Japan’s economy shrank 1% as consumers fled Covid

TOKYO — Last December, after two years of uninterrupted growth, Japan’s economic engine finally seemed to pick up speed. Covid cases were virtually non-existent. Consumers were back in town, shopping, eating out, traveling. The year 2021 ended on a positive note, with the country’s economy growing year-on-year for the first time in three years.

But the Omicron variant of the coronavirus, geopolitical unrest and supply chain issues have once again set back Japan’s fragile economic recovery. In the first three months of the year, the country’s economy, the world’s third-largest after the United States and China, contracted at an annualized rate of 1%, according to government data released Wednesday.

A combination of factors contributed to the decline in growth. In January, Japan had new emergency measures in place as the number of coronavirus cases, pushed by Omicron, headed towards the highest levels of the pandemic. In February, Russia invaded Ukraine, driving up energy prices. And that was before China, Japan’s biggest export market and a key supplier of parts and labor for its manufacturers, imposed new lockdowns on Shanghai, throwing off supply chains. in chaos.

The contraction was not as “extreme” as previous economic setbacks thanks to high levels of vaccination and less extensive emergency measures than in previous coronavirus waves, according to Shinichiro Kobayashi, senior economist at Mitsubishi UFJ Research. Institute.

But Japan’s economic recovery from the enormous damage caused by the pandemic has also not been as rapid as that of the United States, China or the European Union, he said.

“The pace has been slow,” he said, adding that Japan was the “only country among major economies that hasn’t recovered.”

Growth is expected to rebound strongly in the second quarter, analysts say, a pattern that has defined Japan’s economy during the pandemic: demand rose as Covid cases fell, and vice versa.

Nevertheless, growth in the coming months will face significant challenges. The pandemic and the war in Ukraine have led to sharp increases in food and energy prices in Japan. And the measures taken by the US Federal Reserve to combat high inflation have caused the value of the Japanese currency, the yen, to fall. This has driven up costs in the resource-poor country, which relies heavily on imports of food, fuel and raw materials.

Inflation in the country, while still modest, is rising at its fastest pace in years, with consumer prices in Tokyo rising 2.5% in April. And over the past year, prices for growers have climbed 10%, the highest levels since 1980.

China’s draconian efforts to keep Covid under control are likely to create further disruption for Japanese companies that manufacture, source parts and export their goods there.

Consumer spending “will recover from the downward pressure, but because there are these negative factors, the question is, how big will that recovery be?” said Yoshiki Shinke, senior economist at the Dai-ichi Life Research Institute.

Japanese Prime Minister Fumio Kishida tried to offset the effects of rising prices with large government fuel subsidies and cash handouts to families with children. But Japanese consumers, wary of the economic effects of the pandemic, have poured large sums of stimulus money into their savings.

Japan’s growth faces various challenges, but ultimately its recovery will depend on Covid, analysts say, a common refrain over the past two years.

While Japan has high vaccination rates and has done better than most other wealthy countries in controlling the pandemic, the protean nature of the virus has made it difficult to predict its trajectory. And that has made experts hesitant to engage in predictions of its future impact on global economies.

“The big risk is that the corona starts to spread again,” said Naoyuki Shiraishi, an economist at the Japan Research Institute. “If a new variant appears, there will be new activity restrictions, and that will remove consumption.”

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