Japan’s economy is recovering from COVID-induced recession, but outlook is murky

TOKYO (Reuters) – Japan’s economy grew at the fastest pace on record in the third quarter, rebounding strongly from its biggest post-war recession, as improving exports and consumption helped the country to emerge from the damage caused by the coronavirus pandemic.

However, analysts described the sharp rebound as a one-time effect from the depths of the recession and warned that any further rebound in the economy would be moderate as a resurgence in infections at home and abroad darkens the outlook.

The world’s third-largest economy recorded 21.4% annualized growth in July-September, beating median market forecast for a gain of 18.9% and marking the first increase in four quarters, government data shows Monday.

This was the biggest increase since comparable data became available in 1980 and followed a 28.8% drop in the second quarter, when consumption was hit by lockdown measures to prevent the spread of the virus.

“The strong growth in July-September was probably a one-time rebound from an extraordinary contraction caused by the lockdown stages,” said Yoshiki Shinke, chief economist at the Dai-ichi Life Research Institute.

“The economy may not fall off a cliff. But given the uncertainty about the outlook, I would be cautious about the pace of any recovery, ”he said.

The rebound was mainly fueled by a record 4.7% increase in private consumption as households increased their spending on cars, recreation and restaurants, a government official said at a point.

External demand also added 2.9 percentage points to gross domestic product (GDP) growth thanks to a rebound in demand from abroad which pushed exports up 7.0%, the data showed.

But capital spending fell 3.4%, declining for a second straight quarter, a worrying sign for policymakers hoping to revitalize the economy through private sector spending.

Economy Minister Yasutoshi Nishimura said the economy still has more than 30 trillion yen (216.9 billion pounds) of negative output gap, or spare capacity, some of which needs to be filled by a new stimulus plan currently in preparation.

“We cannot make up the entire output gap just with public works spending. We also need to stimulate private investment. But the size (of the output gap) is something that we will look at “when compiling the new spending package,” he told a press conference.

A negative output gap occurs when real output falls below the full capacity of the economy and is seen as a sign of weak demand.

Without further stimulus, Japan could experience a fiscal cliff next year, with the effect of two big packages rolled out earlier this year – worth a combined $ 2.2 trillion – fading away.

Prime Minister Yoshihide Suga instructed his cabinet to come up with another package, which analysts say could be between 10 and 30 trillion yen.

“Nishimura’s remark about the 30 trillion yen output gap suggests that the size of the new package would be that much larger,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.

The Bank of Japan is also expected to extend its corporate finance program beyond its March deadline, with a decision expected next month or in January, analysts said.

Despite some signs of improvement in recent months, analysts expect the world’s third largest economy to shrink 5.6% in the current fiscal year ending March 2021 and say it would take years to return to pre-COVID levels.