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Japan is currently surprising with growth rates that other economies like Germany can only dream of. What is different there than in the other industrialized countries?
Economists are amazed at the Japanese economic growth: while Germany is in the middle of a recession, Japan’s economy is on course for growth. The economy grew significantly in the second quarter, with gross domestic product (GDP) climbing an annualized 6.0 percent between April and June. Compared to the previous quarter, the plus is 1.5 percent.
Foreign trade drives that economic growth
What are the reasons for the exceptional growth rate? “The GDP surge to a record high was led by foreign trade. Exports rose sharply while imports fell,” commented John Vail, market strategist at Asian wealth manager Nikko AM.
Japan is currently benefiting from the Bank of Japan’s delayed monetary tightening, the devaluation of the yen and a late post-pandemic reopening of the economy. “This gives Japan a good chance of decoupling itself from the global economic cycle,” says Johan Van Geeteruyen, market expert at asset manager DPAM.
Unlike other industrialized countries, the Japanese central bank has kept the key interest rate consistently low in recent years in order to support the economy. This in turn means that the yen has depreciated significantly against other currencies. That’s why Japanese exports are currently cheap on the world market.
A Japanese special way
The key interest rate in the USA is currently 5.5 percent. The European Central Bank recently raised the interest rate to 4.25 percent – it was last this high at the beginning of the financial crisis in 2008. In Japan, on the other hand, the key interest rate has been minus 0.1 percent since 2016. For more than 20 years now, it has largely been moving along the zero line. Unlike the euro zone or the USA, however, Japan’s currency watchdogs do not have to struggle with the phenomenon of rising consumer prices in a comparable way.
While inflation in Germany rose to 8.8 percent, Japan’s inflation rate peaked at 4.3 percent in January this year. The rate is currently at a comparatively low 3.3 percent.
Compared to the rest of the developed world, inflation is not a major problem in Japan so far, says Aisa Ogoshi, portfolio manager at JP Morgan Asset Management. On the contrary, it should be viewed positively that inflation has returned in the past 18 months after a long phase of deflation.
Change in mentality?
Japan had to struggle with deflation for decades. This means a decline in the general price level, which can lead to a downward spiral of falling sales, falling wages, redundant workers and a lack of investment by companies.
Is deflation in Japan over now? A change in mentality is looming in the Asian country, says Alex Lee, portfolio manager at Columbia Threadneedle Investments. Until recently, there were no price increases in Japan, and wages have not risen either, according to the expert. “Japan is in the process of shaking off an ingrained deflationary mindset,” said Nikko AM experts.
Rising wages and a shortage of labour
When it comes to wages, the shift in corporate management attitudes is taking place: “Several companies have told us that when they make longer-term business plans, they now anticipate that wages in Japan will rise for the first time in a generation,” Lee said.
One reason for rising wages is likely to be the aging of Japanese society, which could lead to a labor shortage in flourishing export-oriented companies. With rising wages, firms could try to gain an advantage in the struggle for workers. That, in turn, could fuel inflation further. However, the Japanese central bank is currently assuming that consumer prices will fall to two percent in the coming year.
inflation as stress factor
But there are also skeptical voices: Stefan Angrick, an economist at Moody’s Analytics, told the Financial Times that despite the strong GDP figures, it would be premature to say that the Japanese economy is out of the woods. “If you look beyond overall GDP, it’s not all sunshine,” he said. According to the expert, domestic demand is lacking momentum.
In fact, private consumption, which contributes around 60 percent to Japan’s economic output, actually fell by 0.5 percent compared to the previous quarter. On the one hand, the weak yen makes imported goods and merchandise particularly expensive.
In addition, the comparatively high inflation rate also caused a general reluctance to buy: “The high inflation has prevented households and companies from spending money. This raises the question of whether Japan’s recovery after the pandemic ran out of steam before it really got going.” , according to Angrick.