TOKYO- Japan’s economy shrank at the fastest pace in almost six years in the December quarter as last year’s sales tax hike hit consumer and business spending, highlighting a fragile outlook made worse by growing coronavirus risks.
Analysts say the widening fallout from the epidemic, which is damaging output and tourism, could undermine growth in the current quarter and push Japan into recession – defined as two straight quarters of decline.
“There’s a pretty good chance the economy will suffer another contraction in January-March. The virus will mainly hit inbound tourism and exports, but could also weigh on domestic consumption quite a lot,” said Taro Saito, executive research fellow at NLI Research Institute.
“If this epidemic is not contained by the time of the Tokyo Olympic Games, the damage to the economy will be huge,” he said.
Japan’s gross domestic product (GDP) shrank an annualized 6.3 percent in the October-December period, government data showed on Monday, much faster than a median market forecast for a 3.7 percent drop and the first decline in five quarters.
It was the biggest fall since the second quarter of 2014, when consumption took a hit from a sales tax hike in April of that year.
The latest sales tax hike in October last year – as well as unusually warm weather that hurt sales of winter items – weighed on private consumption, which sank a bigger-than-expected 2.9 percent, marking the first drop in five quarters.
Capital expenditure fell 3.7 percent in the fourth quarter, much faster than a median forecast for a 1.6 percent drop and the first decline in three quarters, the data showed.
Combined, domestic demand knocked 2.1 percentage points off GDP growth, more than offsetting a 0.5 point contribution from external demand.
The weakness in capital expenditure – considered among the few bright spots in the economy – casts doubt on the Bank of Japan’s view that growth will continue to expand moderately as robust domestic demand makes up for weakness in exports.
Economy Minister Yasutoshi Nishimura said the government was ready to take all necessary steps and was watching the impact the coronavirus outbreak could have on the economy and specifically tourism.
“The government had hoped Japan’s economy would continue a moderate recovery. But we must be vigilant against the impact of the coronavirus on domestic and overseas economies,” he said in a statement issued after the GDP’s release. — Reuters
