May 15, 2020 / 4:34 AM / 20 days ago

Japan's economic recovery to be modest after sharp coronavirus-led contraction: Reuters poll

TOKYO (Reuters) - Japan will recover only modestly in the second half of this year from a steep contraction in the current quarter, a Reuters poll showed on Friday, underscoring just how badly the world’s third largest economy has been hit by a global coronavirus pandemic.

FILE PHOTO: Japan's economy has been seriously disrupted by the coronavirus outbreak and restrictions imposed to curb its spread, leaving many districts in Tokyo much quieter than usual. Picture taken April 8, 2020. REUTERS/Issei Kato/File Photo

As the Bank of Japan opens its money spigot to battle the fallout, its balance sheet was also expected to swell to a record level by the end of 2020, economists said.

The global health crisis has forced many countries to impose strict lockdowns crippling economic activity worldwide.

Against this backdrop, Japan’s economy is in the cusp of deep recession as a government state of emergency adopted in April requested citizens to stay home and businesses to close.

While the government lifted the state of emergency in large parts of the country on Thursday, big cities like Tokyo will keep restrictions in place in a sign of persistent economic weakness lasting many more months.

Analysts polled by Reuters expected Japan’s economy to shrink an annualized 22.0% in the second quarter, which would be the biggest decline on record, after an expected decline of around 4.5% last quarter.

The May 7-14 poll of over 30 economists also found the economy would rebound 7.7% in the third quarter and 6.1% in the fourth - still not enough to make up for the steep falls in the first half.

“A V-shaped recovery will be difficult because it will take time for the economy to normalise, given the government needs to lift restrictions in several stages,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“The pace of recovery from July-September will be limited compared with the huge drop in the first half of this year.”

In the worst-case scenario projected in the poll, the economy will drop over 29% this quarter and only manage to flatline in July-September.

GDP will shrink 5.8% this fiscal year to March 2021 before rebounding 3.2% next year, according to the poll.

The government is due to release first-quarter gross domestic product data on May 18 and for the second quarter in August.

BOJ’S BALANCE SHEET

Asked about the size of the central bank’s balance sheet, a median forecast showed it would have increased to a record 660 trillion yen ($6.2 trillion) by the end of this year from the 620 trillion yen as of this week.

It will expand to 700 trillion yen by the end of 2021, according to the poll.

Nearly 80% of economists surveyed expected the central bank to expand its stimulus, unchanged from the April survey, and many said it could happen by July.

The poll also showed core consumer inflation, which excludes volatile fresh food costs, would fall to 0.4% this fiscal year, boosting fears slumping oil costs and soft consumption due to the coronavirus pandemic could push Japan back to deflation.

The core consumer price index grew 0.4% in the year to March, slowing down from a 0.6% gain in February.

Japan’s central bank ramped up monetary stimulus for a second straight month in April, pledging to boost risky asset buying and purchase an unlimited amount of government bonds to keep borrowing costs low.

“The BOJ will focus on credit easing measures,” said Izuru Kato, chief economist at Totan Research. “When the government further expands supports for corporate financing, the BOJ will likely take steps to cooperate.”

Reporting by Kaori Kaneko, Polling by Shaloo Shrivastava in Bengaluru; Editing by Leika Kihara and Ana Nicolaci da Costa

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