• Japan is the world’s third largest economy
  • Japan has now delivered three consecutive quarters of GDP declines
  • Japanese has been particularly hammered by a record 8.2% drop in domestic consumption

Japan saw its gross domestic product shrink by a record 27.8% in the second quarter on an annualized basis.

The government’s Cabinet Office said on Monday that on a quarter-over-quarter basis, Japan’s economy shrank by 7.8% in the period ending in June.

Japan, the world’s third largest economy, has now delivered three consecutive quarters of GDP declines, marking its worst performance since 1955. The economic gains engineered by Prime Minister Shinzo Abe – who commenced stimulus policies that became known as ‘Abenomics’ in 2012 – have now been wiped out.

Although Japan’s second quarter contraction was not as bad as the comparable 32.9% plunge in the U.S., it was a greater loss than its previous record – the 17.8% drop Japan suffered in the first quarter of 2009 during the global financial crisis.

BBC reported that the Japanese economy has been particularly hammered by a record 8.2% drop in domestic consumption (which represents more than one-half of the economy) and a sharp 18.5% decline in exports, with automobiles hit very hard.

“In April [and] May, a state of emergency was issued, it was a situation where the economy was artificially stopped so to speak, and the impact was severe,” said Yasutoshi Nishimura, the minister of economic and fiscal policy, according to Associated Press. “These are tough numbers but they bottomed out in April and May, we would like to put all our efforts into returning to a growth trajectory.”

Even before the emergence of the COVID-19 pandemic earlier this year, Japan’s economy already was struggling from a hike in the sales tax to 10% in 2019, the ongoing trade tensions between the U.S. and China and the impact of Hagibis, a category 5 hurricane that struck the nation in October.

Japan has already injected $1.1 trillion in fiscal and monetary stimulus to protect the economy from the pandemic, and may deploy another huge package in the autumn.

Karishma Vaswani, BBC’s Asia business correspondent, wrote that in Japan “no one escaped the reach of the pandemic, and even if there weren't strict lockdowns put in place, people generally stayed indoors and didn't spend money. That has a knock-on effect on corporate earnings, as consumers buy less and so companies earn less.”

Vaswani added: “It's a vicious cycle that in turn leads to a lack of confidence about hiring prospects – which means there's also nervousness about job prospects.”

However, some analysts expect Japan’s economy to rebound.

Capital Economics said that while Japan is undergoing a second wave of COVID-19 infections, its health care system is performing well.

“I expect growth to turn positive in the July-September quarter,” said Takeshi Minami, chief economist at Tokyo’s Norinchukin Research Institute, according to Reuters. “But globally, the rebound is sluggish everywhere except for China.”

But other economists worry things in Japan may worsen.

“Demand for business investment is expected to fall due to worsening corporate profits and risk of the coronavirus spreading,” said Saisuke Sakai, senior economist at Tokyo’s Mizuho Research Institute. “There is a chance economic activity may stagnate if major nations adopt lockdown measures again, or Japan reissues a state of emergency.”