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U.S. and global stock market indexes have been trading at near record-highs as a slew of big government stimulus packages and optimism over fast and effective vaccine rollouts raise hopes that life should return to normal sooner rather than later.

With vaccinations for people for age 65 and over finally set to start in Japan from April 12, is the country on course to quickly get its economy back to pre-pandemic levels?

Vaccines, which have proven effective in preventing COVID-19 in those without prior infections and sharply cutting the number of serious cases and deaths, are likely to hold the key.

Most economists say a full economic recovery is unlikely until well after the vaccination of the general public is underway. Norinchukin Research Institute economists have projected the pace of economic recovery will be “stop and go” until herd immunity is attained around the end of this year.

While most economists don’t foresee the economy surpassing pre-pandemic levels until mid-2022, Takuto Murase, senior economist at the Japan Research Institute, sees a slightly faster recovery, with the economy reaching that level in the first quarter of 2022.

Murase expects the economy to show clearer signs of a gradual recovery once the vaccination of people age 65 and older is complete. Once the more than 36 million people in that demographic go out and spend more, personal consumption should be given a significant boost over time, he says.

“It has been mostly the elderly who voluntarily haven’t gone out and have been stuck at home,” he said. “So once the vaccination of older people progresses, the economy should start showing clearer signs of a gradual recovery.”

Still, the return of Japan’s economy to pre-pandemic levels will be about a year behind the U.S., as the vaccine rollout in Japan — one of the slowest among developed countries — is putting it at a disadvantage when it comes to achieving a speedy economic recovery.

The world is racing to accelerate the fast and effective distribution of vaccines to get more people to return to work. But such a scenario may be too optimistic, as herd immunity is not something that will be attained easily, Taro Saito, executive research fellow at the NLI Research Institute, cautions.

“If we could achieve herd immunity, we would have done that with influenza,” he said.

Prime Minister Yoshihide Suga receives his first dose of the Pfizer-BioNtech COVID-19 vaccine at the National Center for Global Health and Medicine in Tokyo on March 16. | KYODO
Prime Minister Yoshihide Suga receives his first dose of the Pfizer-BioNtech COVID-19 vaccine at the National Center for Global Health and Medicine in Tokyo on March 16. | KYODO

While it remains uncertain whether the vaccines will help achieve herd immunity, analysts say there are other factors that will drive the economic recovery forward, such as government stimulus packages. Saito says a series of giant U.S. stimulus packages are providing a much needed lifeline that makes a faster economic recovery possible.

“The biggest reason why Japan’s recovery is slower than the U.S. comes from the difference in the size of the economic stimulus of the two countries,” he said. “Japan’s stimulus is giant, but it still pales in comparison to that of the U.S.”

The U.S. has extended $4 trillion (¥442 trillion) in fiscal support to deal with the pandemic, the biggest in the world and accounting for nearly 30% of pandemic stimulus globally, according to the International Monetary Fund’s Fiscal Monitor update in January. Japan ranked No. 2 with ¥244 trillion in stimulus.

In addition, U.S. President Joe Biden last month signed into law $1.9 trillion in spending, a package that included $1,400 stimulus checks for most Americans, and introduced a $2 trillion plan to reshape the nation’s infrastructure Wednesday.

In contrast to the U.S., where the total number of COVID-19 vaccination doses has topped 150 million, the figure in Japan only topped 1 million on Wednesday, which bodes ill for a swift rebound for its economy.

The return of Japan's economy to pre-pandemic levels will be about a year behind the U.S., as the vaccine rollout in Japan — one of the slowest among developed countries — is putting it at a disadvantage when it comes to achieving a speedy economic recovery. | REUTERS
The return of Japan’s economy to pre-pandemic levels will be about a year behind the U.S., as the vaccine rollout in Japan — one of the slowest among developed countries — is putting it at a disadvantage when it comes to achieving a speedy economic recovery. | REUTERS

The world’s third-biggest economy grew for two straight quarters after suffering a record contraction of an annualized 29.3% in the April-June period last year. But the government’s reimposing of a state of emergency in Tokyo and other parts of the country between January and March likely resulted in the first negative growth in three quarters, projections show.

Following the complete lifting of the state of emergency in late March, Saito projects a strong 5.8% expansion on an annualized basis in the April-June period from the previous quarter. But the economy won’t likely exceed pre-pandemic levels until the April-June quarter next year, he says, as social-distancing measures will continue to put a damper on a recovery in corporate earnings and some sectors of the economy such as restaurants and hotels.

The pandemic has also highlighted widening gaps in economic performance between countries and sectors, posing a risk to job opportunities in the long term. Murase warns that the pandemic has brought about many changes to people’s lifestyles as remote work has taken hold, which is leading to robust sales of personal computers on one hand but fast-declining demand for business suits on the other.

“We expect a speedy recovery at the macroeconomic level, but the pandemic is widening gaps between certain sectors of the economy depending on whether companies are adopting optimum management strategies that match the lifestyle changes seen under the pandemic,” he said.

“Companies in the retail and restaurant sectors that adopted digitalization early on are enjoying a faster economic recovery, while those who have stuck to physical stores have been struggling.”

A recent surge in COVID-19 infections also casts a shadow over a sustained economic recovery. The economy likely won’t reach its pre-pandemic peak — recorded in the July-September 2019 quarter, just before a consumption tax hike that took effect in October that year — until late 2022 or the first half of 2023, most analysts say.

“Some industries that have been hit hard, such as the hotel, airline and transportation sectors, have been struggling to gain ground,” Murase said. “The government needs to keep an eye on those sectors and consider policies to continue extending support.”

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