Japan’s economy, which is the world’s third largest by GDP, registered a fall of annualized rate of 1.0% in January-March over that in the previous quarter, which translated into a quarterly drop of 0.2%. COVID-19 curbs hit the service sector hard and increasing commodity prices exerted increased pressure, raising concerns about a protracted downturn. Business optimism in Japan’s manufacturing sector hit a low as firms struggled with increasing import costs due to a weak yen and higher raw material prices. The decline in the GDP of Japan has been due to the following reasons:
Covid 19 Impact
To tackle the pandemic, the government urged many prefectures to adopt strict anti-Covid measures for about two months until March 21, making people cautious about spending on non-essential items. The travel and tourism sector was suffering as domestic leisure travel did not pick up until late March to early April. The Covid 19 restrictions to curb the spread of the infection and the impact of inflation led to a decrease in household spending, which affected the GDP growth.
Russia-Ukraine conflict
The Russia-Ukraine conflict has aggravated the global supply chain constraints, and increased the inflation. Increasing food and energy costs continue to erode the purchasing power of many households, and when consumers wish to buy new vehicles or appliances, or even spend on luxury goods – the choices are limited, and deliveries have been delayed further. With the conflict, the already high energy prices became still higher, which is a big problem for a country that mainly depends on imports for oil and gas.
Net Exports Down - Pressure on Yen
Net exports of goods pushed down the total domestic output in the first quarter. The export of goods and services rose 1.1% in January-March quarter. Imports rose at a much faster pace of 3.4% after increasing 0.3% in the previous quarter. This was complicated by higher prices of energy and commodities and the need to purchase more Covid-19 vaccines from the U.S. and Europe. Alongside, the Yen has weakened, making imports relatively more expensive.
Sectors Heavily Affected: Manufacturing and Consumer Goods
With increasing import costs and a disrupted supply chain, manufacturing companies had to endure inconsistent supply and higher raw material prices. The consumer goods industry, on the other hand, was reeling under the falling household spending due to the Covid 19 pandemic, coupled with increasing food and energy prices stemming from the Russia-Ukraine conflict.
GDP Recovery Expected in Q2 amid Uncertainty
The lifting of Covid 19 restrictions in March, and the pent-up demand, will likely hasten recovery in domestic consumption (to pre-COVID levels), which is expected to lead the GDP growth in the next quarter. According to Japan Center for Economic Research (JCER), the country’s seasonally adjusted real gross domestic product grew 0.8% in March over that in February as COVID-19 restrictions were lifted across the country. To cushion the blow from inflation, the Japanese government approved a 2.7 trillion yen ($21 billion) fiscal spending program, comprising gasoline subsidies and cash handouts to low-income families.
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