The Japanese economy: External demand supports the economy

In Japan, gross domestic product grew by a substantial 3.0 percent in the fourth quarter of last year, following a strong recovery in the third quarter with a growth rate of 5.3 percent. In the fourth quarter, growth was supported not only by strong domestic demand but also by external demand, with exports rising by 11.1 percent. As imports rose by only 4.1 percent, the trade surplus widened significantly.

With higher Corona case numbers again in the winter and tighter lockdown measures to contain the pandemic, the Japanese economy is likely to contract somewhat in the first quarter of the current year. Private consumption in particular is likely to decline. This is also indicated by the decline in retail sales in January and the deterioration in consumer sentiment. Although sentiment among Japanese companies improved in the winter, it remained subdued. The economy continues to be supported by strong external demand, particularly for motor vehicles and electronic goods. Industrial production continued to increase in January, which should limit the decline in GDP in the first quarter. Industrial production was slightly dampened in February by an earthquake in the Fukushima region, which led to the temporary closure of some production facilities there.

The Japanese economy is expected to pick up significantly in the second quarter. The vaccination program – Japan began vaccinating the population in February – and the onset of the summer half-year should gradually ease the pandemic situation. However, various containment measures and uncertainties about the further course of the pandemic remain and are dampening economic momentum.

The Japanese economy is being supported above all by expansionary monetary and fiscal policy. The Bank of Japan is likely to continue its policy of yield curve control, by which it controls yields on government bonds with short and long maturities through securities purchases. Inflation is likely to remain low, falling short of the inflation target of two percent. Fiscal policy will also remain very expansionary. Following the adoption of far-reaching aid and stimulus packages in the spring of 2020, the government adopted another extensive program in December 2020, although this mainly comprises long-term measures in the area of digitization and the promotion of “green” energy sources and is less strongly geared to stimulating the economy in the short term than the previous packages. Temporary construction is also planned in the first half of the year with a view to the Summer Olympics; hosting the Games is very likely, but not yet definitely secured. However, only a few foreign visitors are likely to arrive, so the Olympic Games are not expected to have a noticeable stimulating effect on gross domestic product.

In view of the expansive fiscal and monetary policy and a gradual easing of the pandemic situation, private consumption will pick up again from the second quarter. Consumer sentiment has already brightened again recently. Exports are also likely to continue to increase strongly in the wake of the global economic recovery and growing foreign demand. In view of this development, business investment will also increase at solid rates. As the economy gradually recovers, the unemployment rate will gradually decline. Despite the economic slump, the official unemployment rate has increased only slightly since the outbreak of the pandemic, from 2.2 in December 2019 to 3.1 in October 2020; the government’s short-time work program has prevented unemployment from rising more sharply. In January 2021, the unemployment rate was as low as 2.9 percent.

All in all, I currently expect the Japanese economy to grow by 2.9 percent in the current year. In 2022, the growth rate is likely to be 1.8 percent.

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