In the second quarter, Japan's economy rebounded at a slower than expected pace due to a COVID-induced slump, data showed on Monday that there was uncertainty on whether consumption will grow enough to bolster a much-delayed, fragile recovery.
A revival in Japan, like most other economies, has been hampered by the Ukraine war and rising prices of commodities, even as rising consumption propped up growth in April-June.
Growth will be driven by consumption and capital expenditure in July-September. But the momentum may not be as strong as rising inflation is cooling household spending, said Atsushi Takeda, chief economist at Itochu Economic Research Institute.
While domestic demand may continue to expand, falling exports could put a brake on Japan's recovery, he said.
Japan's outlook has been hampered by a resurgence in COVID infections, a slowing global growth, supply constraints and rising raw material prices that are boosting households' living costs.
In April-June, the world's third-largest economy expanded an annualised 2.2%, which is the third straight quarter of growth but falls short of median market forecasts for a 2.5% gain, according to government data.
It followed a 0.1% increase in gross domestic product GDP in January-March, as surging COVID cases hurt spending.
Restaurants and hotels saw demand recover thanks to the lifting of the pandemic-related curbs, as the growth was driven by a 1.1% gain in private consumption.
Capital expenditure increased by 1.4% from the previous quarter, exceeding the median market forecast for a 0.9% expansion, according to the data.
The rise in second quarter consumption was smaller than market forecasts for a 1.3% increase, casting doubt on whether the rebound in household spending will have legs.
Some analysts say a resurgence in COVID infections and recent price hikes for a wide range of daily goods could discourage households from spending money on leisure and dine-outs.
In April-June, the remuneration of the wage fell by 0.9% from the previous quarter, a deeper drop than a 0.1% fall in January-March, a sign that rising living costs are already hurting household income.
A wave of monetary tightening by major central banks has slowed the prospects of a sustained recovery in Japan's economy, which has led to increased fears of a global slowdown.
Domestic demand added 0.5% to April-June GDP, but external demand did not add to, nor shaved off from growth in a sign of waning support from the once strong export sector.
There are downside risks to domestic demand due to a renewed spike in COVID cases. External risks are also being skewed to the downside due to the rise in recession fears in the United States and Europe, said Toru Suehiro, an economist at Daiwa Securities.
Prime Minister Fumio Kishida told his ministers to draw up additional steps to moderate the pace of increases in fuel and food prices in order to cushion the economic blow from rising living costs. Japan has lagged other major economies in recovering fully from the pandemic due to weak consumption, blamed in part on curbs on activity that lasted until March.
The Bank of Japan BOJ has turned into an outlier in the global monetary tightening phase sweeping across many economies because of the surging inflation.
Policymakers hope that pent-up demand will reduce consumption until wages rise enough to make up for increasing living costs. There is uncertainty about whether companies will hike salaries because of the risks of slowing global demand, according to analysts.
The BOJ has stressed its commitment to maintain a tight monetary policy even as inflation exceeded its 2% target for three consecutive months in June, to make sure the economy has a sustained recovery driven by solid consumption and wage growth.