Japan recovers from economic growth as coronavirus fears subside

TOKYO — Restaurants are packed. Shopping malls are packed. People are traveling. And Japan’s economy has started to grow again as consumers, fatigued by more than two years of the pandemic, turned away from precautions that have kept coronavirus infections among the lowest levels of any rich country.

Shutdowns in China, soaring inflation and brutally high energy prices couldn’t suppress Japan’s economic expansion as domestic consumption of goods and services soared in the second quarter of the year. The country’s economy, the third largest after the United States and China, grew at an annualized rate of 2.2 percent during that period, government data showed on Monday.

The second quarter result followed 0 percent growth, revised from an initial reading from a 1 percent decline, during the first three months of the year, as consumers retreated to their homes amid the rapid spread of the Omicron variant.

After the initial wave of Omicron petered out, domestic shoppers and travelers returned to the streets. Then the number of cases quickly returned to record levels for Japan, but this time the public, highly vaccinated and tired of self-control, reacted with less fear, said Izumi Devalier, head of Japan economics at Bank of America.

“After the Omicron wave ended, we had a big jump in mobility, a lot of catching up expenses in categories like restaurants and travel,” he said.

The new growth report indicates that Japan’s economy may finally return to normal after more than two years of yo-yoing between growth and contraction. Still, the country remains an economic “laggard” compared to other wealthy nations, Devalier said, adding that consumers, especially older people, “are still sensitive to Covid risks.”

As that sensitivity has slowly decreased over time, he said, “we’ve had this very gradual recovery and normalization of Covid.”

Second-quarter growth came despite stiff headwinds, particularly for Japan’s small and medium-sized businesses.

China’s Covid lockdowns have made it difficult for retailers to stock products in demand, such as air conditioners, and for manufacturers to source some critical components for their products.

A weak yen and higher inflation have also weighed on businesses. Over the past year, the Japanese currency has lost more than 20 percent of its value against the dollar. While that has been good for exporters, whose products have become cheaper for foreign customers, it has pushed up prices for imports, which have already become more expensive due to shortages and supply chain disruptions caused by by the pandemic and Russia’s war in Ukraine.

While inflation in Japan (around 2 percent in June) remains much lower than in many other countries, it has forced some companies to raise prices substantially for the first time in years, which could reduce demand for goods. consumers accustomed to paying the same amounts each year. after the year.

The gradual return to normal economic activity produced strong growth in private investment, data on Monday showed.

The growth was fueled in part by spending to improve companies’ sustainability and digital infrastructure, efforts heavily promoted by government policy, said Wakaba Kobayashi, an economist at the Daiwa Research Institute.

Still, it’s not clear how long that growth can continue, he said. Among many companies, “there is a sense that the global economy will continue to slow down,” he said. The economies of the United States, China and Europe have slowed faster than expected in recent months due to the Ukraine war, inflation and the pandemic.

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

Additionally, geopolitical tensions are creating further uncertainty for Japan’s key industries. Frictions between the United States and China over House Speaker Nancy Pelosi’s visit to Taiwan this month have raised concerns among Japanese politicians about potential trade disruptions. Taiwan is Japan’s fourth largest trading partner and a critical producer of semiconductors, essential components for Japan’s large automotive and electronics industries.

As for Japan’s overall economic outlook, “in the short term, the momentum is pretty good, but beyond that, we’re actually pretty cautious,” Ms. Devalier said.

At home, he expects consumption to decline as people adjust to the new normal of living with the pandemic and their enthusiasm to spend tempers. Wage growth, which has been stagnant for years, is lagging behind inflation, which is likely to weigh on spending. And, he said, “for manufacturing and exports, we expect a slowdown in momentum that reflects the fact that we expect global growth to be weaker.”

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