Japan's Economic Outlook for Fiscal Years 2021 and 2022
Economic Research Department Executive Research Fellow Taro Saito
1. The economy grew at an annualized rate of 1.3% in the April–June quarter of 2021
Although the contribution of external demand declined for the second consecutive quarter by 0.3% (an annual slump of 1.3%) from the previous quarter, even with the declaration of the state of emergency, private consumption (0.8%), housing investment (2.1%), and capital investment (1.7%) in private demand all climbed, covering the reduction in external demand. Public investment saw a decline, but public demand was also boosted as government consumption rose 0.5% from the previous quarter, reflecting the progress of vaccinations.
Real GDP in the April–June quarter of 2021 posted its first positive growth in two quarters but has not recovered the drop in the January–March quarter 2021 (down 0.9% from the previous quarter and 3.7% per annum). After posting record-high negative growth in the April–June quarter of 2020, the Japanese economy recorded double-digit annual growth for two consecutive quarters, but has remained stagnant since the beginning of 2021, when the state of emergency was reissued.
In 2021, U.S. growth in the April–June quarter was 6.5%, while Japan’s growth was only 1.3%. Compared to pre-coronavirus levels of real GDP (October–December quarter 2019), the U.S. was 0.8% above while Japan was 1.5% below. Looking back at developments in real GDP during the COVID-19 pandemic, the decline in the first half of 2020 was greater in the United States where the lockdown was implemented, and it rapidly recovered at about the same pace in the second half of 2020. As of the October–December quarter of 2020, Japan was slightly above the United States in real GDP compared to pre-coronavirus levels. In 2021, however, while the United States continued to enjoy high economic growth thanks to the relaxation of restrictions on activities in line with the progress of vaccination, Japan’s economic activities again stagnated due to the declaration of a state of emergency and the priority preventative measures to prevent the spread of the disease. As a result, the gap between the growth rates in the United States and Japan widened rapidly.
In Japan, meanwhile, personal consumption has fallen 2.4% compared to pre-coronavirus levels, pushing real GDP down 1.3%, even as government spending is pushing real GDP up 0.9% in the wake of coronavirus response measures and other factors. Private investment (housing and capital investment) also saw strong growth in the April–June quarter of 2021, but remains below pre-coronavirus levels.
Service consumption remained almost the same in Japan and the United States in 2020, but since the beginning of 2021, the United States has continued to recover with the relaxation of social distancing in line with the progress of vaccination, whereas Japan has seen sluggish recovery from the enforcement of restrictions on activities. Comparing the crowds at retail and entertainment facilities, which is closely linked to service consumption, the decline in the United States was consistently large until approximately the beginning of 2021. Since April 2021, however, the decline in Japan has greatly exceeded that of the United States.
2. Real growth rate is expected to be 3.1% in FY 2021 and 2.0% in FY 2022
In Japan, either a declaration of a state of emergency or priority preventative measures have been implemented in most of 2021. Both measures were not performed for only a brief period of time, from January 1 to 7 and March 22 to April 4. In 2021, the January–March and April–June quarters accounted for 40% and 55% of Japan’s GDP, respectively, of the regions subject to the declaration of the state of emergency and the priority preventative measures. However, the ratio has risen to 74% at present (August 17) and to 86% from August 20. Although the government’s declaration of the state of emergency has been less effective in curbing the flow of people due to the effects of the coronavirus and fatigue from voluntary restraint, it is highly likely that this summer’s crowds will be lower than last year’s.
Private consumption is likely to remain sluggish for a long time due to the declaration of the state of emergency. However, unlike spring 2020, demand items other than private consumption are less susceptible to the declaration.