Japan’s economy rebounded in brief window before Omicron

Private consumption accounts for more than half of Japan's gross domestic product. PHOTO: REUTERS

TOKYO (NYTIMES) - Japan’s economy surged back into growth in the fourth quarter of 2021, as consumer spending rebounded during an autumn respite from the pandemic that briefly allowed life to return to something close to normal.

But the good news is likely to be followed, once again, with bad as the Omicron variant of the coronavirus drove consumers back indoors and disrupted manufacturing during the winter months.

In the period from October to December, the country’s economy, the third largest after the United States and China, grew by an annualised rate of 5.4 per cent, government data showed on Tuesday (Feb 15). The result, a quarterly rise of 1.3 per cent, followed a contraction in the previous three-month period, when economic output shrank at a revised annualised rate of 0.7 per cent.

The strong quarter capped Japan’s first year of economic growth since 2018. It was a rare bright spot for an economy that had been struggling with slow growth even before the virus hit, amid slumping demand for exports and trade frictions between the US and China.

Japan’s economy expanded in 2021 by 1.7 per cent in real terms, government data showed. The result followed a contraction of 4.5 per cent in 2020 and a 0.2 per cent drop the year before.

The growth in the last three months of 2021 was driven by a jump in domestic consumption as vaccine uptake reached almost 80 per cent and the threat of the Delta variant receded. For a brief window, the virus seemed to have been vanquished, with daily case counts hovering in the low hundreds. Relieved, people flooded back into shops and restaurants.

The autumn was “a very good time for Japan’s economy thanks to the good vaccine roll-out”, said Mr Naohiko Baba, chief Japan economist at Goldman Sachs, adding that “finally, Japan’s economy started to reopen”.

That bright spot, however, looks to have been brief, with short-term forecasts provoking a strong sense of deja vu.

Analysts agree that the country’s next reporting period is likely to show that the economy - which has bounced between growth and contraction on a quarterly basis for the better part of two years - shrank again, as the arrival of Omicron battered consumption and forced infected workers to stay home, disrupting manufacturing.

Surging commodities prices and a weak yen are also putting the first real upward pressure in decades on the price of consumer goods, creating another potential headwind for consumption.

“Even without the state of emergency, people’s mobility was down a lot because of the big threat of the Omicron variant,” Mr Baba said. Tokyo and other parts of the country have been under a quasi-state of emergency as Omicron cases rose.

But the situation is likely to improve as spring turns to summer and, businesses hope, the virus’ effect on the economy wanes. Barring the appearance of another disruptive variant, the prospects look good. As in other countries, Omicron has proved much less virulent than previous variants, and case numbers - which surged to their highest levels during the pandemic last month - appear to have already peaked.

“In the medium term, there’s a lot of potential for Japan’s economy to accelerate,” said Ms Izumi Devalier, the head of Japan economics at Bank of America.

Still, one long-term concern among economists is that the virus may have caused the economic equivalent of long Covid-19, indefinitely weakening consumption patterns among consumers who have become used to going out less and staying home more, she said.

Ms Devalier, however, remains sanguine that consumer sentiment will rebound as the virus recedes. “What we’ve noticed is every time the virus ebbs, every time a virus wave peaks out and you have a reduction in virus risk, consumer spending surges quite strongly,” she said.

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