Covid drags down Japan’s first-quarter growth

Japan’s economic output fell 1.3 per cent in the first quarter of 2021, a drop of 5.1 per cent at an annualised rate, as a renewed Covid-19 state of emergency bit into consumer spending.

The decline was slightly worse than analysts’ expectations of a 1.2 per cent drop, and marked a return to contraction after the economy expanded in the final quarter of 2020.

The steep decline in output suggested that Asia’s largest rich economy will be slow to bounce back from the pandemic because of its laggardly rollout of coronavirus vaccines.

With Japan’s big cities still under restrictions to control the spread of Covid-19, the economy could contract further in the second quarter, prompting economists to cut growth forecasts for the full year.

“We still probably have quite a bit of downward revision to full-year 2021 GDP to do,” said Rob Carnell, head of Asia-Pacific research at ING. Most analysts had forecast full-year growth of more than 3 per cent, but reaching that level will now require a huge second-half rebound.

Japan will therefore probably lag behind the economic recovery in Europe and the US, where rapid vaccine rollout combined with a large fiscal stimulus under President Joe Biden has driven a speedy recovery in demand.

Japan declared a renewed Covid-19 state of emergency in early January, which was subsequently extended into March, affecting the economy through most of the first quarter. Under the emergency declaration, people were asked to work from home when possible and restaurants were instructed to close at 8pm.

Another state of emergency began in late April, but it has failed to bring the number of cases under control, and the Japanese authorities have expanded the geographic scope and severity of the restrictions.

Infections are running at about 6,000 a day, the highest level since early January. Medical systems in parts of the country are under strain.

Underlying the need for continued public health restrictions is the slow progress on vaccinations. Japan has given a first dose to 4.4m people, just 3.5 per cent of the population, making its rollout one of the slowest in the industrialised world.

Weakness was widespread across the economy during the first quarter. Consumption shaved 0.7 percentage points off total output and business investment contributed 0.2 percentage points to the decline, with government spending and net exports also weak.

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