TOKYO — Last December, after two years of stop-and-go growth, Japan’s economic engine finally seemed to pick up. Covid cases were practically non-existent. Consumers were back in town, shopping, dining out, traveling. The year 2021 ended on a high, as the country’s economy grew on an annual basis for the first time in three years.
But the Omicron strain of the coronavirus, geopolitical turmoil and supply chain wailing have once again thwarted Japan’s fragile economic recovery. In the first three months of the year, the country’s economy, the world’s third largest after the United States and China, shrank 1 percent year-on-year, government data showed on Wednesday.
A combination of factors contributed to the decline in growth. In January, Japan had taken new emergency measures as the number of coronavirus cases, driven by Omicron, moved to the highest level of the pandemic. In February, Russia invaded Ukraine and energy prices rose. And that was before China, Japan’s largest export market and a major supplier of parts and labor to its manufacturers, imposed new lockdowns in Shanghai, sending supply chains into chaos.
According to Shinichiro Kobayashi, chief economist at the Mitsubishi UFJ Research Institute, the contraction was not as “extreme” as previous economic downturns thanks to high vaccination coverage and less extensive emergency measures than during previous waves of the coronavirus.
But Japan’s economic recovery from the massive damage done by the pandemic has also not been as fast as the United States, China or the European Union, he said.
Understand the supply chain crisis
“The pace has been slow,” he said, adding that Japan was the “only country of the major economies that has not recovered”.
Growth is likely to recover strongly in the second quarter, analysts said, a pattern that has defined the Japanese economy during the pandemic: Demand has increased as Covid cases have declined, and vice versa.
However, growth will face some difficult challenges in the coming months. The pandemic and the war in Ukraine have led to major increases in the cost of food and energy in Japan. And measures by the US Federal Reserve to tackle high inflation have caused the value of the Japanese currency, the yen, to fall. This has pushed up costs in the poor country, which is heavily dependent on imports for food, fuel and raw materials.
Inflation in the country, while still modest, is rising at the fastest pace in years, with consumer prices in Tokyo rising 2.5 percent in April. And in the past year, prices for producers have risen 10 percent, the highest level since 1980.
China’s draconian efforts to contain Covid are likely to lead to additional disruptions for Japanese companies that manufacture, source and export their goods there.
How the supply chain crisis unfolded
The pandemic caused the problem. The highly complex and interconnected global supply chain is in turmoil. Much of the crisis has been traced to the Covid-19 outbreak, which led to an economic slowdown, mass layoffs and a production shutdown. This is what happened next:
Consumer spending “will recover from the downward pressure, but because there are these negative factors, the question is how broad that recovery will be?” said Yoshiki Shinke, senior economist at the Dai-ichi Life Research Institute.
The Japanese Prime Minister, Fumio Kishida, has tried to offset the effects of price increases with large government subsidies for fuel and coupons for families with children. But Japanese consumers, wary of the economic effects of the pandemic, have largely put stimulus money into savings.
Japan’s growth faces several challenges, but ultimately its recovery will depend on Covid, analysts said, a common refrain of the past two years.
While Japan has high vaccination rates and has outperformed most other rich countries in keeping the pandemic under control, the virus’s proteic nature has made it difficult to predict its path. And that has made experts hesitant to commit to forecasting its future impact on global economies.
“The big risk is that corona will spread again,” said Naoyuki Shiraishi, an economist at the Japan Research Institute. “When a new variant appears, there are new restrictions on activity and that puts pressure on consumption.”