Japan, the third largest GDP of the world, has experienced a shrink of 7.8% in this quarter, which culminates to around 27% fall in annual pace of GDP growth. The private consumption, which is a major contributor to national economy, also saw an 8.2 percent fall, following an increase in tax on consumption from 8 percent to 10 percent. The policy reform aimed to increase collection for national debt payments and fund the needs of an increasingly aging population, proved to be a costly deal for Japan.
This fall is record high in the recent decades, exceeding the Lehman crisis of 2008, when the GDP dropped by 4.8 percent in the first quarter. This decline grounded most of the reforms brought in the wake of signature reform program—Abenomics, of Prime Minister Shinzo Abe, in the past eight years. Although the decline is less severe than that experienced in the U.S.A (9.5 percent) and U.K. (20.4 percent); it is more serious than its Asian peers, South Korea and China. South Korea’s GDP fell by 3.3 percent in the second quarter whereas China’s GDP rebounded from a negative 6.8 percent to a positive 3.2 percent.
Fortunately, the retail sales and factory outputs in Japan are showing signs of early recovery, the export of cars and electronics overseas has drastically slowed down. With the postponement of the hugely expected Olympic games, expected tourist spending is a forego now. Government has proposed a stimulus to prevent bankruptcies and job-retention subsidies amounting to a whooping 40 percent of national GDP. In this emergency, government has proposed a handout of 100,000 yen ($940) to its citizens which will aid to boost the private consumption.
Job losses are relatively on a safer side as compared to the U.S.A because of rigid hiring practices of Japan, which makes it difficult to lay off employees. However, this isn’t a guarantee for a rapid recovery of consumption demand. In fact, there might be a “negative feedback loop” which brings pessimism among the people, further lowering the demand.