For first time in two years, Japan has some room for economic optimism

Green shoots of economic recovery that had begun to spring up domestically in the latter half of 2021 seemed to be put under threat at the end of the year due to the emergence of the omicron variant, which cast yet another shadow over service sectors such as travel and dining that have already been hit hard by the pandemic.

But growing evidence of the effectiveness of booster shots, combined with Japan’s already high vaccination rate, is helping to lift some of that pessimism, and many experts believe that 2022 will be the year when the economy gets back on track as people tap into the savings they’ve amassed. Japan in fact already got a taste of a rebound from late September, after the fifth COVID-19 wave subsided and states of emergency were lifted across the country.

“Signs of resuscitation have already been visible in the October-December quarter and we think that this recovery will continue,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies, a Tokyo-based think tank.

The speed of recovery will depend on how consumption fares. Economists say that although they expect it to gain momentum, it won’t reach pre-pandemic levels due to the risks of further coronavirus waves and rising prices, which could dampen consumer sentiment.

Mizuho Research and Technologies estimates that gross domestic product will grow by 3.2% this year — an ostensibly high figure for Japan. The economy plunged 4.5% in 2020, while the think tank’s estimate for 2021 is 1.6%.

“Given that major drop in 2020, (the estimated growth in 2022) is unfortunately not a strong recovery,” said Sakai.

The estimated growth rate also lags those of other advanced economies, such as the United States, with 4.1%, and the European Union’s 4.3%.

The International Monetary Fund, for its part, also projects that Japan’s GDP will grow 3.2%.

Japan’s service industry is expected to be the driving force for consumption this year, Sakai said, as more people dine at restaurants and travel in the first half of the year. Prime Minister Fumio Kishida’s administration is considering resuming the Go To Travel tourism subsidy program early in 2022.

However, demand for durable goods, such as home appliances and computers, may be not so strong. During the early stage of the pandemic, demand for those kinds of items saw a boost, since many had to stay home, but that is already starting to wane, Sakai said.

One of the major factors determining the extent of the recovery is how willing people will be to make use of their savings.

Households have piled up “an excessive amount of savings during the pandemic — whether they will spend it or not will be a significant point,” said Yasunari Tanaka, a researcher at Tokyo-based think tank Mitsubishi Research Institute.

According to an estimation by MRI, Japan has amassed about ¥40 trillion in excess savings during the pandemic, thanks in part to the government’s ¥100,000 cash handouts to all residents.

An MRI survey has indicated that consumers will possibly spend about 37% of their savings, but Tanaka says how much they will really loosen their purse strings remains to be seen. He added that other surveys show spending on traveling and dining will be down by about 5% compared with pre-pandemic levels.

“When looking at the macro scale, (the pandemic) may have changed consumption patterns, with people becoming more modest,” said Tanaka.

There is another looming risk for consumption: rising prices.

Import costs for commodities have climbed in recent months, damaging companies’ profits and household purchasing power as well as having a knock-on effect on energy costs, given Japan’s lack of natural resources.

According to an estimate by Mizuho Research and Technologies, raw material import costs will increase by ¥10 trillion in fiscal 2021, which runs through March, from the previous year due to soaring commodity prices. Of that, companies will shoulder ¥7 trillion, while households will cover the rest.

Sakai said the global inflation trend is expected to push up prices of electricity, oil and food products in Japan in the first half of this year.

“If prices of everyday goods soar, consumers will become more budget conscious,” he said.

Signs of rising prices can already be seen in recent data. In November, wholesale prices increased a record 9% from a year earlier because of rising energy costs and a weak yen, according to the Bank of Japan.

Although Japan’s inflation rate is still far from the BOJ’s 2% target, its core consumer price index in November jumped 0.5% from a year earlier, in the sharpest increase since February 2020.

Tanaka said that, as consumer prices fell earlier in the pandemic, limited inflation based on the recent pressures wouldn’t have a serious impact on consumption. What is concerning, though, is that soaring wholesale prices could hurt the earnings of companies, which are often hesitant to pass cost increases onto consumers.

“As a result, companies might be reluctant to raise wages,” Tanaka said.

If firms are reluctant to offer wage hikes, it would be a blow to the Kishida administration, as raising wages is a major part of its policy agenda.

Another risk is the potential threat of further economic fallout from the pandemic due to the rapid global spread of the omicron variant.

Economists are still uncertain how omicron, which is believed to be even more transmissible than the delta variant, will impact the economy, given that its nature is still not entirely clear.

If and when Japan faces another wave of infections, perhaps in the next few months, the economic impact will depend on how omicron affects public health.

Sakai of Mizuho Research and Technologies said that its economic projection, which released on Dec. 17, did not really take the impact of omicron into account.

Instead, the think tank based its projection on the country possibly facing a resurgence of the delta variant around the summer after people’s activities return close to pre-pandemic levels in the spring. It says that it’s possible the next wave could occur in February or March if omicron overtakes the delta variant.

In that case, the government might impose countermeasures, such as a state of emergency, that would restrict economic activities.

But there is a ray of hope that the economic damage would be limited compared with the fifth wave Japan went through last summer, thanks to the fact that nearly 80% of the population has been vaccinated twice and boosters are already being administered to health care workers. The government has also hinted that it will bring the booster schedule forward for the general population.

Although the government discouraged both vaccinated and unvaccinated people from traveling, dining out in large groups and attending large-scale events last year, “it’s likely that the government would not implement strict restrictions for vaccinated individuals even if it were to issue a state of emergency,” Sakai said.

“Therefore, I think the impact on consumption would be smaller.”