October 6, 2022

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Japan returns to economic growth as coronavirus fears subside

Japan returns to economic growth as coronavirus fears subside

TOKYO – Restaurants are full. Shopping centers are teeming. people travel. And the Japanese economy is starting to grow again, as consumers, more than two years into the pandemic, are turning away from the precautions that have kept the coronavirus infection among the lowest levels of any rich nation.

Lockdowns in China, high inflation and brutally high energy prices were unable to stem Japan’s economic expansion as domestic consumption of goods and services surged in the second three months of the year. Government data showed on Monday that the country’s economy, the third largest after the United States and China, grew at an annual rate of 2.2 percent during the period.

Second quarter result followed 0 percent growth – revised from Initial reading From a 1 percent drop – during the first three months of the year, when consumers retreated home in the face of the rapid spread of the Omicron variant.

After the initial Omicron wave burned out, local shoppers and travelers once again flocked to the streets. Case numbers have quickly returned to record levels for Japan, said Izumi Devalier, head of Japanese economics at Bank of America, but this time the public – who have been largely vaccinated and tired of restraint – reacted with less fear.

“After the Omicron wave ended, we made a very good jump in commuting, a lot of spending catching up in categories like restaurants and travel,” she said.

The new growth report indicates that the Japanese economy may finally be back on the right track after more than two years of swinging between growth and deflation. However, the country remains economically “backward” compared to other wealthy nations, Ms Devalier said, adding that consumers, especially the elderly, “remain sensitive to the risks of Covid”.

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Because this sensitivity has slowly decreased over time, she said, “We’ve had this very gradual recovery and normalization from Covid.”

Growth in the second quarter came despite severe headwinds, especially for small and medium-sized Japanese companies.

The Covid lockdowns in China have made it difficult for retailers to stock up on needed products such as air conditioners, and for manufacturers to purchase some critical components of their merchandise.

The weak yen and rising inflation also affected businesses. Over the past year, the Japanese currency has lost more than 20% of its value against the dollar. While this has benefited exporters — whose products have become cheaper for foreign customers — it has driven up import prices, which are already becoming more expensive due to shortages and supply chain disruptions caused by the pandemic and the Russian war in Ukraine.

While inflation in Japan – at around 2 per cent in June – is still much lower than in many other countries, it has forced some companies to raise prices significantly for the first time in years, potentially dampening demand from consumers accustomed to to pay the same amount per year. after a year.

Monday’s data showed that the gradual return to normal economic activity has produced robust growth in private investment.

Wakaba Kobayashi, an economist at Daiwa Research Institute, said the growth was driven in part by spending to improve corporate sustainability and digital infrastructure — efforts strongly reinforced by government policies.

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It was still not clear how long this growth could continue, she said. “There is a feeling that the global economy will continue to slow,” she said among many companies. The economies of the United States, China and Europe have slowed more quickly than expected in recent months due to the Ukraine war, inflation and the pandemic.

Japan faces other challenges at home and abroad. Small and medium-sized businesses in particular are likely to struggle as pandemic benefits end and their business traffic remains below pre-pandemic levels.

In addition, geopolitical tensions create uncertainty for key industries in Japan. Disagreements between the United States and China over House Speaker Nancy Pelosi’s visit to Taiwan this month have raised concerns among Japanese policymakers about potential disruptions to trade. Taiwan is Japan’s fourth largest trading partner and an important producer of semiconductors – essential components for Japan’s large automotive and electronics industries.

Regarding the general economic outlook for Japan, “in the short term, the momentum is very good, but beyond that, we are actually very cautious,” Ms Devalier said.

At home, you would expect consumption to slow as people adjust to the new normal of living with the pandemic and their enthusiasm for spending wanes. Wage growth, which has been stagnant for years, is holding back inflation, which is likely to weigh on spending. “For manufacturing and exports, we expect a slowdown in momentum that reflects the fact that we expect global growth to be weaker,” she said.

Shinichiro Kobayashi, chief economist at Mitsubishi UFJ, said that despite some positive indicators, Japanese economic activity will take some time to return to normal.

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The economy is almost back to the size it was in just before the pandemic. But even then, it was on the weak side after a hike in Japan’s consumption tax cut spending.

“There is still enough cause for concern,” Kobayashi said, citing inflation and the ongoing epidemic. “The situation is not so bad that we see growth stalling, but we also can’t say that things will go well.”