Japan returned to growth in the second quarter, with a GDP growth of 0.3% compared to the previous quarter and 7.5% year-on-year.
This sharp rebound in GDP over one year is not surprising: because of the pandemic, the second quarter of 2020 resulted in a very sharp fall in GDP (see chart). The rebound is, therefore, first since we start from a shallow base.
Like most of its Asian neighbours, Japan is far from out of the woods. After controlling the pandemic during the first waves, most Asian countries did not rush to vaccinate their populations, as in the West. And as to this delay taken by vaccination came to be added new variants, more infectious, the health situation deteriorated sharply.
Japan is currently experiencing unprecedented infection numbers, with the seven-day average of new infections exceeding 16,600 cases. We are well above the peak of 2020 (3500 cases) and the latest peak (in May), which peaked at less than 6500 cases. Therefore, the pandemic is beyond the control of the Japanese authorities, preparing to extend the state of emergency (until mid-September). The restrictions on economic activity will, therefore, not starting any sooner.
Fortunately, the human being’s character is to adapt. The Japanese prove it: faced with the stagnation of foreign trade and that of public spending and investment (which only grew by 0.1% compared to the previous quarter), it is the increase in household spending (+0.9%) and private investment (+2.1% for residential, +1.7% for non-residential) that has pulled growth up. Thus, restrictions do not prevent households from spending and investing.
Although the current quarter will still be challenging, there is no doubt that Japan (as well as its neighbours) will be able to start again with the acceleration of the vaccination campaign. Moreover, heavily penalized by the pandemic and often cheaper than Western equity markets, Asian markets are now emerging as an attractive diversification for any portfolio. As a result, Japanese equities are present in our portfolio.