TOKYO • Japan's economy sank deeper into its worst post-war contraction in the second quarter as the coronavirus outbreak jolted businesses more than first thought, underscoring the daunting task the new prime minister faces in averting a steeper recession.
Other data has put that challenge in perspective, with household spending and wages falling in July as the impact of the pandemic kept consumption frail even after lockdown measures were lifted in May.
The world's third-largest economy shrank an annualised 28.1 per cent in the April-June period, more than a preliminary reading of a 27.8 per cent contraction, revised gross domestic product (GDP) data showed yesterday.
The data will put the new prime minister, to be elected in a ruling party leadership race next Monday, under pressure to take bolder economic support measures.
Chief Cabinet Secretary Yoshihide Suga, the front runner to become the next premier, has signalled his readiness to boost spending if he were to lead the country.
"The risk ahead is that the effect of measures taken so far, such as payouts to households, will peter out," economist Koichi Fujishiro at Dai-ichi Life Research Institute said. "If Covid-19 weighs heavily on wages, the new administration could take additional steps to help households."
The government has so far unveiled a US$2 trillion (S$2.7 trillion) package of stimulus measures, adding to an enhanced easing programme from the Bank of Japan (BOJ).
Japan recently recorded a renewed rise in virus infections but has been spared the kind of big casualties seen in Western countries. Total infections stood at 72,321 as of Monday, with 1,380 deaths, against a global tally of over 27 million cases and more than 888,000 deaths.
The main culprit behind the downward GDP revision was a 4.7 per cent drop in capital expenditure, much bigger than a preliminary 1.5 per cent fall, suggesting the pandemic was hitting broader sectors of the economy.
"We can't expect capital expenditure to strengthen much ahead. Companies won't boost spending when the outlook is so uncertain," said Mr Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
Japan's economy has shown some signs of life after suffering three straight quarters of contraction, with factory output rising in July at the fastest pace on record thanks to rebounding demand for automobiles.
But separate data yesterday suggested that any recovery will likely be modest, as household spending fell a bigger-than-expected 7.6 per cent in July year on year, while real wages declined for the fifth straight month, pointing to more pressure on consumer spending.
The health crisis has ravaged a broad array of sectors, with firms such as automaker Honda Motor forecasting a 68 per cent decrease in annual operating profit.
Analysts polled by Reuters last month said they expect the economy to shrink 5.6 per cent in the current fiscal year to next March, and grow just 3.3 per cent the following year.
The fresh batch of data will be among factors the BOJ will scrutinise at its rate review next week, when it is widely expected to keep monetary settings unchanged.
The central bank eased policy twice this year to pump money to cash-strapped small firms, complementing two big government spending packages.
The BOJ is widely expected to hold off on ramping up stimulus for now as steps to spur demand could risk spreading the virus.
"It will probably take a long time for the economy to normalise and return to levels before the pandemic," said chief economist Yoshiki Shinke at Dai-ichi Life Research Institute.