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Japan’s economy rebounds, but Covid clouds 2021 outlook

Invest in Japan: Japan economy

After slumping in the first three months of this year, Japan’s economic outlook stepped back into recovery in the second quarter. Japan’s gross domestic product (GDP) rebounded more than expected, growing at an annualized 1.3% in the April-June quarter, after a revised -3.7% slump in the first quarter.

The preliminary data released by the Cabinet Office showed that this was the first real GDP growth recorded in two quarters, signaling a recovery in Japan’s economy from the coronavirus outbreak, following an acceleration in virus vaccinations.

On a seasonally adjusted quarterly basis, Japan’s economy rose 0.3% from the revised -0.9% drop for the first quarter, previously estimated at 1%. While exports rose 2.9% in April-June from the previous quarter, imports grew by 5.1%.

In 2020, Japan’s GDP shrank by more than 4.8% from the coronavirus pandemic’s initial hit, registering its first contraction in more than a decade.

Despite the Covid state of emergency, the rebound in the second quarter of the world’s third-largest economy was supported by an upturn in exports, business investment, and government spending. As per the Cabinet Office, corporate capital spending turned positive, while household consumption remained sluggish amid the outbreak-led lockdowns.

However, Japan’s economic recovery was weaker than other advanced economies, like the US, which recorded a 6.5% jump in Q2 GDP, and the euro area that logged an 8.3% expansion.

Japan’s economic outlook dim

“I have very mixed feelings about this GDP result. Our priority is to prevent the spread of the virus. It’s very bad for the economy for this situation to drag on,” economy Minister Yasutoshi Nishimura said.

Analysts said prospects for a more robust recovery in Japan’s economic outlook looked dim as it grapples through its worst coronavirus outbreak since the pandemic began. With just over 36% of the population being fully vaccinated, Japan has reported almost 18,000 new infections on Sunday, with nearly 4,300 in Tokyo, that entered its fourth state of emergency in July.

Moreover, a spike in cases of the Delta variant in other parts of Asia has also disrupted supply chains for some of Japan’s manufacturers, which could hurt factory output and threaten the economic outlook.

Due to tighter restrictions in the first half of the year, the International Monetary Fund (IMF) in July slightly downgraded Japan’s economic outlook for 2021 by 0.5 percentage points to 2.8%. However, IMF improved Japan’s 2022 growth forecast to 3.0%, anticipating a stronger rebound in the second half of the year as vaccination efforts proceed.

ING revised its GDP outlook for Japan to 2.3%, dimmed by the “possibility of further more severe states of emergency to deal with the rising Covid-19 infection rate, alongside Japan’s disappointing vaccination statistics”.

The bank’s Regional Head of Research, Asia-Pacific, Robert Carnell, said: “The JPY has strengthened fractionally on the back of this data, and 10Y Japanese Government bond yields have also nudged slightly higher, but we would not imagine much more than small temporary effects on the back of this data. Neither the Bank of Japan nor Japan’s government has much in the way of remaining firepower to help deliver a stronger outcome than the one we are now forecasting.”