Japan slashes economic outlook for first time since April 2020

Japan’s government cut its view on the overall economy in February for the first time since April last year as an extended state of emergency to curb coronavirus infections battered consumer spending.

Analysts expect the world’s third-largest economy to shrink in the current quarter as renewed restrictions rolled out in Tokyo and some prefectures last month to contain the pandemic damage businesses and household spending.

“The economy shows some weakness though it continued picking up amid severe conditions due to the coronavirus,” said the economic report for February.

The government slashed its assessment on consumer spending for a third straight month in February, saying it has shown weakness recently, as the emergency hurt the retail industry as people avoided eating out and travelling.

Meanwhile, the government raised its view on capital spending for a second consecutive month, saying it has been “recovering recently”, reflecting an improvement in the nation’s core machinery orders.

The government also upgraded its assessment on corporate profits for the first time in two months as they were “picking up while weakness is seen in non-manufacturers” due to the impact from the pandemic.

Manufacturers’ profits improved helped by a recovery in auto production and 5G technology related demand, the report said.

Thanks to brisk demand for communication devices, the government raised its outlook on imports for the first time in two months.

Japanese stocks rose to a 30-year high this week as progress in the distribution of coronavirus vaccines boosted expectations for an economic recovery.

Japan’s economy grew for a second straight quarter in October-December, extending the recovery from its worst postwar recession earlier last year.

But new state of emergency measures cloud the outlook, underscoring the challenge policymakers face in preventing the spread of COVID-19 without choking off the country’s fragile recovery.

The government estimates the economy will expand 4.0% in the next fiscal year starting in April after an expected 5.2% fall in the current fiscal year to March.

Japan’s core consumer prices marked the sixth straight month of annual declines in January but the pace of falls slowed, offering some relief for policymakers worried about deflationary pressures the economy face from the coronavirus pandemic.

Still, soft domestic demand means the Bank of Japan’s priority will be to avert a return to deflation, unlike other countries such as the United States where inflation has recently perked up.

Core consumer prices, which includes oil products but excludes volatile fresh food costs, fell 0.6% in January from a year earlier, government data showed on Friday, compared with a median market forecast for a 0.7% drop.

The decline was smaller than a 1.0% drop in December, partly due to the termination of the government’s “Go To” discount campaign for domestic travel and a recent rebound in fuel costs.

Durable goods prices rose on strong demand from stay-home policies to prevent the spread of the pandemic, with prices of air conditioners rising 7.2% and those for microwave ovens up 12.2%, the data showed.

The so-called “core-core” CPI, which strips away the impact of both energy and fresh food costs, rose 0.1% from a year earlier after three straight months of declines.

“Looking past a potential renewed drag once the Go To campaigns resume ... inflation should recover into positive territory over the coming months as energy prices rebound and underlying price pressures return in line with the economic recovery,” said Tom Learmouth, Japan economist at Capital Economics. Japan’s economy expanded more than expected in the fourth quarter, extending the recovery from its worst postwar recession thanks to a rebound in overseas demand that boosted exports and capital spending.

But new state of emergency curbs rolled out in January cloud the outlook, underscoring the challenge policymakers face in preventing the spread of COVID-19 without choking off a fragile recovery.

Japan’s industrial production grew for the first time in three months in January as manufacturing activity picked up globally, a Reuters poll found on Friday, offering a glimmer of hope for an economy battered by the coronavirus pandemic.

But retail sales, a key gauge of consumer spending, probably contracted for a second straight month, suggesting the pandemic continued to dampen consumption, the poll showed.

Analysts expect the economy in the current quarter to shrink as a local state of emergency in some areas, including Tokyo, to contain coronavirus cases hit businesses and consumers.

Japan’s factory output was projected to have risen 4.0% in January from the previous month, the poll of 18 economists showed on Friday, rebounding from a revised 1.0% fall in December.

“Factory output of production machineries and electronic parts and devices likely grew as exports of capital goods and semiconductors increased,” said Daichi Kawabata, economist at Mizuho Research Institute.

Analysts also said front-loading of production before the Lunar New Year holidays also helped boost Japan’s factory output.

The poll estimated retail sales in January declined 2.6% from a year earlier after a revised 0.2% drop in December.

Japan’s renewed restrictions to contain COVID-19 cases likely slashed sales at department stores and super markets as consumers avoided going out to shop, analysts said.

The poll also found Tokyo’s core consumer price (CPI) index, which includes oil products but excludes fresh food prices, slipped 0.4% in February from a year earlier as energy costs eased.