Haruhiko Kuroda, Governor of the Bank of Japan, speaks during a meeting of the Budget Committee of the upper house of parliament in Tokyo on Monday, a day that had brought predictions of recession. Photo: AFP / The Yomiuri Shimbun

Japan said Monday its economy contracted more than initially believed in the October-December quarter, reflecting the country’s economic fragility even before the new coronavirus outbreak began to threaten global growth.

The gloomy revised figures led economists to project that Japan is headed for its first recession since 2012, with the viral outbreak seen depressing exports.

Tokyo stocks sank more than 5% on fears over the new coronavirus and a plunge in oil prices that sent the dollar down against the yen.

The country’s gross domestic product for the October-December quarter was revised down to a contraction of 1.8%, dropping further from the 1.6% contraction estimated in February.

The fall was also sharper than a 1.7% contraction estimated by private economists, according to a survey by the Nikkei business daily.

The latest estimate tracked a contraction during the April-June quarter of 2014 after the government raised the consumption tax from five to eight percent.

The tax was raised again, to 10%, in October of last year, despite fears of its economic impact. The last quarter also saw a series of natural disasters including typhoons that caused widespread flooding.

The nation logged a larger-than-expected fall in non-residential investments that pushed overall domestic demand to shrink by 2.3$, rather than the fall of 2.1% estimated earlier, according to the Cabinet Office.

And Japan faces a difficult path ahead, with the global virus outbreak expected to depress growth at home and abroad, particularly pressuring exports.

“Unfortunately, any recovery in Q1 has been nipped in the bud by the global spread of the coronavirus,” said Tom Learnmouth, Japan economist at Capital Economics.

“We have pencilled a 0.5% quarter-to-quarter contraction in GDP this quarter,” January through March, he said, raising the possibility of a recession.

“That’s likely to be primarily driven by plunging export volumes,” he said.

Consumer spending will also be “hit hard” with many people staying at home to avoid the virus, following calls from Prime Minister Shinzo Abe for the public to cancel unnecessary outings while schools across the nation were requested to shut for most or all of March.

“We think Japan’s GDP will shrink by 1% across 2020,” Learnmouth added.

Stocks sharply down

The benchmark Nikkei 225 index dropped 5.07% – the biggest fall since February 2018 – or 1,050.99 points to close at 19,698.76, falling below the psychologically important 20,000 line.

The broader Topix index fell 5.61%, or 82.49 points, to 1,388.97.

The market opened sharply lower after Wall Street stocks tumbled Friday, with petroleum producers and banks falling especially hard.

“It was like panic selling,” Shinichi Yamamoto, a broker at Okasan Securities in Tokyo, told AFP.

Driving the declines was a ferocious sell-off in the oil markets, sparked by top exporter Saudi Arabia slashing prices – in some cases to unprecedented levels – after a bust-up with Russia over production.

“A strong yen also depressed investor sentiment in Tokyo,” Yamamoto said.

The dollar traded at 102.59 yen in Asian afternoon trade, down from 105.40 yen in New York on Friday.

The dollar temporarily dropped to the 101 yen level for the first time in more than three years.

A strong yen is a negative for Japanese exporters as it makes their products less competitive abroad and also erodes profits when repatriated.

Finance Minister Taro Aso told parliament he was watching foreign exchange rates and “staying on guard.”

The key Nikkei temporarily plunged more than six percent but slightly recovered before the closing bell on bargain-hunting, brokers said.

BoJ governor Haruhiko Kuroda told parliament: “Investor sentiment is deteriorating as uncertainty widens due to the spread of infections of the new coronavirus.”

He vowed to take “appropriate action without hesitation when it’s necessary.”

Aso also told parliament: “We think we have to respond with not only monetary policies but fiscal measures.”

Oil-related shares slumped with Inpex Holdings down 12.95% at 766 yen and Japan Petroleum Exploration falling 12.69% to 1,974 yen.

Major exporters were sharply down. Nissan plummeted 8.22% to 389.2 yen with Toyota down 4.40% at 6,495 yen.

Sony lost 7.30% to 6,214 yen and Nintendo was down 3.95% at 35,930 yen.