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Economy

Japan's GDP likely plunged 26% in April-June quarter

Economists predict worst decline in postwar era amid slow recovery

Shops are shuttered in Hakone, Kanagawa Prefecture, as a result of the COVID-19 pandemic.

TOKYO -- The Japanese economy shrank by an annualized 26.3% on the year in the April-June quarter, according to projections from economists, which would mark the worst contraction in the postwar era amid the fallout from the novel coronavirus pandemic.

Real gross domestic product is seen swinging back to positive territory in the current quarter ending September, with 23 private-sector economists projecting 11.9% growth on average. But the pace of recovery will not restore the economy to pre-pandemic levels in the short term.

According to official figures, the economy has shrunk for two consecutive quarters through March. The consumption tax hike in October last year, in which the rate was lifted to 10% from 8%, hobbled Japan's once-healthy domestic demand. The coronavirus shock from the start of this year sent the economy into a tailspin.

The Cabinet Office is due to release preliminary GDP data for April-June on Aug. 17. The data will reflect the effect of the emergency declaration that limited business operations and outdoor excursions.

The quarterly contraction is expected to surpass that of January-March 2009, in which the economy shrank by 17.8% during the immediate aftermath of the global financial crisis -- the standing postwar record.

Estimates from the 23 economists are based on official economic indicators released through Friday. Consumer spending, which accounts for most of the GDP, fell by 6.9% in April-June, the third straight quarter of decline, according to the average finding by the economists.

In comparison, consumer spending fell 4.8% in April-June of 2014, just after the government raised the consumption tax to 8% from 5%.

External demand apparently sustained a more serious downswing. The economists say exports dropped 18.9% in April-June. Demand evaporated from the U.S. and Europe, which affected Japanese production activities.

Both domestic and overseas demand are projected to move up in the July-September quarter and fuel the first GDP growth in four quarters.

However, the bounce "will absolutely not amount to a recovery from the slump in April-June," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. "It will take a long time to return to the levels seen prior to the novel coronavirus epidemic."

The estimates indicate that the annualized GDP was about 487 trillion yen ($4.6 trillion) in real terms in April-June. That would place the economy at about 90% of the most recent peak seen in July-September of last year, or 539 trillion yen. The GDP would still not reach that threshold in April-June of 2021.

Right now, Japan is dealing with a resurgence of COVID-19 cases that will complicate an economic recovery.

"Because of the concerns of an outbreak reoccurrence, as well as the inclement weather patterns, the rebound in private consumption show signs of being temporary," said Takeshi Miwa, chief Japan economist at Nomura Securities.

In an estimate compiled in May, the April-June GDP was expected to shrink by 21.2%, then stage a 7.5% rally in July-September. The economists downgraded their April-June projections after taking into account the weak overseas demand figures.

The economy is on track to shrink 5.7% during the full fiscal year ending March 2021, then grow 2.7% in the following fiscal year. But the forecast will drastically change if Japan is hit by a second wave of infections in the fall or later.

"A large negative growth surpassing 15% is in store for fiscal 2020" under that scenario, said Takashi Masuda, chief economist at Toray Corporate Business Research.

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