Japan economy heals, buoyed by weak currency

Japan‘s economy has outpaced expectations in the quarter ending June, as its weak currency bolstered exports. The Gross Domestic Product (GDP) of the world’s third-largest economy surged by an annualised 6%, surpassing economists’ predictions and marking the most substantial growth in nearly three years.

The depreciation of the yen played a significant role in supporting exporters, as products manufactured in Japan became more affordable for consumers globally. Over the past months, Japan’s currency has experienced a notable decline against major currencies, dropping by over 10% against the US dollar in the current year.

Fujitsu’s chief economist, Martin Schulz, attributed the favourable GDP figures to the weak yen. The GDP is a crucial tool for evaluating an economy’s performance, aiding businesses in decision-making regarding expansion and employment, and guiding governments in fiscal planning.

Leading car manufacturers like Toyota, Honda, and Nissan experienced boosted profits due to increased export demand resulting from the weak currency. While a devalued currency can make imports more expensive, the fall in global commodity prices, such as oil and gas, has counteracted this effect. Consequently, imports have decreased by 4.3% compared to the previous quarter, a factor labeled by EY’s Nobuko Kobayashi as a “major contributor to GDP growth.”

Japan’s economy also benefited from a surge in tourist numbers following the relaxation of border restrictions by the government in late April. As of June, foreign visitor numbers had rebounded to more than 70% of pre-pandemic levels, as reported by the national tourism authority. The relaxation of travel restrictions by China is expected to further bolster the economy as spending by tourists from China picks up again. Prior to the pandemic, Chinese visitors accounted for over a third of tourist spending in Japan.

This recovery in tourism has helped counterbalance the slower consumption recovery within Japan following the pandemic. Marcel Thieliant from Capital Economics pointed out that while the headline growth figure was impressive, the details of the data revealed some concerns. Private consumption, which constitutes over half of Japan’s economy, witnessed a decline. Despite Japanese workers experiencing the fastest pay increase in 28 years, inflation near a four-decade high has led to falling real wages for over a year.