Japan's economy to shrink at fastest pace in decades this fiscal year due to pandemic

[TOKYO] Japan's economy will shrink at the fastest pace in decades in the year through March 2021, forcing the government to compile another stimulus package to cushion the blow from the coronavirus pandemic, a Reuters poll showed on Friday.

Many respondents predicted the Bank of Japan's (BOJ's) next policy step would be to expand stimulus, but they do not see the pandemic triggering a banking sector crisis this year.

The world's third-largest economy is forecast to contract 5.3 per cent this fiscal year, a July 3-9 poll of over 30 economists shows, the most it has shrunk since comparable data became available in 1994.

It will rebound 3.3 per cent next year, according to the poll.

The economy will grow at an annualised 10.0 per cent pace in the current quarter of the calendar year 2020 after having shrunk 23.9 per cent in the second quarter ended June, the poll shows.

"It would take two to three years for economic activity to return to normal levels in Japan as its overseas markets are likely to continue suffering from the spread of the virus," said Atsushi Takeda, chief economist at Itochu Research Institute.

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Two-thirds of economists polled expect Japan to compile its next stimulus package this year to ease the pain on companies and households. Japan has so far rolled out two packages totalling US$2.2 trillion.

Arata Oto, market economist at Societe Generale Securities Japan, expects the next stimulus package to be worth about 1-2 per cent of the country's gross domestic product.

The package "would aim at accelerating Japan's recovery ... once there are more signs the pandemic is beginning to subside, or to help further cushion the blow from Covid-19 if the likelihood of a second wave heightens", he said.

Globally, more than 12 million have been infected by the virus and over half a million people have died. In Japan, more than 21,000 people have been infected and over 900 killed.

Policy support for hard-hit firms should help counter worries about Japan's financial system, over 90 per cent of economists surveyed said.

Asked about BOJ's next move, 26 of 40 economists said they expect it to expand its stimulus, with 18 saying it would happen this year and five predicting it would be next year.

At next week's rate review, the BOJ is expected to roughly maintain its view the economy will gradually recover this year from the virus-led downturn, sources have said, even as fears of a second wave of infections cloud the outlook.

Japan's core consumer prices, which exclude volatile fresh food but includes energy costs, will drop 0.4 per cent this fiscal year and rise 0.3 per cent next fiscal year, the latest poll showed.

REUTERS