Japan rebounds on economic growth as coronavirus fears fade

TOKYO — The restaurants are full. Shopping centers are teeming. People travel. And Japan’s economy has started to grow again as consumers, weary of more than two years of the pandemic, have moved away from the precautions that have kept coronavirus infections among the lowest levels of any wealthy country.

Lockdowns in China, soaring inflation and brutally high energy prices failed to curb Japan’s economic expansion as domestic consumption of goods and services soared in the second quarter of the year. ‘year. The country’s economy, the third-largest after the United States and China, grew at an annualized rate of 2.2% during that period, government data showed Monday.

The second quarter result follows 0% growth – revised from an initial reading of a 1% decline – in the first three months of the year, when consumers retreated to their homes in the face of the rapid spread of the Omicron variant.

After that first Omicron wave dried up, domestic shoppers and travelers returned to the streets. The number of cases then quickly returned to record highs for Japan, but this time the public – highly vaccinated and tired of restraint – reacted with less fear, said Izumi Devalier, head of Japan’s economy at Bank of America.

“After the Omicron wave ended, we had a really nice increase in mobility, a lot of catch-up spending in categories like dining and travel,” she said.

The new growth report indicates that the Japanese economy could finally get back on track after more than two years of yo-yoing between growth and contraction. Yet the country remains an economic “lag” compared to other rich countries, Ms Devalier said, adding that consumers, especially the elderly, “are still sensitive to the risks of Covid”.

As this sensitivity has slowly diminished over time, she said, “we’ve had this very gradual recovery and normalization since Covid.”

The second-quarter growth came despite headwinds, especially for Japan’s small and medium-sized businesses.

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

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

While inflation in Japan – at around 2% in June – is still well below that of many other countries, it has forced some companies to raise prices dramatically for the first time in years, which could dampen demand. consumers accustomed to paying the same amounts year after year.

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

Growth has been driven in part by spending to improve sustainability and digital infrastructure for businesses — efforts strongly encouraged by government policies, said Wakaba Kobayashi, an economist at the Daiwa Institute of Research.

Still, it’s unclear how long this growth can continue, she said. Among many companies, “there is a feeling that the global economy is going to continue to slow down,” she 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 greater uncertainty for Japan’s key industries. Friction between the United States and China over President Nancy Pelosi’s visit to Taiwan this month has raised concerns among Japanese policymakers about potential trade disruptions. Taiwan is Japan’s fourth largest trading partner and a key producer of semiconductors, essential components for Japan’s major automotive and electronics industries.

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

At home, she expects consumption to slow as people adjust to the new normal of living with the pandemic and their enthusiasm to spend wanes. Wage growth, which has been stagnant for years, is below inflation, which should affect spending. And, she said, “for manufacturing and exports, we expect slower momentum reflecting the fact that we expect weaker global growth.”

Despite some positive signs, it will still take some time for Japan’s economic activity to normalize, said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ.

The economy is almost back to the size it was just before the pandemic. But even then, it was in a weakened state after a consumption tax hike in Japan dented spending.

“There are still plenty of reasons to worry,” Kobayashi said, citing inflation and the ongoing pandemic. “The situation is not so bad that we see growth stagnating, but we also cannot say that things will be fine.”

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