Japanese consumers boost economy ahead of Omicron setback

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(Bloomberg) — Japan’s economy returned to growth in late 2021, fueled by the power of consumer spending now threatened by the latest omicron wave.

Gross domestic product grew at a slightly slower-than-expected annualized rate of 5.4% in the three months to December compared with the previous quarter, the Cabinet Office reported on Tuesday. Economists had forecast growth of 6%.

Last quarter’s growth was meant to be the start of a more sustainable rebound for Japan as it strives to catch up with pandemic upswings from its Group of Seven peers. But record virus cases in early 2022 and new restrictions on businesses raised fears of another imminent contraction.

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“Consumer spending was the main driver of the economy last quarter as the state of emergency was lifted,” said Taro Saito, director of economic research at the NLI Research Institute. “But there’s no doubt that Japan’s growth will come to a screeching halt this quarter and I expect it to be around zero percent.”

The economy has contracted in half of the past 10 quarters amid recurring security advisories that have hit the services sector particularly hard.

Read more: Japanese economy at risk of contracting again due to Omicron

The quarterly figures showed the key importance of virus concerns on consumer behavior.

During an autumn lull in Covid cases, private consumption jumped 11.2%. While this indicates how easing infection fears may unleash demand, the opposite outcome is likely this quarter amid a record rise in cases triggered by the omicron variant.

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Business investment and exports also contributed to the expansion as supply chain lockdowns eased and the worst of the virus delta wave passed, but gains were not as stronger than expected.

Government spending has fallen, although a stimulus package announced by Prime Minister Fumio Kishida in November is expected to increase government spending this quarter, provided the latest restrictions do not impede its implementation.

Kishida hopes to quickly contain the latest wave of the virus and limit the downturn in the economy ahead of the summer elections that are key to bolstering his administration.

The size of the Japanese economy still remains slightly below its end-2019 level in real terms, even with the rebound in the final months of last year. The United States had already closed the pandemic hole in its GDP last summer.

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The virus situation in Japan deteriorated rapidly at the start of the year, with daily virus cases rising from around 500 to a record high of over 100,000 in early February. Kishida then reinstated a semi-emergency state in areas covering most of the economy, although he did not call for full restrictions.

The near-emergency allows local governments to push bars and restaurants to close early and stop serving alcohol. The measures were extended last week until early March for Tokyo and 12 other prefectures.

What Bloomberg Economics says…

“Looking ahead, we expect GDP to contract in the first quarter of 2022 amid a new wave of Covid-19 infections and virus control measures reinstated to stop the spread in areas. covering about 90% of the economy.”

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–Yuki Masujima, Economist

For the full report, click here.

Death rates from the virus remain very low by international comparison and there are already signs that the omicron wave has peaked, but some consumers are likely to stay home until booster shots are more widely distributed.

So far, less than 10% of the population has received a third vaccine, according to the government, by far the lowest among rich countries.

Read more: Japanese PM pushes for 1 million daily catches as support wanes

Foreign demand may not provide as much support this quarter either.

“Exports are expected to weaken a bit as grunts of supply from Southeast Asia keep domestic factories from operating,” said Yuichi Kodama of the Meiji Yasuda Research Institute.

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The economy also faces other obstacles. Soaring energy costs are pinching household budgets and hurting businesses.

Businesses are facing the highest costs in decades, a factor that is clouding prospects for meaningful wage increases this year despite Kishida’s hopes of reigniting upward wage momentum.

The Prime Minister hopes that higher wages will trigger longer-lasting inflation and fuel a longer-term recovery in consumer spending.

Higher wage gains are also a centerpiece of Kishida’s program to share the benefits of growth more equitably. Failing to make notable progress could also weaken support for the prime minister.

©2022 Bloomberg LP

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