Japan: Severe contraction expected in Q2 - UOB

FXStreet reports that фccording to Senior Economist at UOB Group Alvin Liew, the Japanese economy is expected to contract further in the second quarter due to the impact of the coronavirus crisis.

“Japan’s 1Q 2020 GDP remained in contraction but it was revised to a smaller -0.6% q/q (-2.2% annualized rate) in 1Q… and an improvement from the 1st preliminary estimate of -0.9% q/q (-3.4% annualized rate).”

“The main factor for the 1Q upward revision was the surprise turnaround in business spending/capital expenditure (capex) which recorded a 1.9% q/q increase (instead of the preliminary estimate of -0.5% q/q) even as other major GDP segments (including private consumption, public demand, net exports and private inventories) continued to decline, contributing to the 1Q weakness.”

“Despite the more benign 1Q decline, Japan’s outlook has definitely worsened in light of the COVID-19 pandemic and the measures taken to contain the spread, and we see Japan facing significant challenges due to the virus impact, on both trade and the domestic economy.”

“The real test of the severity of the COVID-19 driven GDP contraction will be in 2Q 2020. We expect the 2Q contraction to be more severe, at -5% q/q (-18.6% annualized rate). This is slightly worse than the sharpest contraction Japan experienced during the great recession in 2008/2009 (at -4.8% q/q, -17.8% annualized rate in 1Q 2009) while some polls expect the contraction to exceed 20%, potentially the worst decline on record.”

“While the copious amounts of fiscal and monetary stimulus will help cushion the economic fallout (including the latest US$1.1 trillion second extra budget to be tabled at the Japan Diet this week), we believe it is inevitable Japan will enter a full recession this year. Based on the significant downgrade in the 2Q outlook, we expect Japan full-year GDP to contract by 5.5% in 2020 (from +0.7% in 2019).”