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Economy

Japan GDP slump appears to hit bottom but consumption still weak

Worst also likely over for Taiwan and South Korea boosted by tech diversity

Japan's economy shrank 7.8% in April-June from the preceding quarter, as consumption and exports bore the brunt of COVID-19, the government said. A woman wearing a protective face mask walks past a sign of sale in Tokyo.    © Reuters

TOKYO -- Japan became the latest Asian economy to report a big economic contraction in the second quarter as they try to put the worst behind them and chart a course of recovery.

Besides Asia's second-biggest economy, Taiwan and South Korea also suffered setbacks in the three months from April to June as demand from the U.S. and Europe plummeted amid the coronavirus-sparked lockdowns in April and May.

But the good news for all of them is that the period appeared to mark the bottom of their downturns. The question now is how quickly they will recover.

"The picture for Japan is, directionally, we are heading in the right direction. The worst is clearly over," said Izumi Devalier, head of Japan economics at Merrill Lynch Japan Securities. But the recovery "is going to be a slow slog."

Of the three economies, Japan was slammed the hardest, due in part to its dependence on auto exports to the U.S. and Europe. South Korea and Taiwan, on the other hand, were helped by their greater exposure to semiconductors and other technology products, demand for which increased as more people worked from home and 5G investment in China accelerated.

The impact of private consumption was another difference. In Taiwan, the decline in consumer spending was much more modest than in Japan. In South Korea, meanwhile, it actually increased from the January-March period.

"Asian countries are in a similar boat, but the dispersion in performance partly reflects the success of the public health response and the private sector's confidence in the public health response," Merrill Lynch's Devalier added. "In that regard, Japan may be losing out."

Japan's economy shrank 7.8% in April-June from the preceding quarter, or at an annualized pace of 27.8%, the Cabinet Office said Monday, as private consumption and exports bore the brunt of the coronavirus pandemic.

The third consecutive decline on the quarter was also Japan's biggest under gross domestic product data going back to 1955, exceeding the country's 4.8% drop in January-March 2009 in the wake of the Lehman crisis.

Economists expected a decline of 7.3%, or an annualized fall of 26.3%. A big drop was anticipated following a state of emergency in April and May that kept many retail outlets closed, while exports were slammed by shutdowns in the U.S. and Europe.

The April-June plunge wiped out much of the growth achieved under Abenomics, the signature economic program of Prime Minister Shinzo Abe, in the past nearly eight years under his leadership.

South Korea's economy shrank 3.3% in the second quarter. The country, a top producer of memory chips, benefited from a surge in demand for personal computers as more people opted to work from home to avoid the risk of infection.

Taiwan's GDP, meanwhile, shrank 1.4% in the second quarter, or an annualized rate of 5.5%, in the steepest contraction in over a decade.

China's economy rebounded with 3.2% growth on the year in April-June after a decline of 6.8% in January-March. Beijing's draconian handling of coronavirus cases helped contain the outbreak faster, and reopen the economy earlier, than in other countries, economists said.

South Korea, China and Taiwan have all responded forcefully to the coronavirus outbreak, enforcing stricter testing and tracing rules. While Japan is perceived to have implemented relatively effective policies, recent conflicting signals from the Abe government about bringing the pandemic under control and keeping the economy going has sown confusion.

Still, Japan's decline was less severe than in the U.S. and the U.K., where the economies shrank 9.5% and 20.4%, respectively.

Some analysts are taking a more bullish view on Japan's recovery.

"While the country is in the midst of a second wave of COVID-19, the health care system isn't overwhelmed yet and new infections have started to decline again," said Marcel Thieliant, senior Japan economist at London-based research company Capital Economics. "Given its strong corporate balance sheets, generous credit guarantee scheme and low reliance on tourism, we think that Japan will recover more quickly than most anticipate."

Other economists also point out that an emergency government program to hand out 100,000 yen ($940) to every Japanese resident helped resuscitate private consumption as the economy gradually reopened in May and June.

"The top priority for the Abe government should be to bring the coronavirus outbreak under control so that normal economic activity can be resumed," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. Helping rebuild industries hit hardest by the pandemic, such as restaurants and tourism, is an urgent task, so is accelerating the digitization of the economy, an area where the pandemic has shown Japan is falling short, Kodama said.

A long-term fiscal sustainability plan also needs to be formulated after a sharp increase in government deficits, Kodama added.

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