Japan's economy shrinks faster than estimated as virus compounds recession risk

GLOBAL ECONOMY - TOKYO. Japan's economy shrank more than initially estimated in the fourth quarter - by the most since the 2014 sales tax hike - exacerbating fears for economic prospects at a time when the impact of the coronavirus outbreak is increasing recession risk.

A spike in the yen and drop in Tokyo stocks - against a backdrop of oil price cuts that are playing havoc with financial markets - add to woes for an economy which is contending with an October sales tax hike to 10% from 8%, as well as slumping tourism and supply chain disruption caused by the health crisis.

The bleak data piles renewed pressure on the government and central bank to deploy stronger fiscal and monetary support.

"Japan's economy is already in recession and there are emerging signals that the worst has yet to come," said Mizuho Securities senior market economist Toru Suehiro.

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"There's not much the Bank of Japan (BOJ) can do as monetary easing cannot cure the disease. The least the government and the BOJ can do is to prevent the negative psychological effects of the epidemic from spiralling further."

The world's third-largest economy shrank an annualised 7.1% in the three months through December, revised data showed on Monday, more than a preliminary reading of 6.3% and a median market forecast of 6.6%.

The figure represents the steepest decline since April-June 2014, when a sales tax hike to 8% from 5% in April of that year pushed the economy into recession.

The deeper contraction and the virus impact have fuelled fears of contraction in January-March to mark two consecutive quarters - the definition of a recession.

"Unfortunately, any recovery in Q1 has been nipped in the bud by the global spread of the coronavirus," said Capital Economics' Japan economist Tom Learmouth. The economy is likely to contract 0.5% in the current quarter from the last, he said.