Japan’s economy rebounds in third quarter, but coronavirus set to slow recovery

Japan’s biggest expansion in more than a half-century outpaced expectations as exports and consumption powered growth, though the recovery is likely to cool this quarter as the coronavirus sets new infection records at home and overseas.

Gross domestic product grew an annualised 21.4 per cent in the three months through September from the previous quarter, the Cabinet Office reported on Monday. It was the fastest growth since 1968, helped by government stimulus that fuelled a sharp jump in consumer spending and a strong pickup in trade. Economists had forecast an 18.9 per cent expansion.

Still, the rapid expansion only managed to claw back about half of the growth lost since last year, less than some other major economies. With the resurgence of Covid-19 likely to keep a keep a lid on further export and consumption gains, the government is already making plans to add to stimulus.

“There is no way we can be optimistic about the outlook,” said Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute. “Virus cases are rising at home and abroad and that will weigh on global demand and household sentiment.”

Japan PM Suga rules out new state of emergency despite coronavirus surge

Concern the economy will lose steam prompted Prime Minister Yoshihide Suga last week to call for a third extra budget. New spending would add to Japan’s mountain of debt, but is seen as necessary as the boost from the government’s earlier cash handouts weakens and funds for a job furlough programme run out.

Japan’s economy minister Yasutoshi Nishimura, speaking after the GDP report, said the pace of recovery would have been faster had it not been for an earlier uptick in virus cases during the summer that weighed on consumer spending.

Economist Yuki Masujima, economist said high-frequency indicators suggest the recovery has slowed in the fourth quarter. “What’s more, the strong fiscal boost that has powered the recovery means the fiscal drag ahead will be that much heavier.”

While additional public spending should help the economy, Masujima said the fresh Covid-19 cases raised the prospect of new containment measures, and “a slowdown in the recovery is inevitable”.

Japan’s number of new virus cases hit a record of 1,722 on Saturday, topping the summer peak. Fresh cases rose above 1,000 for a sixth day on Sunday, a level that is likely to discourage people from shopping and eating out, even if the government doesn’t move to adopt new restrictions.

The resurgence is fuelling fears that recovery momentum could be lost at a critical time. Nishimura said the overall state of the economy would be taken into consideration when deciding on the size of stimulus and pledged to bring the economy back to its pre-Covid size by 2022.

“Government measures like Go-To Travel subsidies helped boost consumption, but what concerns me is business investment fell more than I expected,” said economist Harumi Taguchi at IHS Markit. “As the virus spreads again, companies are cutting back on hiring and, once government measures expire, low wages may weigh on consumption.”