Tokyo, Feb 15 (BNA): Japan’s economy rebounded in the last three months of 2021 as a drop in coronavirus cases helped support consumption, despite rising raw material costs and a sharp rise in new Omicron variable contagion clouding the outlook.
Bank of Japan Governor Haruhiko Kuroda also highlighted escalating tensions in Ukraine as a new risk to the central bank’s expectations of a moderate economic recovery, Reuters reported.
Government data showed, on Tuesday, that the world’s third-largest economy expanded 5.4% on an annual basis in October and December after shrinking 2.7% in the previous quarter, below average market expectations for a gain of 5.8%.
Some analysts expect the economy to slow down again in the current quarter as rising COVID-19 cases prevent families from shopping and disrupt the supply chain affecting factory production.
“The economy is likely to slow in January-March or may contract, depending on how the Omicron variable affects service sector consumption,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Economic growth was largely driven by a 2.7% quarter-on-quarter increase in private consumption, which accounts for more than half of Japan’s GDP.
The expansion in consumer spending, which was bigger than market expectations for a 2.2% gain, came after Japan ended coronavirus restrictions in October.
Capital spending also rose 0.4%, roughly in line with market expectations. External demand added 0.2% a point to growth, a sign that exports continue to benefit from the global recovery.
“With the reopening of the economy, consumption of services, such as hotels, restaurants and entertainment, got a big boost,” said Wakaba Kobayashi, an economist with Daiwa Research Institute.
Still, Japan’s recovery lags behind other advanced economies, forcing the Bank of Japan to keep monetary policy very loose, even as other central banks look to raise interest rates.
The country’s seasonally adjusted real GDP, which is about 541 trillion yen ($4.69 trillion), is still below the pre-pandemic level in late 2019.
The record rise in Omicron cases has forced the government to loosely impose restrictions on most areas and keep borders closed, which is likely to dampen consumption since the beginning of this year.
The mounting infections have also forced some manufacturers to halt production, causing production disruptions and delivery delays at auto giants such as Toyota Motor Corp (7203.T).
Meanwhile, creeping import costs add risks to Japan’s fragile recovery.
“Rising tensions in Ukraine may have unfavorable effects on global and Japanese growth if it leads to an increase in fuel and commodity prices,” Bank of Japan Governor Kuroda told parliament on Tuesday.
Hiroshi Shirashi, chief economist at BNP Paribas Securities, expects economic growth to slow to an annual pace of 1-1.5% in January-March, or even decline.
“The recovery of the economy may be delayed later this year because the Ukraine crisis may raise fuel costs and dampen companies’ appetite for capital spending,” he said.
“There is not much left for the government and the central bank to do in terms of the new stimulus measures. Both fiscal and monetary policy have reached their limits.”
MI