Japan’s GDP expected to contract up to 5% in Q1

Japan will release preliminary first quarter GDP growth figures today as the world’s third-largest economy moves to reopen businesses.

The Japanese government has gone to great lengths to avoid a catastrophic public health and economic crisis. After declaring a state of emergency on April 7, Tokyo quickly rolled out a $1.1 trillion rescue package (equivalent to 21% of GDP), which included lower interest rates and massive commercial bond purchase commitments through 2021.

Today’s GDP figures will likely indicate an economy expected to contract sharply by up to 5% in Q1 and 22% in Q2, with a slow rebound in the second half of the year. With no guarantee of even a modest recovery, the Bank of Japan will likely be forced to keep injecting stimulus into the economy to keep the country out of a deep recession.

Japan’s national debt is already at 250% of GDP, but most of it is owned by domestic investors. However, with an aging population, increasing interest payments, and low pre-crisis GDP growth, the pandemic’s economic shock will heighten the need to attract foreign capital. This in turn will likely weaken the Japanese government’s negotiating position and force future governments to cut services and benefits across the board in order to avoid a debt crisis.

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