Japan’s recession has stretched to nine months after the world’s third biggest economy suffered a record-breaking drop in activity of almost 8% in the second quarter of 2020. Falling household consumption was the main reason behind the contraction, with the postponement of the Olympics and weak demand for Japan’s manufacturing goods additional drags on growth. Although the 7.8% quarterly reduction in gross domestic product was the steepest decline since comparable modern records began in 1980, Japan has performed less badly than other G7 countries during the coronavirus pandemic. Official figures released by the government in Tokyo showed that action taken to combat the spread of the pandemic had taken its toll on consumer spending but business investment had held up relatively well. By comparison, the UK economy shrank by 20.4% in the three months to June – comfortably the worst performer of the G7 group of industrialised nations. Of the remaining members, the US contracted by 9.5%, Germany by 10.1%, Italy by 12.4% and France by 13.8%. A flash estimate put Canada’s decline at 12%. Japan’s recession began in late 2019 when growth was hit by an increase in sales tax but deepened in the first half of 2020. The recession has wiped out the gains from the era of “Abenomics” – the pro-growth policies introduced by the country’s prime minister, Shinzō Abe, eight years ago. Analysts expect Japan’s economy to start growing again in the third quarter but say the country’s recovery is vulnerable to increased trade tension between the US and China. Washington and Beijing called off the latest round of talks over the weekend. Saisuke Sakai, a senior economist at the Mizuho Research Institute, said: “There is a chance economic activity may stagnate if major nations adopt lockdown measures again or Japan reissues a state of emergency.” A breakdown of Japan’s GDP showed external demand – or exports minus imports – shaving a record 3.0 percentage points off growth in the second quarter. Overseas shipments tumbled 18.5%, with auto exports hit particularly hard. Falling global vehicle sales have hurt automakers such as Mazda and Nissan, among the biggest drivers of Japan’s economy. The economy minister, Yasutoshi Nishimura, conceded that the GDP readings were “pretty severe” but pointed to some bright spots such as a recent pickup in consumption. Marcel Thieliant, the senior Japan economist at Capital Economics, said the second-quarter growth figures were already old news and he expected activity to bounce back. “We already know that retail sales volumes had nearly returned to pre-virus levels in June, though spending on many services activities recovered less rapidly. And while the country is in the midst of a second wave of Covid-19, the healthcare system isn’t overwhelmed yet and new infections have started to decline again. “Given its strong corporate balance sheets, generous credit guarantee scheme and low reliance on tourism, we think that Japan will recover more quickly than most anticipate. We’ve pencilled in a 4.5% rebound in GDP for the third quarter and expect the economy to expand by 3.5% in 2021; well above the consensus of 2.6%.”