Japan's economy rebounded in the final three months of 2021 as falling coronaviruses helped prop up consumption, though rising raw material costs and a spike in new omicron variant infections cloud the outlook.
Some analysts expect the economy to contract again in the current quarter, as rising COVID 19 cases and supply chain disruptions hit factory output, increasing the challenges for policymakers in sustaining a fragile recovery.
The world's third-largest economy expanded an annualized 5.4% in the October-December quarter after contracting a revised 2.7% rate in the previous quarter, government data showed Tuesday, falling short of a median market forecast for a 5.8% gain.
A 2.7% rise in private consumption was a factor in the increase, which accounts for more than half of Japan's gross domestic product. The market forecasts of a 2.2% gain were not included in the expansion.
Takeshi Minami, chief economist at the Norinchukin Research Institute, said the data confirmed a consumption-led rebound in the final quarter as COVID 19 curbs were lifted.
The recovery could be short-lived as a surge in COVID 19 cases, driven by the omicron variant and geopolitical risks over Ukraine, is likely to be a drag on growth, Minami said.
The economy could stall in January-March, or it could even contract, depending on how the omicron variant affects service sector consumption. In January-March, the economic growth is expected to slow to a rate of 1% to 1.5%, according to senior economists at BNP Paribas Securities.
He said that the economy's recovery could be delayed until later this year because of the Ukraine crisis, which may cause fuel costs and dampen corporate appetite for capital expenditure. There isn't much left for the central bank and the government to do in terms of new stimulus measures. Both fiscal and monetary policy have reached a limit. Capital expenditure increased by 0.4% compared to the forecast of a 0.5% increase. In the October-December period, external demand added 0.2 percentage point to GDP growth, compared with market forecasts of a 0.3 point contribution.
Japan ended state of emergency curbs to combat the pandemic that it had in October last year, and helped lift consumption through the end of 2021 because of a decline in COVID 19 cases.
A record spike in omicron cases has forced the government to impose loose curbs on most areas and keep borders closed, which could have a negative effect on consumption since the beginning of this year.
Some manufacturers have had to halt production due to rising omicron infections, which has resulted in production disruptions and delivery delays at auto giants such as Toyota Motor Corp.
The fourth quarter growth wasn't as strong as expected. Business investment and exports also contributed to the expansion as supply chain blockages eased and the worst of the delta wave of the virus passed, but the gains weren't as robust as expected.
In November, government spending fell, but a stimulus package announced by Prime Minister Fumio Kishida is likely to ramp up public outlays this quarter.
After the emergence of omicron at the end of last year, retail sales and industrial production showed that the economy's momentum was sluggish.
The conditions deteriorated quickly at the beginning of the year, with daily virus cases jumping from around 500 to a record of more than 100,000 by early February. Kishida then reinstated quasi-emergencies in areas covering most of the economy.
Local governments can force bars and restaurants to close early and stop serving alcohol because of a quasi-emergency. The measures were extended for Tokyo and 12 other prefectures last week through early March.
Analysts think the economy will decline in the current quarter due to chip shortages, supply snags and slowing Chinese growth, adding to the expected weakness in consumption.
Overseas demand may not provide as much support this quarter.
Exports are likely to weaken as supply side snarls from southeast Asia keep domestic factories from operating, Yuichi Kodama said at Meiji Yasuda Research Institute.
The cost of energy is hurting households and hurting businesses. Companies are facing the highest costs in decades, a factor that hurts the prospects for meaningful wage hikes this year despite Kishida's hopes to reignite upward momentum in pay.
The prime minister hopes that bigger pay packets will spur more sustainable inflation and spur a longer-term recovery in consumer spending. Higher wage gains are a part of Kishida's agenda to share the benefits of growth more evenly. Failing to achieve noticeable progress could weaken support for the prime minister.
Kishida hopes to contain the latest virus wave and limit the setback to the economy ahead of the summer elections that are key to shoring up his administration.