Japan’s economy shrank slightly in the first quarter of this year, official data showed yesterday, hit by COVID-19 restrictions and higher prices.
The world’s third-largest economy shrank 0.2 percent quarter-on-quarter in the January-to-March period, slightly less than market expectations of a 0.4 percent contraction.
It followed a modest rebound of 0.9 percent in the final three months of last year that proved short-lived after Japan put COVID-19 restrictions in place as an outbreak fueled by the Omicron variant of SARS-CoV-2 took hold in January.
Photo: Bloomberg
Growth was also hit by the rising cost of imports, with energy prices surging and the yen falling to its lowest level against the US dollar in 20 years.
Economists expect the economy to recover again in the April-to-June quarter now that virus restrictions have been lifted, but caution that there are some caveats.
“We see three headwinds to this expected recovery,” UBS economists Masamichi Adachi and Go Kurihara said in a note ahead of the GDP data release.
First is a rise in food and energy prices, second is a drag from the lockdown in China and third is the risk of a potential resurgence in virus infections, they said.
Others point to ongoing uncertainties linked to “tensions in international relations and military conflicts,” a survey among economists conducted by the Japan Center for Economic Research showed.
In the second quarter, major Japanese firms such as Sony Group Corp and Nissan Motor Co have offered cautious forecasts due to the uncertainty, particularly over supply chain disruptions and the effect of COVID-19 lockdowns in China.
The yen has also slumped against the US dollar, with a widening gap between Japan’s ultra-loose monetary policy and tightening in the US, as the US Federal Reserve attempts to combat inflation.
Rising energy prices and other hikes are squeezing Japanese consumers and businesses, with household spending dipping 2.3 percent in March from a year earlier.
Analysts have said that the pace of nominal wage increases in Japan is unlikely to track rising prices, dampening spending appetites.
Last month, the government unveiled a ￥6.2 trillion (US$48 billion) economic package that included handouts for low-income families to help cushion the effects of rising prices and energy costs.
Looking ahead, “net trade will boost growth over the coming months as supply shortages ease, and the weak yen boosts exports and softens demand for imports,” Capital Economics economist Tom Learmouth said in a note. “With coronavirus cases continuing to fall and nearly 60 percent of the population triple-jabbed, another round of restrictions looks unlikely for now.”
“However, we expect GDP growth to disappoint across 2022 due to the hit to household income from higher inflation and signs that elderly consumers remain wary of catching the virus,” he added.
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