Japan says virus has made economy's condition 'severe', worst view in seven years

Japan's government offered its bleakest assessment on the economy in nearly seven years, saying conditions in March were "severe" as the coronavirus pandemic shut down factories and cooled consumption.

In a monthly report released on Thursday, the government cut its economic assessment and removed language describing the economy as "recovering" for the first time since July 2013.

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The downgrade lays the groundwork for Japan to compile a stimulus package next month, which, sources say, will involve spending of at least $137 billion to cushion the blow from the pandemic.

"Japan's economy is in a severe situation, extremely depressed by the coronavirus," the report said. "Conditions are likely to remain severe due to the influence of the disease."

In February, the government said the economy was recovering moderately, albeit with some weakness among manufacturers.

The government also cut its assessment on consumption, capital expenditure and business sentiment - which all took a hit from worldwide travel bans, event cancellations and supply chain disruptions caused by the pandemic.

A decision by the International Olympic Committee (IOC) and the government to postpone the Tokyo Olympic Games until 2021 also deals a blow to Japan's economy by hitting hotels and airlines.

"The economy is worsening at a pace comparable to when the March 2011 earthquake struck, and toward levels last seen during the collapse of Lehman Brothers" in 2008, Masahiko Tsutsumi, director of macroeconomic analysis at the Cabinet Office, told reporters in a briefing.

"The damage is as bad as those two events put together."

Passengers of bullet trains, usually packed with business users and tourists, halved from year-before levels in the first half of March, as companies urged employees to work from home, the report said.

Some department stores saw sales in the first half of March tumble nearly 40% from year-before levels due to a plunge in the number of overseas visitors, it said.

The labour market remains tight and wages are steady, though there is a growing chance jobs and household income could be hit if the outbreak persists, Tsutsumi said.

"If this (worsening economic) situation continues, the foundations for a recovery could be undermined," he said.

Prime Minister Shinzo Abe is expected to instruct his cabinet on Friday to start working on the spending package, which he said would be "big and powerful" enough to help the economy stage a V-shaped recovery after the virus is contained.