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Japan's state of emergency seen triggering first quarter economic contraction

Leika Kihara
·2-min read
First business day of the new year amid the coronavirus disease (COVID-19) pandemic

By Leika Kihara

TOKYO (Reuters) - Japan's likely decision to declare a state of emergency in the Tokyo area will most probably trigger a contraction in January-March, analysts say, adding to the headache for policymakers struggling to cushion the blow to the economy from the pandemic.

The world's third-largest economy rebounded sharply in the third quarter last year from a record April-June slump caused by the pandemic, heightening expectations a moderate recovery.

But such hopes have been dashed by a resurgence in COVID-19 infections that have forced the government to consider imposing a state of emergency that could last about a month.

Media reported on Monday that preparations were being made for a state of emergency that would take effect by Friday.

While the restrictions will be far less sweeping than those during last year's nationwide state of emergency, analysts expect them to inflict severe damage on consumption.

"There's no doubt Japan's economy will suffer a contraction this quarter," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"The question will be whether it's a double-digit or a single-digit drop, which depends on how long the restrictions last and whether stronger curbs could be added."

The current plan, unveiled by government officials this week, focuses on requests for restaurants to close early and for residents to refrain from non-essential outings in the evening.

BNP Paribas chief Japan economist Ryutaro Kono said he plans to slash his January-March forecast to an annualised contraction of around 2% from the current projection of a 0.2% increase.

Daiwa Institute of Research also expects the economy to shrink in January-March, even though it sees the hit to real gross domestic product (GDP) at less than 1 trillion yen ($9.7 billion) per month - one-third that from last year's curbs.

"If the government is forced to impose longer and broader restrictions than the current plan, the risk of a double-dip recession rises sharply," Daiwa economists wrote in a report.

In a Reuters poll last month, analysts had expected the economy to expand an annualised 3.9% in October-December last year followed by a 2.1% gain in January-March.

($1 = 102.8400 yen)

(Reporting by Leika Kihara; Editing by Raju Gopalakrishnan)