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Japan’s economy shrank 1 percent as consumers fled Covid

TOKYO – Last December, after two years of stop-and-go growth, Japan’s economic engine finally seemed to be picking up speed. There were practically no Covid cases. Consumers were back in town, shopping, eating out, travelling. 2021 ended on a high note as the country’s economy expanded on an annualized basis for the first time in three years.

But the Omicron variant of the coronavirus, geopolitical turmoil and supply chain problems have once again set back Japan’s fragile economic recovery. In the first three months of the year, the country’s economy, the world’s third-largest after the United States and China, shrank at an annual rate of 1 percent, government data showed on Wednesday.

A combination of factors contributed to the slowdown in growth. In January, Japan implemented new emergency measures as Omicron-hyped coronavirus case numbers approached the highest levels of the pandemic. In February, Russia invaded Ukraine, driving up energy prices. And that was before China, Japan’s largest export market and a key supplier of parts and labor to its manufacturers, imposed fresh lockdowns in Shanghai, throwing supply chains into chaos.

According to Shinichiro Kobayashi, chief economist at the Mitsubishi UFJ Research Institute, the contraction was not as “extreme” as previous economic setbacks, thanks to high vaccine uptake and less sweeping emergency response measures than during previous waves of the coronavirus.

But Japan’s economic recovery from the tremendous damage from the pandemic has also not been as quick as in the United States, China or the European Union, he said.

“The pace has been slow,” he said, adding that Japan is the “only country among major economies that has not recovered.”

Growth is likely to rebound strongly in the second quarter, analysts said, a pattern that has shaped Japan’s economy during the pandemic: demand has risen while Covid cases have eased, and vice versa.

Still, growth will face some major challenges in the coming months. The pandemic and war in Ukraine have caused food and energy costs in Japan to rise sharply. And actions by the US Federal Reserve to combat high inflation have caused the value of Japan’s currency, the yen, to plummet. That has pushed up costs in the resource-poor country, which is heavily dependent on imports for food, fuel and raw materials.

Inflation in the country, while still moderate, is rising at its fastest pace in years, with Tokyo consumer prices rising 2.5 percent in April. And last year producer prices have soared 10 percent, the highest level since 1980.

China’s draconian efforts to keep Covid under control will likely result in additional disruption for Japanese companies that manufacture, source parts and export their goods there.

Consumer spending “will recover from the downward pressure, but with these negative factors in place, the question is how broad that recovery will be.” said Yoshiki Shinke, senior economist at the Dai-ichi Life Research Institute.

Japan’s Prime Minister Fumio Kishida has tried to offset the impact of price hikes with heavy government subsidies for fuel and cash donations to families with children. But Japanese consumers, fearful of the economic fallout from the pandemic, have largely put stimulus money into savings.

Japan’s growth faces various challenges, but ultimately its recovery will depend on Covid, analysts said, a frequent refrain over the past two years.

While Japan has high vaccination rates and has done better than most other wealthy countries in containing the pandemic, the virus’s versatility has made it difficult to predict its path. And that has made experts reluctant to embark on any predictions about its future impact on the global economy.

“The big risk is that Corona will spread again,” said Naoyuki Shiraishi, an economist at the Japan Research Institute. “If a new variant emerges, there will be new restrictions on activity, and that will suppress consumption.”

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