Japan’s Yo-Yoing Economy Shrinks as Virus Spreads and Vaccinations Lag

Japan’s economy contracted in the first three months of 2021 and continued to alternate between growth and contraction as the vaccination campaign threatened to hold back recovery from the pandemic, although other major economies appeared poised for rapid growth.

In about a year since the coronavirus emerged, Japan’s domestic demand has seen cycles of shrinking and expansion as coronavirus cases have risen and consumers have withdrawn indoors and then infections have receded and businesses have welcomed customers back to have.

Japan is currently experiencing a resurgence of virus cases with much of the country in a state of emergency and the number of deaths rising, particularly in Osaka. According to analysts, the yo-yo economic pattern is unlikely to stop until the country has vaccinated a significant portion of its population. These efforts have only just begun and are unlikely to accelerate significantly in the months ahead.

These dynamics could potentially drag the country back into recession – defined as two consecutive quarters of contraction – later this year as it struggles to control the spread of more deadly and contagious variants of coronavirus.

Japan’s economy, the third largest in the world after the US and China, contracted 1.3 percent from January to March, an annual decline of 5.1 percent. The contraction followed two consecutive quarters of expansion.

Growth skyrocketed in the second half of last year as consumers who had holed up at home for months to avoid the virus piled into department stores, restaurants, bars and theaters.

The recovery went a long way in getting the economy out of the huge hole that formed in the early months of the pandemic. However, as the new data shows, the turnaround is fragile and will be difficult to sustain as long as the country continues to face the threat from the virus.

“We are in a situation where we cannot relax until the vaccine is well distributed,” said Keiji Kanda, senior economist at the Daiwa Institute of Research in Tokyo.

In early 2020, when the pandemic hit, Japan’s economy was already battling headwinds from falling demand from China, a hike in consumption tax, and a devastating typhoon. When the country plunged into distress this spring, domestic consumption crumbled and exports fell to new lows.

The result was the biggest blow to the economy since 1955, when the country first began using gross domestic product to measure its growth.

Even so, the impact of the pandemic on Japan was relatively minor compared to the devastation in the US and many European countries. Japan has never been completely locked down and the total death toll remains below 12,000.

Updated

May 17, 2021, 6:24 p.m. ET

These factors, combined with – by some measures – the world’s largest stimulus measures, have kept the country’s unemployment rate low and propped up many small businesses such as restaurants and hotels.

While Japan’s pandemic response has managed to mitigate the worst of the economic damage, the recovery will continue to be an uphill battle, said Tomohiro Ota, senior economist at Goldman Sachs in Japan.

Trade has rebounded in recent months as some countries reopened, but “without a recovery in consumption we cannot go back to the days before Covid,” he said.

To achieve this goal, two steps forward and one step back had to be taken. Home consumption has increased in waves that increase and decrease as the number of cases increases.

Japan’s state of emergency last spring devastated domestic demand when people stashed at home. Consumption recovered briefly in summer and autumn. A similar upswing followed a second state of emergency in January.

Last month, authorities put the country in dire straits for the third time to review the spread of the coronavirus ahead of the Olympics, which are slated to begin in Tokyo in late July.

The latest round of restrictions only affects parts of the country, but also includes major metropolitan areas such as Tokyo and Osaka and is stricter than the previous one. Earlier iterations focused on shortening the opening times of bars and restaurants. In this version, for the first time, officials demanded that department stores restrict most services and that restaurants stop serving alcohol.

The economic impact of the measures will depend on the response of a public already tired of staying home, said Taro Saito, an executive research fellow at the NLI Research Institute in Tokyo.

“We cannot say with certainty that there will be a contraction between April and June,” he said because of the restrictions. But “if the target areas expand, this could put pressure on growth. The situation is very fluid. “

The stop-and-go pattern is likely to repeat itself for some time, said Izumi Devalier, Japan’s chief economist at Bank of America Merrill Lynch.

“The domestic economy continues to be affected by developments surrounding the virus,” Devalier said, adding that vaccination remained key to improving domestic demand.

Japan’s vaccine rollout was one of the slowest among major industrialized nations. Authorities have approved the use of only one vaccine, made by Pfizer and BioNTech, and strict regulations that require vaccinations to be given by doctors and nurses have slowed its spread. Just over 3 percent of the country has received an initial shot, and vaccines are unlikely to be made available to the general population until late this summer at the earliest.

“Japan is way behind other countries that were in their vaccination programs at the time,” Ms. Devalier said, adding that slow progress “simply delays recovery.”

Mr. Kanda of the Daiwa Institute of Research said, “If vaccination makes good progress, economic activity can basically resume from fall this year.”

But, he added, “if the current pace continues, we could see another explosion of infections.”

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