Japan GDP Ends 2021 Near Pre-Covid Level

But 2021 GDP is just 2% Above Its Level 14 Years Ago in 2007

Source: Cabinet Office

The good news in Japan’s latest GDP report for the final quarter of 2021 is that the recovery was at a robust 5.4% annual rate and this brought GDP almost back to its pre-COVID peak. The bad news is that this is a robust quarter in what continues to be a saw-toothed recovery from a low base. The very bad news is that Japan’s real (i.e., inflation-adjusted) GDP in 2021 was just 2% above where it was 14 years earlier in 2007 just before the global financial cataclysm. Japan had already been shrinking in 2019 even before COVID hit.

Moreover, private domestic demand (mostly household consumption and business investment) was an astonishing 2.6% below where it was 14 years ago (see figure above). Personal consumption was up a measly 2% from 2007 while business capital investment was down 2.4% and housing construction down 20%. Hence, what little growth Japan has eked out has been dependent on government deficit spending (up almost 20%). The trade surplus in 2021 was actually smaller than in 2007.

Japan’s poor performance over the long haul put it 4th from the bottom among 28 OECD countries in the total increase in GDP from 2007 through 2020 (comparable international data for 2021 is not yet available). The only countries with worse performance than Japan were four European countries hurt by the Eurodebt crisis and then particularly hard by COVID: Portugal, Spain, Italy (which, like Japan, also suffers from long-term problems), and Greece.

Source: OECD

Economists are expecting the recovery to continue its saw-toothed pattern, with growth at just a 1.7% annual rate in January-March, according to a survey by the Japan Center for Economic Research. One reason is the appearance of the Omicron variant which affected Jan-March output.

In its latest update, the International Monetary Fund said that it expected Japan to grow 3.3% percent this year and 1.8% in 2023. If the IMF is right, come 2023, Japan’s economy will be only 2% above its level in 2018, five years earlier. By contrast, US GDP will be up almost 9% from its 2018 level, and the Eurozone up 6.5%. The upshot is that Japan’s biggest problem is not Covid per se. Rather, Covid hit an economy and that was already in the doldrums and, moreover, very sensitive to external shocks.