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

Gross domestic product grew at an annualized pace of 1.9% in the three months to June — faster than earlier estimates 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 in the country.

The stronger rebound confirms that the economy avoided falling back into recession despite returning to a state of emergency, but it still failed to recoup the losses of the first quarter.

As public support for Suga's premiership drained away, his failure to stop the subsequent jump in infections ultimately proved to be more significant than signs of economic resilience.

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 and supply chain bottlenecks in the weeks leading up to a general election this fall.

Suga’s replacement will also need to plot out a course for how the economy can balance the need to contain the virus and the desire to loosen restrictions on economic 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 ($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 on Wednesday morning.

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 the cooling of the global recovery as supply chain issues bog down production.

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 that people have been finding ways to use their money as they increasingly adapt to life with COVID-19, 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.

"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,” said Yuki Masujima, economist at Bloomberg Economics.

"My conclusion is that the economy has yet to regain strength,” Nomura's 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.

The announced 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 that the recovery of the economy will be delayed and that easing must continue.

"We will probably avoid 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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