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A coronavirus wave for each Olympic ring

While consumption remains a weak link, robust exports and capital spending in Q2 may have helped the economy just about avoid a double-dip recession. And while Japan will be in the midst of a fifth wave of coronavirus during the Tokyo Olympics which formally begin this evening, we still expect GDP to recover further in Q3. Economic activity is holding up well so far and the fast-moving vaccine rollout should allow restrictions to be eased towards the end of the quarter.
Tom Learmouth Japan Economist
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Japan Chart Book

Output will return to pre-virus trend eventually

With a record virus wave sweeping across the country and consumer confidence slumping, we’re slashing our forecast for Q3 consumption growth from 0.8% to 0.2%. While the government has refrained from declaring another state of emergency, spending was weakening even before virus cases started to surge. That means that GDP will remain much weaker in the near term than the pre-pandemic trend, forcing the Bank of Japan to keep policy loose even as central banks elsewhere are tightening the screws. However, we still expect that gap to close eventually, for two reasons. First, while the long-running rise in the labour force participation rate stalled over the last couple of years, the share of the population available for paid employment is now on the rise again. What’s more, mobility has recently reached pre-virus levels for the first time since the start of the pandemic, which suggests that households are learning to live with the virus even if currently they are not spending as before. The still very high household savings rate should fall in earnest before long.

8 August 2022

Japan Economics Weekly

The rise and fall of Japan's energy imports

Japan is still struggling to wean itself off fossil fuels despite a new government push to boost solar power. However, the country has become more energy efficient over the past decade, which has helped the economy weather the impact of rising global energy prices. Meanwhile, the government has recommended a 3.3% rise in the minimum wage, the largest move on record. While overall wage growth would get a boost over the next year, we think it would still remain well below the 3.0% level the BoJ maintains is needed to sustain inflation above its 2.0% target  

5 August 2022

Japan Data Response

Japan Labour Cash Earnings (Jun. 22)

The jump in wage growth in June was mostly driven by a surge in summer bonus payments and the Bank of Japan’s 3% wage growth target will remain out of reach for a while yet. More positively, the strength in overtime hours suggests that Japan is finally learning to live with the virus.

5 August 2022

More from Tom Learmouth

Japan Chart Book

Vaccines should limit Delta damage

While infections are now rising sharply nationwide – particularly in Tokyo where the Delta variant has the strongest hold – most of the vulnerable population are now fully vaccinated so we doubt restrictions will have to be tightened any further. Admittedly, the current state of emergency only active in Tokyo (19% of GPD) could be extended to other areas. But most major urban areas are already under quasi-emergency measures. Declaring a full state of emergency – where measures are only slightly more draconian – wouldn’t be a major additional drag. And the mobility data suggest states of emergency hurt economic activity progressively less each time they are declared. Moreover, there are already signs that vaccines are weakening the link between cases, hospitalisations and deaths. That makes sense given that 62% of those aged over-65s are now fully vaccinated. The vaccination rollout remains rapid, with the government well on course to hit its target of fully vaccinating all adults who want the jab by end-November. As such, we still expect most domestic restrictions to be permanently lifted from late-Q3 onwards which should enable the economy to get back to its pre-virus level before the end of this year.

22 July 2021

Japan Data Response

Japan External Trade (Jun. 2021)

The rebound in exports showed further signs of slowing in June despite another high y/y growth rate caused by base effects. We think external demand will only provide a small tailwind to growth over the coming months as capital goods exports continue to rise but consumer goods exports weaken in the wake of vaccine rollouts.

21 July 2021

Japan Economics Weekly

Delta variant taking hold in Tokyo before Olympics

A delta variant-driven fifth wave has begun and cases are beginning to surge in Tokyo ahead of the Olympics opening ceremony next Friday. However, the variant is still overwhelmingly concentrated in Tokyo – where a state of emergency came into force on Monday – and vaccines are already beginning to have a positive impact. Only a small fraction of cases are now amongst the over-65s and nationwide deaths are at their lowest level since November. Indeed, we think the current outbreak should be manageable with the current restrictions in place and still expect PM Suga to be able to remove most domestic restrictions from late-Q3 once vaccine coverage is high.

16 July 2021
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