Japan: Recovery delayed

In Japan, economic output contracted significantly in the first quarter of 2021. The pandemic and measures to contain it continued to dampen economic activity, in particular private consumption. All in all, I expect that the Japanese economy will grow only moderately (when compared to other countries) in the current year due to the slump in economic output in the first quarter. Gross domestic product will – according to my forecast – increase by 1.8 percent in the current year. In 2022, I expect a growth rate of 3.3 percent.

In Japan, gross domestic product contracted significantly by 1.3 percent in the first quarter of 2021 (annualized minus 5.1 percent). As higher number of Corona cases occurred in winter, containment measures were tightened. In particular, people were encouraged to stay at home and switch to working from home if possible. This significantly dampened private consumption. In addition, exports were less dynamic at the start of the year than at the end of 2020. In the second quarter, the Japanese economy is expected to grow only slightly. As Japan’s vaccination program has been slow to get underway, various containment measures remain in place or have even been tightened again for individual regions. This will continue to dampen private consumption.

Economic growth will continue to be supported by strong foreign demand. However, exports will grow less strongly than at the end of 2020, and sentiment among Japanese companies has also improved somewhat recently. Against this background, business investment should increase at solid rates in the second quarter and even stronger in the second half of the current year.

From the third quarter onward, the Japanese economy is likely to grow more significantly again. Increasing vaccination coverage and relaxed containment measures will strengthen Japanese domestic demand in the second half of the year.

In addition, expansionary monetary and fiscal policies are likely to continue to support the recovery process. Financing conditions for companies will remain favorable. Corporate investment is also stimulated by additional fiscal recovery measures agreed last winter. The extensive program adopted in December 2020 is less strongly geared to stimulating the economy in the short term than the previous packages, but instead primarily includes long-term measures in the area of digitization and the promotion of “green” energy sources, which should boost corporate investment in particular. Not only the additional fiscal measures, but also an improved situation on the labor market should strengthen household incomes. Despite the economic slump, the official unemployment rate had increased only slightly since the outbreak of the pandemic, from 2.2 in December 2019 to 3.1 percent in October 2020; the government’s short-time work program prevented unemployment from rising more sharply. In March 2021, the unemployment rate was as low as 2.6 percent.

Whether the Summer Olympics can be held in Tokyo as planned is not yet certain. However, due to the pandemic, only a few foreign guests will arrive even if the Games are held; exports and private consumption will thus only be stimulated to a limited extent. All in all, the Japanese economy will grow will grow only moderately (when compared to other countries) in the current year due to the slump in economic output in the first quarter. Gross domestic product will – according to my forecast – increase by 1.8 percent in the current year. In 2022, I expect a growth rate of 3.3 percent.

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