Japan suffers worst GDP contraction on record in Q2

The Japanese economy suffered its worst contraction on record in the second quarter as the coronavirus pandemic took its toll.

GDP shrank by 7.8% on the quarter, accelerating from a 0.6% contraction in the first quarter, coming in worse than the 7.5% decline expected by economists and wiping all the growth since 2011.

On an annualised basis, the economy contracted by 27.8% in the second quarter.

Private consumption was the main drag, down 8.6% quarter-on-quarter following a 0.8% decline in the first quarter. Fixed investment fell 0.7% following a 0.5% increase in Q1 and net trade knocked three percentage points off GDP growth. Exports slid 18.5%, which was nearly four times the first-quarter fall.

Miguel Chanco, senior Asia economist at Pantheon Macroeconomics, said the damage was broad-based as expected, with the nationwide state of emergency that enveloped most of Q2 "killing domestic demand and the near-global lockdown dealing a body-blow to exports".

"Looking forward, expect to see a GDP bounce-back in the current quarter to the tune of 6%, thanks in large part to the very low base set in Q2," he said. "The recovery, overall, will be more gradual than the steepness of the downturn, due to the second Covid-19 wave having over domestic demand and the still-uneven relaxation of restrictions globally."

Marcel Thieliant, senior Japan economist at Capital Economics, said: "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.

"We’ve pencilled in a 4.5% q/q rebound in Q3 GDP and expect the economy to expand by 3.5% in 2021, well above the consensus of 2.6%."