Resurgences of COVID-19 infections in Japan this year have prolonged the economic fallout from the pandemic. Tokyo has pushed back its expected return to pre-pandemic norms, while high energy and raw material costs conspire to compound the county's problems.
Japan's real gross domestic product (GDP) shrank by 2.9 percent, 2.0 percent and 3.6 percent in the first three quarters of this year and the government's target of restoring the economy to its pre-pandemic level by the end of the year is unlikely to be met.
The Japanese economy was expected to emerge from recession in 2021 with a slow expansion of 1.8 percent, according to the Organization for Economic Cooperation and Development (OECD), and to grow by 3.4 percent in 2022.
New variants disrupted supply chains, and shortages of semiconductors and components have troubled manufacturers. People were asked to avoid unnecessary outings and curfews were imposed several times, hitting personal consumption - more than 50 percent of the Japanese economy - hard. Personal consumption under various states of emergency in Q3, fell by 1.1 percent from Q2. Exports declined 2.1 percent, while imports fell 2.7 percent.
Things improved in Q4 as daily infections fell as the vaccination rate hit 70 percent. An 80-day state of emergency ended in October and restrictions on businesses have been greatly reduced. Regarding the Omicron variant, Japan has not tightened restrictions. Vaccine passports are seen as vital to keeping the economy going. Some economists predict 7-percent growth in Q4 with a high probability of that pace being sustained into Q1 next year.
NEW PM'S VISION
Fumio Kishida, leader of the Liberal Democratic Party (LDP) was chosen as the country's 100th prime minister on Oct. 4. In the face of a weak economy and structural problems, Kishida put forward the idea of a virtuous cycle of growth and capital distribution by improving labor distribution.
Through fiscal policies to encourage better wage distribution, Kishida plans to raise incomes and expand the middle class to stimulate consumption, combat a shrinking market and bring about his "virtuous circle." This new form of capitalism is viewed as a break from the neoliberalism that Japan has pursued doggedly for at least 20 years at the cost of increased wealth stratification and deflationary pressure.
Kishida is committed to drastic monetary easing and high spending. The ultra-loose monetary policy of former Shinzo Abe's administration led to a sharp rebound in Japan's stock and property markets, with wealthy households benefiting. Ordinary people have been left behind and their real incomes have fallen instead of rising, reducing purchasing power and making it difficult for Japan's economy to emerge from deflation.
At present, Kishida's virtuous circle is a mere vision. Actually getting there will require root and branch tax reform and a profound change in salary structures which will not happen overnight.
Kishida's Cabinet approved a record 78.9-trillion-yen (690-billion-U.S. dollar) economic stimulus in November, which included some of Kishida's signature policies such as handouts of 100,000 yen in cash, support for struggling families, students and small companies.
The extra budget will weigh on Japan's fiscal health, which is the worst among major economies. Due to dependence on borrowing to fund expenditure, government debt is expected to be close to 1,000 trillion yen (8.7 trillion U.S. dollars) by the end of fiscal 2021.
On Dec. 10, Kishida's administration approved a tax plan to encourage businesses to raise wages. According to the plan, large corporations that raise wages by at least 3 percent will be eligible for tax breaks, while for small businesses, only 1.5 percent is needed. Whether companies will take on higher labor costs at such uncertain times is an open question. Economists doubt whether a corporate tax deduction will be enough for companies to raiser labor costs.
ENERGY, RAW MATERIALS WOES
Japan is susceptible to swings in oil and other energy prices as it relies on imports. Both wholesale prices, prices of goods traded between companies, and the consumer price index (CPI) of the country have shown the effects of rising energy costs. Japan's wholesale prices have grown by 9 percent this year, the steepest gain on record. November's CPI also rose 0.5 percent year-on-year, the highest increase since February 2020.
Japanese companies face pressure to pass on costs to consumers. Some food companies have announced price hikes to pass on rising raw material costs. Electricity bills rose 10.7 percent in November.
"It's easy for energy and food companies to pass on higher costs quickly to consumers," said Toru Suehiro, a senior economist at Daiwa Securities Co. "Beyond such items, price hikes have not spread, especially in the services sector."
"The worry is that such items as energy and food are closer to people's daily lives so higher prices hurt consumers. They may start to feel that it's inflation accelerated by yen weakness, at a time when economic conditions are not good," he said.
Though about 80 percent of the natural gas needed for Japan's power companies is under long-term contracts and less affected by rising prices in the spot market, the power companies still face significant cost pressure given that the spot price of liquefied natural gas (LNG) now costs 10 times more than it did last year.
Ken Koyama, chief researcher at the Japan Institute of Energy Economics, said that as the prices of natural gas and crude oil in Japan are linked and lag behind, the real fuel price rise is yet to come. The natural gas market is facing an anomaly of high spot prices, and the supply and demand situation this winter is worrying, he said.
Naohiro Niimura, an analyst at Market Risk, said a severe winter would tighten supply and demand in the international market, and lead to higher prices, while power companies will have to increase their purchases of spot market gas, adding that the trend of rising electricity prices is likely to continue until next summer. (1 U.S. dollar equals 114.9 yen)