Japan’s Economy Posts a More Severe Contraction Than Forecast in Q1 2021

The world’s third largest economy – Japan, started 2021 by contracting through the first quarter of the year on account of the coronavirus pandemic forcing authorities to impose restrictions which hampered economic activity. Data released by the government reveals that the Japanese economy contracted by 1.3% QoQ in Q1 2021 after having grown during the previous two quarters.

On an annual basis, the Japanese economy posted a 5.1% contraction, a deeper contraction than the 4.6% reading forecast by economists. This comes after the economy had posted a strong 11.6% growth during Q4 2020, and was mainly caused by a sharp fall in private consumption as the state of emergency measures forced people to remain indoors, hitting their spending on clothing and eating out.

In January, Japan’s government had enforced a state of emergency across Tokyo and other parts of the nation, hurting domestic consumption. What’s even more worrying is that Japan could experience a technical recession as economic conditions are unlikely to improve in the current quarter as the nation battles the fourth wave of the pandemic, bringing back restrictions again.

In addition, the economic outlook for Japan is skewed to the downside as it has been slow to distribute the COVID-19 vaccines across its population, unlike its Western peers. On a positive note, however, the economy could receive some support from an increase in private capital investment as the manufacturing sector rebounds on the back of improved external demand.