Japan: Economic recovery strengthens somewhat but remains subdued

In Japan, economic output slightly expanded in the second quarter of 2021. The pandemic and measures to contain it continued to dampen economic activity. All in all, I expect that the Japanese economy will grow only moderately (when compared to other countries) in the current year mainly due to the slump in economic output in the first quarter and a relatively subdued recovery. Gross domestic product will – according to my forecast – increase by 2.4 percent in the current year. In 2022, I expect a growth rate of 2.8 percent.

In Japan, gross domestic product increased slightly by 0.3 percent in the second quarter of 2021 compared with the previous quarter, after the economy had still contracted by 0.9 percent in the first three months of the year in the face of widespread pandemic containment measures. The Japanese economy has thus returned to a subdued growth path. Private investment in particular developed strongly in the second quarter, but household consumption expenditure also increased at a solid rate. The marked growth in domestic demand led to significantly higher imports, which increased more strongly than exports, which also rose.

Growth is expected to accelerate only slightly in the second half of the year. The spread of the delta mutation is still dampening further economic development in Japan to a slightly greater extent than in other developed economies – partly because, due to a delayed start to the vaccination program, the vaccination rate is still lower than in other developed economies. In July and August, corona case rates and intensive care unit occupancy rose significantly after a decline in the spring. Containment measures were tightened again in some regions – including the Tokyo capital region. In particular, people were urged to stay at home and switch to home-based work if possible. Business sentiment and consumer confidence had improved somewhat in early summer, but are now expected to deteriorate again somewhat in late summer and fall. Economic development continues to be supported by noticeable growth in foreign demand, although export growth rates are likely to be somewhat lower than in the first half of 2021 due to problems with international supply chains and the global spread of the delta mutation. The Olympic Games at the end of July and beginning of August are unlikely to have provided any noticeable economic impetus; due to the pandemic, hardly any foreign visitors arrived. Uncertainties exist with regard to the outcome of the Japanese parliamentary elections, which must be held by November. The popularity of Japanese Prime Minister Suga has worsened, in particular because of the pandemic management, which many people perceive as inadequate. However, fundamental changes in economic policy are not to be expected regardless of the election outcome.

Expansionary fiscal and monetary policy will continue to support the moderate recovery process of the Japanese economy. Financing conditions for companies will remain favorable and stimulate investment. Further impetus for corporate investment will also come from the fiscal stimulus package adopted last year, which includes measures in the area of digitization and the promotion of “green” energy sources.

Not only the additional fiscal policy measures but also the good situation on the labor market are likely to support household incomes. Despite the economic slump, the official unemployment rate has increased only slightly since the outbreak of the pandemic; in June 2021, the unemployment rate was only 2.9 percent, after having increased in the meantime from 2.2 in December 2019 to 3.1 percent in October 2020; above all, the government’s short-time work program and the reluctance of Japanese companies to lay off workers have probably prevented a stronger increase in unemployment.

Advances in the vaccination campaign and economic policy stimulus keep the Japanese economy on a moderate recovery path despite the dampening effect of the delta mutation and problems with international supply chains. Gross domestic product is likely to grow by 2.4 percent in the current year. In 2022 and 2023, growth rates are likely to be 2.8 and 1.9 percent.

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