China’s lockdown, rising inflation and brutally high energy prices could not dampen 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 annual rate of 2.2 percent during that period, government data showed on Monday. The second-quarter result followed a 0 percent increase – revised down from an initial reading of a 1 percent decline – in the first three months of the year, when consumers retreated to their homes amid the rapid spread of the Omicron variant. After that initial wave of Omicron burned off, shoppers and domestic travelers poured back into the streets. Then the case numbers quickly rebounded to record highs for Japan, but this time the public — heavily vaccinated and weary of restraint — reacted less fearfully, said Izumi Devalier, head of Japan economics at Bank of America. . “After the end of the Omicron wave, we had a really nice jump in mobility, a lot of spending coverage in categories like restaurants and travel,” he said. The new growth report shows Japan’s economy may finally be back on track after more than two years of yo-yoing between growth and contraction. But the country remains an economic “laggard” compared to other wealthy nations, Ms Devalier said, adding that consumers, especially the elderly, “remain sensitive to Covid risks”. As that sensitivity slowly decreased over time, he said, “we’ve had this very gradual recovery and normalization from Covid.” The second-quarter growth came despite tough headwinds, particularly for Japan’s small and medium-sized businesses. China’s Covid lockdowns have made it difficult for retailers to stock in-demand products 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 companies. Over the past year, the Japanese currency has lost more than 20% of its value against the dollar. While that was good for exporters — whose products became cheaper for foreign customers — it pushed up import prices, which have already become more expensive due to shortages and supply chain disruptions caused by the pandemic and war. of Russia in Ukraine. UPDATED Aug. 12, 2022, 5:21 pm ET While inflation in Japan – around 2 percent 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, possibly curbing demand from consumers who are used to paying the same amounts year after year. A gradual return to normal economic activity prompted a strong increase in private investment, data showed on Monday. The growth is partly driven by spending to improve companies’ sustainability and digital infrastructure — efforts strongly promoted by government policies, said Wakaba Kobayashi, an economist at the Daiwa Institute of Research. However, it is unclear how long this growth can continue, he said. Among many businesses, “there is a sense that the global economy will continue to slow,” he said. The economies of the United States, China and Europe have slowed faster than expected in recent months due to the war in Ukraine, 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 end and foot traffic to their businesses remains below pre-pandemic levels. In addition, geopolitical tensions create more uncertainty for Japan’s core 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 critical producer of semiconductors — key components for Japan’s major 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 quite cautious,” Ms. Devalier said. At home, he expects consumption to slow as people adjust to the new normality of life with the pandemic and their enthusiasm for spending. Wage growth, which has been stagnant for years, is lagging 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.” 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 immediately before the pandemic. But even at the time, it was in a weakened state after Japan’s consumption tax hike cut spending. “There are still many reasons for concern,” Mr. Kobayashi said, citing inflation and the ongoing pandemic. “The situation is not so bad that we see growth slowing down, but we also cannot say that things will turn out well.”
