Japan’s Economic Outlook: A Year of Struggles and Recovery in 2024
The economic landscape of Japan in 2024 has been a study in resilience, from an initial slowdown to its recovery. The year began with challenges stemming from both external and domestic factors that weighed heavily on growth. However, decisive fiscal and monetary policies, along with structural shifts in consumer behavior and trade, have set the stage for a moderate recovery in the latter half of the year.
The Japanese economy staggered into 2024, with a contraction of 0.9% in real GDP compared to the first quarter of the previous year, underscoring a disruption in industrial production-a surprise halt in automotive plants late in 2023. Exports contracted for the first time since 2020, with Japan hit by global supply chain issues and subdued international demand.
Inflation also became one of the persistent features. Headline inflation rose to 3% by mid-year, driven by sharp increases in fresh food and energy prices, which went up 7.8% and 12%, respectively. These pressures eroded real wages and dampened household spending, creating a difficult environment for domestic demand to thrive.
Despite the turbulent start, the second quarter offered a glimmer of hope. Real GDP bounced back 0.7%, powered by pent-up demand and strong domestic spending. Consumer spending went up 0.9% quarter-on-quarter, while private investments-both residential and nonresidential-also contributed on the upside. This marked a very important shift in Japan's economic engine from one powered by export growth to one powered by domestic demand.
Key to this resurgence was wage growth. By mid-year, nominal wages began to outpace inflation for the first time since 2022, albeit modestly. In August, contractual wages rose by 3% year-over-year, matching the rate of inflation. While much of the wage growth was driven by seasonal bonus payments, the sustained rise in contractual wages hinted at structural improvements in the labor market.
Meanwhile, the yen significantly appreciated to 144.6 against the US dollar by August. The strong currency had also softened the price of imports, especially food and energy products, and further eased the pressure of inflation. The import price index slowed down in August to a year-over-year increase of 2.6%, compared with a jump of 10.8% in July.
Appreciation of the yen, together with the easing import costs, finally lifted consumer sentiment. Real household spending rose for the first time in July since February 2023, up a small 0.1%. Also, the real consumption activity index hit the highest since February 2020. However, inflation firmed up, particularly the so-called core categories excluding the more volatile food and energy prices, at 2.5% for the year.
Government measures to ease inflationary pressures, such as subsidies for gasoline and energy prices, provided a temporary cushion for households. These policies, combined with wage gains, sustained moderate growth in private consumption despite lingering price pressures.
Although the domestic demand was resilient, the export sector continued to face headwinds. The disrupted auto production due to earlier shutdowns was further set back by the irregularities in regulatory testing. Double-digit declines were experienced in motor vehicle exports to main markets such as China, the United States, and the European Union.
But other export sectors, especially semiconductor machinery, proved particularly resilient. Fueled by investments in global semiconductor manufacturing, semiconductor equipment exports jumped 55.2% year-over-year in August, highlighting Japan's crucial position in the global technology supply chain, even as a firmer yen eroded competitiveness elsewhere.
Accommodative financial conditions and forward-looking fiscal policies have underpinned Japan's recovery. The BOJ left rates unchanged but flagged a possible rise to 1% from 0.25%, in a cautious approach to normalizing monetary policy. Meanwhile, the government has increased spending on strategic priorities such as defense and healthcare, taking advantage of the stronger yen to lower the cost of imports.
Looking ahead, the Japanese economy is projected to expand modestly above its potential growth rate. Private consumption will probably continue to be one of the main drivers, amid persistent wage growth and government measures to buffer the price pressures. Export recovery, especially in the auto sector, will depend upon resolution of production challenges and maintaining competitiveness in the face of a stronger yen.
Japan's economic recovery in 2024 is a tightrope walk between containing inflationary pressures and stimulating domestic demand. Though there are risks, such as reversals in wage growth and global economic uncertainties, structural changes in consumption and investment are setting the stage for Japan's sustainable growth. The transition from recession to recovery underlines the resilience of the Japanese economy and its ability to adapt to emerging challenges.
References
Bank of Japan. (2024). Outlook for Economic Activity and Prices. Retrieved from https://www.boj.or.jp/en/mopo/outlook/gor2410a.pdf
Deloitte. (2024). Japan Economic Outlook. Retrieved from https://www2.deloitte.com/us/en/insights/economy/asia-pacific/japan-economic-outlook.html
