The resurgence of Japan’s economy in the second quarter of 2023, as unveiled by government data on Tuesday, portrays a noteworthy revival from the Covid-induced slump. While this marks a positive trajectory, significant challenges loom in the shadows.
The country’s economic output expanded by an impressive annualized rate of 6 percent during the second quarter, a consecutive uptick for the third quarter running. The January-to-March period had recorded a revised growth of 3.7 percent, and the preceding quarter had seen a modest rise of 0.2 percent.
The Complex Dynamics of Recovery
A remarkable upswing was driven primarily by the vigorous performance of Japan’s export sector. The second-quarter growth surpassed analysts’ expectations by a substantial margin, doubling the average forecasts from a Bloomberg poll. However, beneath this impressive facade, concerns remain as evidenced by Tuesday’s underlying data. A decline in domestic consumption raises eyebrows, suggesting that the robust growth is partially superficial. Sayuri Shirai, an economics professor at Keio University and former Bank of Japan board member, underscores that despite Japan’s GDP recovering to pre-pandemic levels in real terms, the internal economy’s vigor is lacking. The current strong growth largely emanates from external factors, chiefly exports and a surge in tourism. Notably, households and businesses are cutting back spending domestically, indicating a weaker domestic economy. This trend is particularly worrying since Japan, as the world’s third-largest economy, exerts a substantial influence globally.
Challenges and Uncertainties Ahead
Japan’s experience with Covid’s impact diverged from other nations. While the pandemic’s immediate effect wasn’t as severe, the economy sustained more lasting damage due to supply chain disruptions in its export-oriented sectors and a delayed rollback of virus measures. The recent data suggests Japan’s stride toward recovery. The surge in exports signals the successful resolution of logistics issues that previously disrupted supplies to crucial industries like the auto sector. Tourism’s resurgence following travel restrictions further bolsters the recovery. China’s decision to lift the ban on group tours to Japan and other nations will likely amplify this trend.
However, while export-driven growth appears robust, domestic spending is lagging. This discrepancy is partly attributable to a weak yen, which raises costs for imports and fosters inflation. Japan’s ongoing struggle with sluggish economic growth, coupled with an aging population, compounds these challenges. Though the government has employed substantial spending and ultra-low interest rates to stimulate the economy, growth has remained below expectations. Despite these efforts, the Bank of Japan faces pressure to mitigate mounting debt and address currency depreciation. Bank of America’s Chief Japan Economist suggests that the recent data could pave the way for the Bank of Japan to adjust its monetary policy, previously hindered by stagnant growth. As the global economic landscape continues to evolve, uncertainties linger over the sustainability of Japan’s impressive growth, calling for a cautious assessment of the nation’s economic resilience.