Covid slows growth in Japan in first quarter

Japan’s economic output fell 1.3% in the first quarter of 2021, down 5.1% at an annualized rate, as renewed Covid-19 state of emergency affected consumer spending .

The decline was slightly worse than analysts’ expectations of a decline of 1.2%, and marked a return to contraction after the economy expanded in the last quarter from 2020.

The sharp drop in production suggests that Asia’s largest wealthy economy will be slow to recover from the pandemic due to its lagging deployment coronavirus vaccines.

With major cities in Japan still under restrictions to control the spread of Covid-19, the economy could contract further in the second quarter, prompting economists to cut growth forecasts for the entire year.

“We probably still have a bit of a downward revision to GDP in the year 2021,” said Rob Carnell, head of Asia-Pacific research at ING. Most analysts were forecasting annual growth of more than 3%, but reaching that level will now require a huge rebound in the second half of the year.

Japan is therefore likely to lag behind the economic recovery in Europe and the United States, where rapid vaccine deployment combined with big fiscal stimulus under President Joe Biden resulted in a rapid recovery in demand.

Japan declared renewed state of emergency for Covid-19 early January, which was then extended until March, affecting the economy for most of the first quarter. Under the emergency declaration, people were told to work from home when possible and restaurants were told to close at 8 p.m.

Another emergency state began in late April, but it has failed to bring the number of cases under control, and Japanese authorities have widened the geographic scope and severity of the restrictions.

Infections are occurring at around 6,000 per day, the highest level since early January. Medical systems in some parts of the country are under strain.

The slow progress in immunization underlies the need to maintain public health restrictions. Japan gave a first dose to 4.4 million people, or just 3.5% of the population, making its deployment one of the slowest in the industrialized world.

The weakness was generalized throughout the economy during the first trimester. Consumption reduced total output by 0.7 percentage point, and business investment contributed 0.2 percentage point to the decline, with government spending and net exports also weak.

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