Japan returns to economic growth as coronavirus fears subside

TOKYO — The restaurants are full. It is full of shopping malls. People travel. And Japan’s economy has begun to grow again as consumers, weary after more than two years of the pandemic, moved away from precautions that have kept coronavirus infections at among the lowest levels in a wealthy country.

Lockdowns in China, soaring inflation and brutally high energy prices could not dampen Japan’s economic expansion as domestic consumption of goods and services soared in the second three months of the year. The country’s economy, the third largest after the United States and China, grew at an annual rate of 2.2 percent during that period, government data showed Monday.

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

After the first Omicron wave burned out, shoppers and domestic travelers poured back into the streets. Stocks then quickly galloped back to record highs for Japan, but this time the public — heavily vaccinated and weary of restraint — has reacted less fearfully, said Izumi Devalier, head of Japanese economics at Bank of America.

“After the Omicron wave ended, we had a really good jump in mobility, a lot of catch-up in categories like restaurant and travel,” she said.

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

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

Growth in the second quarter came despite strong headwinds, particularly for Japan’s small and medium-sized enterprises.

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

A weak yen and higher inflation have also weighed on the companies. 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 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 percent in June – remains 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 every year. by year.

The gradual return to normal economic activity led to strong growth in private investment, Monday’s data showed.

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

Still, it’s not clear how long that growth can continue, she said. Among many businesses, “there is a sense that the global economy is going to continue to slow down,” she said. The economies of the US, 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. SMEs in particular are likely to struggle as pandemic subsidies end and foot traffic to their businesses remains below pre-pandemic levels.

In addition, geopolitical tensions create greater uncertainty for Japan’s key industries. Friction between the US and China over Speaker Nancy Pelosi’s visit to Taiwan this month has raised concerns among Japanese politicians about possible 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 quite good, but beyond that we are 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 stagnated for years, is lagging behind inflation, which is likely to affect spending. And, she said, “for manufacturing and exports, we expect a slowdown in momentum that reflects the fact that we expect global growth to weaken.”

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 an increase in Japan’s consumption tax drove down spending.

“There is still good cause for concern,” Kobayashi said, referring to inflation and the continuing pandemic. “The situation is not so bad that we see growth stopping, but we can’t say that things will go well either.”

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