Japan’s economic recovery is still incomplete. With the belated start of vaccinations, Japan’s state of emergency was renewed three times during the first three quarters of 2021, leaving business restrictions in place for most of the period. This has dampened economic activity, particularly in services, leaving real GDP below the 2019 average even a year and half after the pandemic began. However, with new infections having dropped sharply and vaccination having progressed rapidly, the government lifted the state of emergency at the end of September, and now seeks a new endemic equilibrium. Since the virus-related drag has been the main constraint on economic activity, and underlying momentum has remained solid, these moves likely will pave the way for a full-fledged recovery.

We believe there is room for a powerful surge in services consumption in particular. With the government’s extended policy supports, pandemic-related damage to labor income has been limited. This, together with constraints on consumption opportunities under the state of emergency, has led to the persistently elevated household savings, leaving households with high accumulated liquid savings. We think the upcoming easing of business restrictions and the removal of self-restraint requests will free up households’ pent-up demand funded out of excess savings amid the solid income environment. The full recovery in domestic consumption activity is likely to boost Japan’s economic growth in coming quarters. 

 

This podcast was recorded on October 15, 2021.

This communication is provided for information purposes only. Institutional clients please visit www.jpmm.com/research/disclosures for important disclosures. © 2021 JPMorgan Chase & Co. All rights reserved.