Japan’s Economy Contracted At An Annualised Rate Of 5.1% In January-March

Japan’s economy contracted at an annualized rate of 5.1% in January-March, the first decline in three quarters.

Aditi Sharma

May 19, 2021

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3 min

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Japan’s economy shrank more than expected from January to March due to slow vaccine rollout and new COVID-19 infections. Items such as dining out and clothes have reported a low sale due to COVID-19 spread, raising concerns that the country will lag behind others emerging from the pandemic. The world’s third-largest economy is struggling with Capital expenditure falling down unexpectedly and export growth slowing down sharply.

“Global chip shortages caused a marked slowdown in exports, putting a drag on capital spending as well,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. He added, “Consumption will probably remain stagnant, raising risks of an economic contraction in the current quarter.”

According to the government data, the economy shrank an annualized 5.1% in the first quarter, more than a median market forecast for a 4.6% contraction and following an 11.6% jump in the previous quarter. The decline was mainly due to a 1.4% drop in private consumption. This is because of the state of emergency curbing to combat the pandemic hit spending for clothing and dine-outs as the data showed.

A surprise 1.4% drop in capital expenditure was reported which was bigger than expected, which stunned the market expectations for a 1.1% increase as companies scaled back spending on equipment for machinery and cars.

“That domestic demand is weak shows the adverse effects from the coronavirus haven’t been shaken off at all,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“There will undoubtedly be fiscal money poured on this problem to soften the blow, though after so much already, it is difficult to see this having more than a fairly marginal effect,” analysts at ING wrote in a research note, adding they expect the economy to shrink again in the current quarter. He also mentioned, “And the Bank of Japan seems to be out of fresh policy stimulus ideas currently, so we don’t anticipate anything new from them apart from extending existing measures.”

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Economy Minister Yasutoshi Nishimura said, “Its true service spending will likely remain under pressure in April to June. But exports and output will benefit from a recovery in overseas growth”. Extended state of emergency curbs are likely to keep any recovery in the current quarter modest, analysts say.

“With the medical situation still worsening and the vaccine rollout too slow, it will take until the end of the year for output to return to pre-virus levels,” said Marcel Thieliant, senior Japan economist at Capital Economics.

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