Japan's economy is booming thanks to strong spending

Japan’s economy is booming thanks to strong spending. Omicron affects the future. 

Tokyo: The Japanese economy grew in the last 3 months in 2021 when the decline in coronavirus cases boosted the economy. 

But the rising cost of raw materials and an increase in new Omicron variants of infections could dim the future outlook.

Bank of Japan Governor Haruhiko Kuroda has also emphasized the escalating tensions within Ukraine as a new risk in the bank’s projection for a moderate recovery in the economy.

The third-largest in the world’s economy grew by an annualized 5.4 percent between October and December, after contracting an estimated 2.7 percentage in the prior quarter, data from the government showed on Tuesday. 

However, it fell below a median market estimate of 5.8 percent increase.

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Many analysts believe that the economy will continue to contract yet again during the current quarter, as the rising number of COVID-19 cases prevents households from shopping, as supply chain issues impact the production of factories.

“The economy is likely to slow in the months of January and March, or even shrink, based upon how much the Omicron variation affects consumption in the service sector,” said Takeshi Minami, who is the chief economist at Norinchukin Research Institute.

Growth in the economy was driven by a 2.7 quarter-on-quarter increase in personal consumption that is responsible for more than 50% of Japan’s gross domestic product (GDP).

The rise in consumer spending that was higher than the market expectations of an increase of 2.2 percent increase occurred following Japan stopped coronavirus restrictions in October.

Capital expenditures too increased 0.4 percent, as expected by market analysts. 

External demand contributed 0.2 percent to the growth, an indication that exports have continued to benefit from the global economic recovery.

“As the economy began to reopen and service-related consumption like hotels as well as restaurants, was boosted by a significant amount,” said Wakaba Kobayashi, who is an economist at the Daiwa Institute of Research.

The recovery of Japan is, however, continuing to be lagging the other developed economies. 

This requires the BOJ to keep its monetary policy extremely loose, even as other central banks look at increases in interest rates.

The country’s real GDP adjusted to the season of 541 trillion dollars ($4.69 trillion) is below the pre-pandemic peak in late 2019.

A record-breaking increase in Omicron cases led to the government imposing restrictions on many regions and to keep the borders shut and likely reduced consumption from the beginning of the year.

The rising number of infections has also caused some manufacturers to stop production, leading to interruptions in production and delays in delivery at giant automakers like Toyota Motor Corp.

The rising cost of imports poses a threat to the weak recovery of Japan.

“Heightening tensions inside Ukraine could have adverse consequences for the global economy and Japanese growth if they trigger an increase in fuel and commodity prices.” BOJ Governor Kuroda told the parliament on Tuesday.

Hiroshi Shiraishi is, a director of economics at BNP Paribas Securities, is expecting the economy to slow down to an annualized pace of 1-1.5 percent in the months of January and March, or even slow down.

“The economic recovery could drag until the end of the year, as the Ukraine crisis could raise the cost of fuel and reduce companies’ appetite for capital investment,” he said.

“There’s nothing left for the government or the central bank regarding the new measures to stimulate. Both monetary and fiscal policy has come to an end.”