, but if confirmed, it would suggest resilience in the underlying economy and potential for a strong rebound.
Japan is suffering an increase in infections, with new cases running at more than 1,000 a day, but it has not imposed a fresh state of emergency. The government has passed several fiscal stimulus packages while the Bank of Japan has increased its equity purchases and offered $1tn in cheap loans to support the economy.