Japan’s economy recorded impressive growth in the second quarter of 2023, government data showed on Tuesday, evidence that the country is finally recovering from the Covid doldrums, even as signs of significant challenges remain.
Economic output in Japan grew by an annualized rate of 6 percent in the second three months of the year, the country’s Cabinet Office said. It was the third consecutive quarter of expansion, following a revised reading of 3.7 percent growth in the January-to-March period and a slight bump of 0.2 percent the quarter before that.
The rapid expansion was fueled by a strong performance by the country’s export sector. The second-quarter figure came as a shock to analysts: While they had expected Tuesday’s data to show healthy growth, the result more than doubled economists’ average forecasts in a poll by Bloomberg.
Still, even with the impressive growth, a closer look at Tuesday’s underlying data — particularly a decline in domestic consumption — left plenty of room for concern, said Sayuri Shirai, a professor of economics at Keio University and a former board member of the Bank of Japan.
Although Japan’s gross domestic product has finally recovered to its prepandemic size in real terms, “the content is not really strong,” Ms. Shirai said. She added that “the only reason that we have stronger-than-expected G.D.P. growth comes from the external side,” referring to exports and a surge in inbound tourism.
Households and corporations alike are spending less at home. “It’s really suggesting that the domestic economy is not doing well,” she said.
Japan is the world’s third-largest economy, and the largest creditor by far. That means that its economic performance reverberates across the globe.
Covid didn’t hit Japan’s economy as hard as it did other countries. But the damage has been longer lasting, partly because of supply chain woes in its export-heavy economy caused by the pandemic, and because the country was slower to roll back virus precautions than many of its peer nations.
Tuesday’s data indicates that Japan is finally catching up. Strong export growth suggests that global logistics networks have largely worked out the kinks that throttled supplies of critical components to Japan’s auto sector and other industries.
The country has also benefited from the flood of tourists that has followed the removal of travel restrictions that had kept most visitors out until November. More are likely to be coming after China last week lifted a ban on group tours to Japan and other countries.
Tuesday’s data “is good news for exporters and manufacturers; it’s good news for the service industry,” said Stefan Angrick, a senior economist at Moody’s Analytics in Japan.
Domestic spending, however, has not kept pace. In fact, flagging imports accounted for part of the strong contribution from exports.
“Most people had been hoping and expecting that the domestic recovery would have a little bit longer to run,” Mr. Angrick said. “The fact that it’s only the second quarter of 2023 and there are question marks everywhere isn’t a good thing.”
Spending has slowed at home partly because of weakness in the yen. Japan is highly dependent on imports for food and energy, and the Japanese currency’s decades-long lows against the dollar have pushed up costs, feeding levels of inflation unseen in the country for a generation.
The currency’s depreciation has largely been driven by Japanese monetary policy, which has kept the country’s interest rates at rock bottom even as the United States and other countries have ratcheted them up.
The anemic yen has been a double-edged sword for the economy, said Takahide Kiuchi, an economist at the Nomura Research Institute.
“It can be a positive for exporters, increasing competitiveness and revenue,” he said. “However, it could undermine consumption.”
Japan has long suffered from sluggish economic growth. Corporate profits and wages have been depressed for decades, and the problems have seemed likely to worsen as Japan’s population shrinks and ages at a rapid clip, meaning fewer workers and consumers alike.
The country has worked to overcome its economic inertia with enormous government spending and the super-low interest rates, which are meant to encourage companies and households to borrow and spend.
But for years growth has remained weaker than hoped, and the country’s mounting debt, combined with the yen’s weakness, have put pressure on the Bank of Japan to rein in its largess.
Izumi Devalier, the chief Japan economist at Bank of America, said that Tuesday’s figures could help set the stage for the Bank of Japan to start unwinding its ultra-easy monetary policy, a goal that has been long stymied by balky growth.
The bank’s policies are intended to create a virtuous cycle in which rising corporate profits push up stagnant wages. And Tuesday’s data could suggest “that virtuous cycle is taking shape,” Ms. Devalier said.
Still, a high reliance on exports makes the recent growth vulnerable to other countries’ malaise. Recent softness in China, Japan’s largest trade partner, is a particular source of worry.
“We see clear signs of slowing in China and Europe,” Mr. Kiuchi, of the Nomura Research Institute, said. That means “the stability of this high growth is unclear.”
