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Japan's economy on brink of recession after shrinking 6.3% in latest quarter

Ben Chapman
A cruise ship, onboard which 454 people have tested positive for coronavirus, is docked in Yokohama: EPA

Japan’s economy is on the brink of recession after shrinking dramatically in the final three months of 2019.

The world’s third-largest economy contracted 6.3 per cent in the quarter compared with the same period a year earlier, with analysts warning that a further hit is likely to come from coronavirus.

Tourism has already been negatively impacted, with concern growing that the deadly outbreak may not be contained in time for the Tokyo Olympic Games in July.

Analysts had been expecting Japan’s growth to slow thanks to a rise in sales tax, the fallout from a powerful typhoon and the continuing effects of a trade war between America and China.

However, the larger-than-expected drop in output was the fastest since 2014, delivering a further concerning sign for the global economy.

Consumer spending slumped 2.9 per cent after the Japanese government raised the sales tax to 10 per cent from 8 per cent. Capital spending was down 3.7 per cent and exports dipped 0.1 per cent.

“Consumer spending, which slumped following the tax hike in the fourth quarter of 2019, will now struggle to do anything except contract further in the first quarter as the impact of Covid-19 weighs on consumer sentiment, weighing in particular on the consumer services sector,” said Dutch bank ING in a report.

“Some further government spending may help to curb any further contraction in GDP beyond the first quarter of 2020.

“But that will not stop what started off as a technical downturn from evolving into a full-blown recession.”

A recession is defined as two consecutive quarters of economic contraction.

Ratings agency Moody’s said coronavirus could severely dent the global economy if it grows to pandemic proportions.

“The outbreak will first and foremost hurt China’s economy by lowering discretionary consumer spending on transportation, retail, tourism and entertainment,” said Madhavi Bokil, Moody’s vice president.

“There is already evidence – albeit anecdotal – that supply chains are being disrupted, including outside China.

“Furthermore, extended lockdowns in China would have a global impact given the country’s importance and interconnectedness in the global economy.”

Moody’s downgraded its global growth forecast to 2.4 per cent this year from its previous estimate of 2.6 per cent. China’s economy is now predicted to expand 5.2 per cent, down from 6.1 per cent last year.