Japan’s economic recovery is likely to remain sluggish in the July-September period, as the resurgence in domestic coronavirus infections is expected to lead to parts of the country remaining under a state of emergency for the next few months, analysts say.
Some analysts say the economy is unlikely to return to its pre-pandemic size by the end of 2021 as projected by the government, following the release Monday of figures showing real gross domestic product increased at an annualized pace of just 1.3% in the April-June period.
Responding to a survey released Thursday by the Japan Center for Economic Research and conducted over an eight-day period through Aug. 6, 36 private-sector think tanks forecast average GDP growth of an annualized 2.55% in the July-September period, down sharply from the 4.90% increase projected a month earlier.
The downgrade reflects the state of emergency issued in Tokyo in mid-July, which was then expanded to four more prefectures earlier this month, asking restaurants to stop serving alcohol and close early and for people to refrain from unnecessary outings.
Fully covering the period of the Tokyo Olympics, the capital’s fourth emergency was scheduled to end on Aug. 31, but is now set to be extended until mid-September.
“The emergency will be probably extended to around October,” said Keiji Kanda, a senior economist at the Daiwa Institute of Research. “That means, most of the July-September period will be under the state of emergency, and economic growth in the quarter will be very slow.”
Kanda said that it has been “getting harder” to flatten the curve of infections by repeated emergency declarations, as people have become less willing to comply with them.
Such a situation could remain in place until the end of October, when about 80% of Japan’s population is expected to be fully inoculated, he added.
During the second and third emergencies earlier this year, there was a sharp fall in people visiting stores and entertainment facilities from the period before the measures were introduced in the target prefectures and some other areas.
But under the current emergency, the flow of people was only slightly down in Tokyo and roughly flat nationwide in July, according to Daiwa’s analysis.
Daiwa predicts the fourth emergency and a less strict quasi-state of emergency covering 13 prefectures will reduce GDP by ¥520 billion ($4.7 billion) from July 12 through Aug. 31, smaller than the losses incurred under the second and third emergencies.
“The adverse economic impact is expected to be smaller as the virus emergency has become less effective. Still, consumer spending will remain at quite a low level as long as the emergency continues,” Kanda said, adding that the only realistic option for the government to contain the virus spread now is to promote its vaccine rollout.
Although Japan still lags behind other developed economies in inoculations, its rate of fully vaccinated people has been sharply increasing recently, reaching 36.70% as of Thursday, compared with the world average of 23.26%, according to the University of Oxford’s Our World in Data project.
Citing expectations that progress in the vaccination campaign will boost private consumption, the Cabinet Office released an estimate in early July that GDP will return in 2021 to its pre-pandemic level — defined as its size in October-December 2019 — with growth also supported by brisk exports and business investment.
The annualized size of real GDP for the April-June 2021 was ¥538.67 trillion, while that of October-December 2019 was ¥547.00 trillion.
A government official said that the official view will be maintained even after the release of the April-June GDP data and analysts’ relatively pessimistic projections for the following quarter.
“Consumption will be encouraged once vaccinations prevail and allow us to ease restrictions on economic activities, so the economic recovery to the pre-pandemic level by the end of this year is still achievable,” the official said.
But Taro Saito, executive research fellow at the NLI Research Institute, said the recovery is highly likely to be delayed until next year, since he projects GDP will grow by just some 1% in annualized terms in the current quarter, downgraded from his previous forecast of around 5% following the latest emergency.
“As is the case with April to June, the trend of increases in capital expenditure and exports offsetting a virus emergency-induced consumption decline will remain unchanged,” Saito said.
Meanwhile, he pointed out that components of GDP other than consumer spending have become less influenced by virus measures. Among them, capital spending will continue to grow throughout fiscal 2021 and 2022, which ends in March 2023, he predicts.
“On the back of manufacturers’ strong performance, more firms will invest in industrial machinery as well as on digitalization,” he added.
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