Japan: Economic recovery in sight, but remains subdued

In Japan, gross domestic product contracted by 0.8 percent quarter-on-quarter in the third quarter of 2021, after the economy had recovered slightly by 0.4 percent in the second quarter in view of temporary easing of pandemic containment measures. Both private consumption and business investment have recently declined, with only public sector consumption and investment spending increasing slightly. The marked decline in domestic demand contributed to lower imports, which contracted more sharply than exports.

The Japanese economy is expected to pick up again slightly in the fourth quarter. Corona case rates have fallen recently and the vaccination rate has increased significantly after a slow start to the vaccination program. Against this backdrop, containment measures have been eased. There are increased uncertainties surrounding the new Omicron mutation. Business sentiment and consumer confidence improved somewhat in the fall, but are likely to remain subdued, particularly in light of the new Omicron mutation.

Expansionary fiscal and monetary policy will support the moderate recovery process of the Japanese economy in winter 2021/22. The new Japanese head of government Fumio Kishida is planning further fiscal stimulus measures. Monetary policy also remains expansionary in view of low inflation rates. The Japanese central bank’s two percent inflation target will probably not be reached in the forecast period despite the continued expansionary monetary policy.

Foreign demand, which has been weak recently, is expected to recover somewhat, but high export growth rates are not anticipated; the economy has recently cooled in many regions of the world. In addition, problems with international supply chains are likely to persist until summer 2022.

The stable situation on the labor market should also support household consumption. Despite the economic slump, the official unemployment rate has increased only slightly since the outbreak of the pandemic; in September 2021, the unemployment rate was only 2.8 percent, having risen from 2.2 at the end of 2019 to just over three percent in October 2020; the government’s short-time work program and Japanese companies’ reluctance to lay off workers in particular have probably prevented unemployment from rising more sharply. However, wage development is sluggish – which is another reason why there is no inflationary pressure in Japan. Recently, the Japanese head of government called on companies to allow a “three percent” increase in wages in the upcoming wage negotiations.

All in all, gross domestic product is likely to increase by 1.6 percent in the current year. In 2022 and 2023, growth rates will probably be 2.4 and 1.4 percent respectively.

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