Japan returns to economic growth as coronavirus fears subside

TOKYO – Restaurants are packed. Malls are overflowing. People travel. Japan’s economy has started to grow again as consumers, exhausted by more than two years of the pandemic, move away from precautionary measures that have kept the number of coronavirus infections at the lowest level of any wealthy country.

Lockdowns in China, soaring inflation and brutally high energy prices failed to curb Japan’s economic expansion as consumption of domestic goods and services rose in the second quarter 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 the period, government data showed on Monday.

Second quarter results followed 0 percent growth – revised from A preliminary reading A 1 percent decline — in the first three months of the year, when consumers retreated to their homes in the face of the rapid spread of omicron volatility.

After that the initial Omicron wave burned out, and shoppers and domestic travelers poured back into the streets. Case numbers quickly returned to record highs for Japan, but this time the public — tired of so much vaccination and self-restraint — was reacting with less fear, said Izumi Devalier, head of Japan economics at Bank of America.

“After the Omicron wave came to an end, we had a really good run, spending a lot on things like restaurants and travel,” he said.

A new growth report indicates that Japan’s economy may be back on track for more than two years between growth and contraction. However, the country remains an economic “laggard” compared to other wealthy nations, Ms Devalier said, adding that consumers, especially the elderly, are “still sensitive to Covid risks”.

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As that sensitivity has slowly decreased over time, he said, “we have gradually recovered and normalized from Covid.”

Second-quarter growth came despite strong headwinds, especially for Japan’s small and medium-sized enterprises.

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

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

Inflation in Japan – about 2 percent in June – is still much lower than in many other countries, forcing some companies to raise prices significantly for the first time in years, reducing demand from consumers accustomed to paying the same amount in the same year. After the year.

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

The growth was driven in part by companies’ spending on improving sustainability and digital infrastructure — efforts strongly encouraged by government policies, said Wakaba Kobayashi, an economist at the Daiwa Institute of Research.

Still, it’s unclear how long that growth will continue, he said. Among many businesses, “there is a sense that the global economy will continue to decline,” he said. The economies of the US, China and Europe have slowed much faster than expected in recent months due to the Ukraine war, inflation and the pandemic.

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

Additionally, geopolitical tensions create greater uncertainty for Japan’s core industries. Tensions between the US and China over Speaker Nancy Pelosi’s visit to Taiwan this month have raised concerns among Japanese policymakers about potential trade disruptions. Taiwan is Japan’s fourth-largest trading partner and an important producer of semiconductors – essential components for Japan’s large automobile and electronics industries.

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

At home, he expects consumption to slow in line with people’s enthusiasm for a new normal life with the pandemic and subdued spending. Spending is likely to suffer as wage growth, stagnant for years, falls behind inflation. And, “For manufacturing and exports, we expect a slowdown in pace reflecting that we expect global growth to remain weak.”

Despite some positive signs, Japan’s economic activity will take some time to return to normal, said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ.

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

“There are still enough reasons to be concerned,” Mr. Kobayashi said. “The situation isn’t too bad, we see growth slowing down, but we can’t say things will go well.”

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