Japan’s Economy Grew at Faster Clip Before Record Virus Wave

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Japan’s economy had more momentum than initially thought ahead of a record surge in virus cases that contributed to Prime Minister Yoshihide Suga’s downfall.

Gross domestic product expanded at an annualized pace of 1.9% in the three months to June, faster than an earlier estimate of 1.3%, according to a revised report by the Cabinet Office on Wednesday. The figures showed extra government spending, business investment and private consumption buoyed growth. 

While the stronger rebound confirms that the economy avoided falling back into recession despite returning to a state of emergency, it still failed to recoup the losses of the first quarter. Suga’s failure to stop the subsequent jump in infections has ultimately proved more significant than signs of economic resilience as public support for his premiership drained away.

Japan’s next leader is likely to call for a new stimulus package to shore up the economy as it takes a beating from wider restrictions this quarter and supply chain bottlenecks ahead of a general election this fall. Suga’s replacement will also need to plot out a course for how the economy can better balance the need to contain the virus and a desire to peg back restrictions on activity.

“Whoever wins the LDP leadership race will have to launch a new economic stimulus package and its size will likely be big,” said economist Masaki Kuwahara at Nomura Securities. 

Fumio Kishida, one of the candidates vying to become prime minister, cited a past government report that the gap between supply and demand was about 30 trillion yen ($272 billion) when asked by Bloomberg about the possible size of economic package should he take the helm. He reiterated his pledge to put together a package of economic measures at a press briefing Wednesday morning.

Sanae Takaichi, another hopeful for the top job, is reportedly due to outline her policies and officially announce her candidacy later in the day. They will both likely battle vaccine czar Taro Kono for the top job.

The candidates will see that heftier spending by businesses last quarter points to a corporate world that wants to look at growth beyond the pandemic. But the strength of that confidence is being tested this quarter by the virus surge and a cooling of the global recovery as supply chain issues weigh.

Apart from the jump in spending by the government on medical expenses, the rest of the revised numbers were largely in line with expectations. 

A rebound in private consumption shows people have been finding ways to use their money as they increasingly adapt to life with Covid, but the figures also benefited from a technical factor that doesn’t speak to strong growth. A revision of inflation figures pushed up spending in real terms.

What Bloomberg Economics Says...

“The outlook turns decisively weaker for the current quarter, as a failure to curb infections has resulted in an extended and expanded state of emergency in major cities.”

--Yuki Masujima, economist 

For the full report, click here 

“My conclusion is that the economy has yet to regain strength,” Kuwahara said. “We have to keep in mind that the data captures the period just before the latest Covid-19 outbreak. From July, record infections probably have had a negative impact on consumer spending and the virus spread overseas has disrupted supply chains.”

Japan’s latest state of emergency, its fourth since the start of the pandemic, is likely to be extended this week. Daily infections in Japan have been falling in recent days but are still averaging 11,514 this quarter, compared with 3,566 last quarter, according to a Bloomberg calculation based on NHK data.

Today’s figures won’t move the needle on the Bank of Japan’s monetary stimulus, given that prices are falling. BOJ board members have recently pointed out the recovery of the economy will be delayed and that easing must continue.

“We will probably avoid a negative economic growth this quarter, but it’s not going to be anything impressive at all,” said Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute. “Japan’s recovery will remain underwhelming compared with other major economies.”

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