Weak Currency Gives Significant Boost to Japan's Economy

23 Aug, 2023

Weak Currency Gives Significant Boost to Japan's Economy

Japan's economy outpaced expectations in the three months leading up to the end of June, benefiting from a weakened currency that bolstered its exports. The nation's GDP, the world's third-largest economy, surged by an annualized 6% during this period, a rate that's approximately double the growth rate predicted by economists. This upswing represents the most significant increase in nearly three years.

The depreciation of the yen played a pivotal role, rendering Japanese exports more affordable for global consumers and boosting exporters, particularly automobile manufacturers like Toyota, Honda, and Nissan, which experienced heightened demand for their products abroad. Despite the fact that a devalued currency increased the cost of imports, the decline in prices of global commodities, such as oil and gas, counterbalanced this effect.

This dynamic led to a 4.3% decline in import values from the preceding quarter, which EY's Nobuko Kobayashi referred to as a "primary contributor to GDP growth." Furthermore, the Japanese economy benefited from an uptick in tourism following the relaxation of border restrictions by the government in April. By June, the influx of foreign visitors had rebounded to over 70% of pre-pandemic levels, as reported by the national tourism authority. The reopening of group travel from China is also anticipated to provide a substantial boost to tourist spending, a critical economic factor as Chinese visitors once accounted for a significant portion of tourism expenditure in Japan.

Despite these positive developments, there are certain challenges that Japan's economy faces in the latter half of the year. Chiefly, the domestic economy is showing signs of cooling, with private consumption, constituting more than half of Japan's economy, experiencing a decline. While the headline GDP figure appears impressive, Marcel Thieliant of Capital Economics noted that the data's finer details are less encouraging.

In summary, Japan's economy's surprising growth during this period was largely driven by the advantageous effects of a weakened currency on exports, as well as the resurgence in tourism and foreign spending. However, internal factors like cooling domestic consumption present ongoing challenges to sustained economic momentum