Recession risk looms as Japan eyes 3rd state of emergency to contain pandemic

Japan's government is expected to issue a third state of emergency on Tokyo and three western prefectures that could last for about two weeks, according to media reports, underscoring its struggle to deal with a surge in new Covid-19 case numbers.

Some analysts say the decision, expected to be made as early as Friday, may push Japan back into recession if retailers are asked to close during the Golden Week holidays, which start next week and run through early May.

A renewed state of emergency would also cast doubt on whether Tokyo can host the Olympics in July, despite Prime Minister Yoshihide Suga's assurances it will proceed as planned.

"The risk of a double-dip recession has clearly heightened," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities. "The impact of imposing curbs on Tokyo and Osaka alone would be quite big."

With thousands of new cases resulting from highly infectious strains of the virus, Suga said on Wednesday the government will decide this week whether to declare the state of emergency for major parts of the country.

If adopted in all four regions that made requests, the emergency measures would cover close to a quarter of Japan's population of 126 million and roughly 30% of gross domestic product (GDP).

The government is considering imposing state of emergency curbs from April 25 through May 11, Jiji news agency reported.

Other media have raised the possibility of stronger curbs than those issued last time in January, such as requests for department stores and other big retailers to close.

In a news conference on Thursday, Tokyo governor Yuriko Koike urged residents to cancel trips during Golden Week, and non-residents to refrain from coming into the city.

Bad Timing

"The timing is not good," as it would hit service spending during the spring leisure season, said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

Tsunoda cut his forecast for second-quarter GDP to a 0.5% quarter-on-quarter rise, half the previously projected pace.

Japan's economy has emerged from last year's severe slump thanks to robust exports.

But analysts expect GDP to have shrunk in the first quarter due to the hit to consumption from the second emergency curbs that rolled out in January and say a second consecutive contraction in Q2 that would constitute a recession is possible.

While fresh state of emergency curbs likely won't trigger additional monetary easing, it could affect the Bank of Japan's quarterly growth projections due out next week, analysts say.

"Given prospects of strong global demand, the BOJ probably won't make big changes to its forecast of a moderate recovery," said Izuru Kato, chief economist at Totan Research.

"But a contraction in second-quarter GDP can't be ruled out, so the BOJ will probably issue plenty of warnings on the risks to domestic demand," he said.

Slow vaccine rollouts are already casting a cloud over the fate of the Olympics. Tokyo 2020 organisers said a policeman who worked with the torch relay in western Kagawa prefecture had tested positive for the virus.

Adding to signs of the pandemic's widening impact, an auto industry lobby said the Tokyo Motor Show will be cancelled this year.

While Japan has so far avoided an explosive spread of the pandemic that has plagued many western countries, it is locked in a fourth wave driven by infectious strains of the virus and amid a sluggish vaccination drive.

Tokyo reported 843 new cases on Wednesday, the most since Jan. 29 during the third wave of the pandemic and previous state of emergency. Osaka prefecture reported 1,242 daily infections, near the record high recorded last week.