Japan’s economy bounces back as Covid restrictions ease

Economic output defies expectations to expand in Q2 – but analysts warn of contraction risk

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Last modified on Mon 16 Aug 2021 12.50 EDT

Japan’s economy recovered strongly in the second quarter to join the turnaround seen across G7 countries as the easing of lockdown restrictions sent consumers rushing to the shops.

Beating the expectations of City analysts, the world’s third largest economy also capitalised on global trade’s return to health with a surge in exports.

After a 0.9% drop in the first quarter, economic output expanded 0.3% in the second quarter, or by 1.3% using the annualised calculation that is more commonly cited by Tokyo. Analysts had expected the annualised growth to be only 0.7%.

However, a state of emergency imposed in the final days of the Olympic summer games to tackle the Delta variant and a broader slowdown in China and the US is expected to dampen momentum in the third quarter.

“There’s not much to be optimistic on the outlook with a spike in infections heightening the chance of stricter curbs on activity,” said Yoshiki Shinke, the chief economist at Dai-ichi Life Research Institute.

“Japan’s economy stagnated in the first half of this year and there’s a risk of a contraction in July-September. Any clear rebound in growth will have to wait until year-end.”

The second quarter rebound was also more modest than seen in the US, where GDP growth leapt 6.5% on an annualised basis in the second quarter. The 19-member eurozone reported a 2% increase in GDP in the second quarter while the UK, which suffered one of the biggest pandemic-induced slumps during 2020, enjoyed a 4.8% increase in GDP.

After a low infection rate at the outset of the Covid outbreak, Tokyo has struggled to contain the pandemic and in more recent times has experienced a backlash by households against further restrictions. The latest state of emergency is the country’s third since March.

The economy minister, Yasutoshi Nishimura, said: “I have very mixed feelings about this GDP result. It shows that households’ consumption appetite is very strong despite the state of emergency curbs. Our priority is to prevent the spread of the virus. It’s very bad for the economy for this situation to drag on.”

A record number of gold medals for Japan in the Tokyo Olympics was unlikely to have boosted consumption, analysts said, after the games was held behind closed doors in the two weeks to 8 August.

Takeshi Minami, the chief economist at Norinchukin Research Institute, described the second-quarter performance as weak, after a low vaccination rate restricted an even larger bounce-back in consumer spending.

A surge in Delta variant cases in Asia has caused supply chain disruptions for some Japanese manufacturers, which could weigh on factory output and add to gloom for an already fragile recovery.

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