In Japan, wider COVID-19 curbs improve the chance of a double-dip recession

By Leika Kihara and Chris Gallagher

TOKYO (Reuters) – Japan is considering extending the state of emergency from metropolitan Tokyo to other regions as novel coronavirus cases increase. However, this could increase the risk of a double-dip recession for the world’s third largest economy.

Prime Minister Yoshihide Suga admitted that the measures, which went into effect in the capital region on Friday, may also be needed in other parts of the country as the infections spread.

The government has resisted calls by some experts for wider curbs beyond those imposed in Tokyo, as they would cause economic problems.

Analysts and officials have warned that the limited one-month state of emergency in Tokyo and neighboring prefectures could lead to a slowdown in economic growth in the current quarter.

“There is no doubt that this will affect growth from January to March,” Finance Minister Taro Aso told reporters when asked about the economic impact.

Western Osaka Prefecture, the country’s second largest urban area, plans to call on the government to declare a state of emergency there, the governor said on Friday. Kyoto and Hyogo – two other prefectures in western Japan – are expected to make the same request, media reported.

“We will work closely with the regions and respond if necessary,” Suga told reporters earlier when asked about the expected inquiries from the prefectures.

Many policymakers say this time around the growth won’t be as severe as last year’s state of emergency, which hurt retailers across the country and forced many manufacturers to shut down.

Robust overseas demand and the growth spurt from massive government incentives will offset some of the pain, analysts say.

‘MODERATE PICK-UP’

However, the prospect of a wider and longer state of emergency tarnishes the outlook for the economy, which is still emerging from a record slump from April to June last year.

“Even if the state of emergency is lifted, Japan would have to offset the need to curb new infections as the economy resumes,” said Yoshiki Shinke, chief economist at the Dai-ichi Life Research Institute, who expects the economy to post an annualized rate of 3.7 % this quarter.

“The economy can return to positive growth from April to June, but the pace of recovery will be moderate,” he said.

Capital Economics assumes that the lockdown measures will be extended by another month and that consumption from January to March will decrease by 1.5% compared to the previous quarter.

“The decline could be greater if more draconian restrictions are expanded nationwide,” said Marcel Thieliant, senior economist with Capital Economics in Japan.

“Even so, consumption should hold up better than last year just because he’s still depressed.”

Suga said the government will support the economy with reserves that have been put on hold as part of the stimulus packages already in place, signaling that no additional packages are imminent.

But the government could come under pressure to act more boldly if the battle to contain the pandemic brings with it another recession, some analysts say.

Although Japan is less severely affected by the pandemic than many other countries, it failed to contain the virus for the first time on Thursday, with registered infections exceeding 7,000 daily. A total of 267,000 cases and nearly 3,900 deaths have been recorded.

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