why it matters
Japan is the world’s third largest economy and by far the largest creditor nation. This means that its economic performance has implications all over the world.
The new coronavirus did not hit the Japanese economy as hard as other countries. But the damage has been long-lasting, partly because of the supply chain crisis in an export-oriented economy caused by the pandemic, and because it was slower than many countries to roll back virus prevention measures.
Tuesday’s data shows Japan is finally catching up. The strong growth in exports suggests that the global logistics network has largely resolved the problems that prevented the supply of critical parts to Japan’s auto sector and other industries. The country is also benefiting from an influx of tourists following the lifting of travel restrictions that had shut most travelers out until November 2022.
But domestic spending has not caught up. One reason for this is the depreciation of the yen. Japan relies heavily on imports for food and energy, and the decades-long lowness of the Japanese currency against the dollar has driven up costs and triggered levels of inflation not seen in the country a generation ago.
The currency depreciation is largely caused by Japan’s monetary policy, which has kept Japanese interest rates at bottom even as the United States and other countries gradually raise interest rates.
Takahide Kiuchi, an economist at Nomura Research Institute, said a weaker yen would be a double-edged sword for the economy.
“This could be a plus for exporters, improving their competitiveness and profitability,” he said. “But it can hurt consumption.”
background
Japan has long suffered from sluggish economic growth. Corporate profits and wages have been sluggish for decades, and the problem is likely to get worse as Japan’s population declines and ages rapidly, and workers and consumers alike decline. .
The country has worked to overcome economic inertia with massive government spending and ultra-low interest rates aimed at encouraging businesses and households to borrow and consume.
But growth has remained weaker than expected for years, and Japan’s rising debt combined with a weaker yen has put pressure on the Bank of Japan to curb its expansion.
what’s next
The latest growth rate could be a sign of good things to come.
Bank of America Chief Japan Economist Izumi Devalier said the future of the Japanese economy was “very bright” as a strong recovery laid the groundwork to boost long-stagnation in wages and corporate profits. .
If so, it could create the conditions for the Bank of Japan to begin unwinding its ultra-loose monetary policy, long hampered by low growth.
The Bank of Japan’s policy is aimed at creating a virtuous cycle that boosts stagnating wages as corporate profits increase. And Tuesday’s data could suggest “a virtuous cycle is taking shape,” Devalier said.
Yet its heavy reliance on exports has made recent growth vulnerable to economic slowdowns elsewhere. The recent softening in China, Japan’s largest trading partner, is of particular concern.
“There are clear signs of a slowdown in China and Europe,” said Kiuchi of Nomura Research Institute. It means that “the stability of this high growth rate is uncertain.”