TOKYO — Restaurants are full. The malls are teeming with them. People are traveling. And Japan’s economy has started growing again as consumers, fatigued by more than two years of the pandemic, moved away from precautions that have kept coronavirus infections at the lowest level of any prosperous country.
China’s lockdowns, rising inflation and brutally high energy prices failed to stifle Japan’s economic expansion as domestic consumption of goods and services increased in the second three months of the year. The country’s economy, the third-largest after the United States and China, grew 2.2 percent year-on-year during that period, government data showed on Monday.
The second-quarter result followed 0 percent growth — revised from a first reading of a 1 percent drop — during the first three months of the year, as consumers retreated into their homes due to the rapid spread of the Omicron virus. variant.
After that first Omicron wave burned out, shoppers and domestic travelers flocked back to the streets. Case numbers then quickly galloped back to record highs for Japan, but this time the public — heavily vaccinated and tired of self-control — reacted less anxious, said Izumi Devalier, Japan’s chief economic officer at Bank of America.
“After the Omicron wave ended, we had a nice jump in mobility, a lot of catch-up spending in categories like restaurant and travel,” she said.
The new growth report indicates that after more than two years of yo-yoing between growth and contraction, the Japanese economy may finally be getting back on track. Still, the country remains an economic “laggard” compared to other rich countries, Ms Devalier said, adding that consumers, especially older people, are “still sensitive to Covid risks”.
As that sensitivity has slowly declined over time, she said, “we’ve had this very gradual recovery and normalization of Covid.”
Growth in the second quarter came despite strong headwinds, particularly for small and medium-sized enterprises in Japan.
The Covid lockdowns in China have made it difficult for retailers to stock high-demand products such as air conditioners, and for manufacturers to source some critical components for their goods.
A weak yen and higher inflation 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 has benefited exporters — whose products have become cheaper for foreign customers — it has pushed up import prices, which have already become more expensive due to supply chain shortages and disruptions caused by the pandemic and Russia’s war in Ukraine.
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, pushing demand from consumers who are used to it every year. to pay the same amount can be tempered. after year.
The gradual return to normal economic activity fueled strong growth in private investment, Monday’s data showed.
The growth was driven in part by spending to improve companies’ sustainability and digital infrastructure — efforts heavily spurred 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. In many companies, “there is a sense that the global economy will continue to slow,” she 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 different 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 prepandemic levels.
In addition, geopolitical tensions are adding to uncertainty for key industries in Japan. Frictions between the United States and China over President Nancy Pelosi’s visit to Taiwan this month have sparked 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, “short-term momentum is pretty good, but otherwise we’re actually quite cautious,” said Ms Devalier.
At home, she expects consumption to decline as people adjust to the new normal of living with the pandemic and their eagerness to spend dime. Wage growth, which has been stagnant 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 as we expect global growth to be weaker.”
Despite some positive signs, it will take some time for economic activity in Japan to normalize, said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ.
The economy has nearly returned to pre-pandemic size. But even at the time, it was in a weakened state after an increase in Japan’s consumption tax pushed spending down.
“There is still ample cause for concern,” said Mr Kobayashi, referring to inflation and the ongoing pandemic. “The situation is not so bad that we see growth slowing down, but we can’t say it will go well either.”