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Economy

Coronavirus threatens Japan rebound as GDP falls most in 5 years

Economy contracts 6.3% in final quarter of last year on sales-tax hike

 People walk in Tokyo's Ginza district on Feb. 3. A sign in front of the store shows that foreign visitors need not pay the 10% sale tax. (Photo by Takaki Kashiwabara)

TOKYO -- A sales-tax hike and destructive typhoon plunged Japan's economy into its biggest contraction in five years in the final quarter of 2019. Now, the novel coronavirus outbreak is threatening a return to growth.

Gross domestic product for the world's third-biggest economy shrank an annualized 6.3% from a quarter earlier, according to data released by the Cabinet Office on Monday.

Consumer spending fell 11.1% after the national sales tax was raised in October to 10% from 8%. During the same month, Typhoon Hagibis ravaged a large swathe of the country.

Capital spending declined 14.1% and exports slipped 0.4% due to the fallout from the U.S.-China trade war.

But uncertainty over the impact of the virus outbreak has cast a shadow over the economy, especially with China's slowdown expected to worsen.

"The sharp drop in output after October's sales tax hike supports our view that Japan's economy will shrink this year," Capital Economics wrote in a note after the data was published. "But after today's release, our forecast of a 0.2% drop in GDP in 2020 looks optimistic."

Other economists warned the longer the virus continues to infect people, the more the risks to Japan's economy will grow.

"While real GDP could rebound somewhat in January-March from the sharp negative growth in October-December, growth is likely to be sluggish, with the negative impact of the novel coronavirus having a negating effect," said Naohiko Baba, Goldman Sachs' chief Japan economist.

"A larger risk is domestic consumption, particularly the negative ripple effect on nonessential, non-urgent discretionary spending, such as services," Baba added. "We see a need to carefully monitor the situation, since the negative impact could worsen if the number of domestic cases increases and the problem becomes prolonged."

The Japanese government was a little more upbeat.

"We can expect a gradual improvement," Yasutoshi Nishimura, minister for economic and fiscal policy, said after the data was published, adding that the impact of the tax hike was not as big as the previous increase in 2014.

"We need to pay sufficient attention to the impact of the novel coronavirus on the economy, both in and outside of Japan," Nishimura said.

He added that the government would take steps such as using reserve funds to counter the negative effects of declining inbound tourists, supply chain disruption, the Chinese slowdown, and uncertainties in financial and capital markets.

Japan has confirmed 59 cases of the virus -- a count that does not include the 355 infected passengers and crew on the Diamond Princess cruise ship docked at Yokohama.

Telecoms giant NTT is telling it roughly 200,000 employees in Japan to avoid rush-hour commutes or work from home in a bid to protect staff from the virus. The Imperial Household Agency scrapped celebrations for Emperor Naruhito's birthday on Feb. 23, and organizers are finalizing plans to bar non-elite runners from taking part in the Tokyo Marathon on March 1.

The new virus is also hitting forecasts for other economies in Asia.

Thailand on Monday projected its economy would grow only 1.5% this year if the epidemic lasts until June -- down from 2.4% in 2019. Singapore's government forecast the city-state would continue its slow growth in 2020, setting an expected range of -0.5% to 1.5%.

The Japan data helped push the Nikkei Stock Average down as much as 351 yen -- more than 1% -- at one point on Monday morning.

The Japanese government in December approved 13.2 trillion yen ($120 billion) in stimulus spending to cushion the impact of the tax hike. Prime Minister Shinzo Abe's government also plans to implement an extra budget to counter the effects of the virus outbreak.

The fourth-quarter contraction was the first in five quarters and the biggest since a 7.4% decline in the second quarter of 2014 -- the last time Japan raised the sales tax.

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