Japan’s economy posted impressive growth in the second quarter of 2023, government data showed on Tuesday, evidence that the country is finally recovering from the Covid slowdown, despite signs of significant challenges.
Japan’s economic output grew at an annual rate of 6 percent in the second quarter of the year, the country’s Cabinet Office said. It was the third straight quarter of expansion, following growth of 3.7 percent in the January-March quarter and a modest 0.2 percent growth in the previous quarter.
The rapid expansion was fueled by the strong performance of the country’s export sector. The second-quarter number came as a shock to analysts: Tuesday’s data doubled the average forecast of economists polled by Bloomberg, though they had expected it to show healthy growth.
Still, even with the impressive growth, a closer look at Tuesday’s fundamental data — particularly the decline in domestic consumption — leaves plenty of room for concern, said Sayuri Shirai, an economics professor at Keio University and a former board member at the bank. Japan.
While Japan’s gross domestic product is finally recovering to its pre-pandemic levels, “content is not really strong,” Ms. Shirai said. “The only reason we have stronger-than-expected GDP growth is from outside,” he added, referring to a surge in exports and inbound tourism.
Households and corporations spend less at home. “It really suggests that the domestic economy is not doing well,” he said.
Japan is the world’s third largest economy and by far the largest lender. That means its economic performance reverberates around the world.
Covid has not hit Japan’s economy as hard as other countries. But because of supply chain woes in the export-heavy economy caused by the pandemic, and because the country has been slower than many of its peers to roll back virus precautions, the damage has been long-lasting.
Tuesday’s data suggests Japan is finally catching up. Strong export growth has created kinks in global logistics networks that have largely hampered supplies of critical components to Japan’s auto sector and other industries.
The country has benefited from a flood of tourists following the lifting of travel restrictions that kept most visitors out until November. More to come after China last week Removed the ban On group tours to Japan and other countries.
Tuesday’s data is “good news for exporters and manufacturers; This is good news for the services sector,” said Stephen Angrik, senior economist at Moody’s Analytics in Japan.
However, domestic spending has not kept pace. In fact, flagging imports are a strong contributor to exports.
“Most people expected confidence and domestic recovery to run a little longer,” Mr. Angrick said. “It’s only in the second quarter of 2023 and having question marks everywhere is not a good thing.”
Spending at home has fallen due to the weakness of the yen. Japan is heavily dependent on imports for food and energy, and the Japanese currency’s decades-long low against the dollar has fueled levels of inflation the country has not seen in a generation.
The currency’s depreciation is largely driven by Japanese monetary policy, which has kept the country’s interest rates rock-bottom even as the U.S. and other countries raise them.
The anemic yen is a double-edged sword for the economy, said Takahide Kiuchi, an economist at Nomura Research Institute.
“This will be positive for exporters, increasing competitiveness and revenue,” he said. “However, that would undermine consumption.”
Japan has long suffered from sluggish economic growth. Corporate profits and wages have been stagnant for decades, and the problems are likely to worsen as Japan’s population shrinks and ages, meaning fewer workers and consumers alike.
The country has worked to overcome its economic slowdown through massive government spending and ultra-low interest rates, encouraging firms and households to borrow and spend.
But growth has been weaker than expected for years, and the country’s mounting debt, combined with a weak yen, has put pressure on the Bank of Japan to rein in its largesse.
Izumi Devalier, Bank of America’s chief Japan economist, said Tuesday’s figures would help set the stage for the Bank of Japan to begin its ultra-easy monetary policy.
The bank’s policies aim to create a virtuous cycle in which rising corporate profits push up stagnant wages. Tuesday’s data “shows that virtuous cycle taking shape,” Ms. Devalier said.
However, over-reliance on exports has made recent developments to the malaise of other countries. A particular source of concern is the recent softening in China, Japan’s largest trading partner.
“We see clear signs of slowing in China and Europe,” said Nomura Research Institute’s Mr. Keuchi said. That means “the sustainability of this high growth is unclear.”