Roaring Back From Pandemic, Japan’s Economy Grows by 6 Percent

The News

Japan’s economy recorded impressive growth in the second quarter of 2023, government data showed on Tuesday. It’s a promising sign for the country, which had been slower than other wealthy nations to emerge from the Covid doldrums.

Economic output in Japan grew by an annualized rate of 6 percent in the second three months of the year, the country’s Cabinet Office said. That followed a revised reading of 3.7 percent growth in the January-to-March period.

The rapid expansion was fueled by strong performance by the country’s export sector, while domestic consumption declined.

Why It Matters

Japan is the world’s third-largest economy, and the largest creditor by far. That means that its economic performance reverberates across the globe.

Covid didn’t hit Japan’s economy as hard as it did other countries. But the damage has been longer lasting, partly because of supply chain woes in its export-heavy economy caused by the pandemic, and because the country was slower to roll back virus precautions than many of its peer nations.

Tuesday’s data indicates that Japan is finally catching up. Strong export growth suggests that global logistics networks have largely worked out the kinks that throttled supplies of critical components to Japan’s auto sector and other industries. The country has also benefited from a flood of tourists following the removal of travel restrictions that had kept most visitors out until November 2022.

Domestic spending, however, has not kept pace. That’s partly because of weakness in the yen. Japan is highly dependent on imports for food and energy, and the Japanese currency’s decades-long lows against the dollar have pushed up costs, feeding levels of inflation unseen in the country for a generation.

The currency’s depreciation has largely been driven by Japanese monetary policy, which has kept the country’s interest rates at rock bottom even as the United States and other countries have ratcheted them up.

The anemic yen has been a double-edged sword for the economy, said Takahide Kiuchi, an economist at the Nomura Research Institute.

“It can be a positive for exporters, increasing competitiveness and revenue,” he said. “However, it could undermine consumption.”

Background

Japan has long suffered from sluggish economic growth. Corporate profits and wages have been depressed for decades, and the problems have seemed likely to worsen as Japan’s population shrinks and ages at a rapid clip, meaning fewer workers and consumers alike.

The country has worked to overcome its economic inertia with enormous government spending and the super-low interest rates, which are meant to encourage companies and households to borrow and spend.

But for years growth has remained weaker than hoped, and the country’s mounting debt, combined with the yen’s weakness, have put pressure on the Bank of Japan to rein in its largess.

What’s Next

The latest growth figures could be a sign of good things to come.

Izumi Devalier, the chief Japan economist at Bank of America, said that the country’s economic future looks “quite bright,” with the strong recovery setting the stage for a boost in long-stagnant wages and corporate profits.

If so, that could create the conditions for the Bank of Japan to start unwinding its ultra-easy monetary policy, a goal that has been long stymied by balky growth.

The bank’s policies are intended to create a virtuous cycle in which rising corporate profits push up stagnant wages. And Tuesday’s data could suggest “that virtuous cycle is taking shape,” Ms. Devalier said.

Still, a high reliance on exports makes the recent growth vulnerable to other countries’ malaise. Recent softness in China, Japan’s largest trade partner, is a particular source of worry.

“We see clear signs of slowing in China and Europe,” Mr. Kiuchi, of the Nomura Research Institute, said. That means “the stability of this high growth is unclear.”

Ben Dooley reports on Japan’s business and economy, with a special interest in social issues and the intersections between business and politics. More about Ben Dooley

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