Japan's economy shrinks for first time in 2 quarters

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Japan's economy shrinks for first time in 2 quarters

TOKYO Reuters -- Japan's economy fell for the first time in two quarters in the first three months of the year as COVID 19 curbs hit the service sector and Ukraine war and surging commodity prices created new headaches for consumers and businesses.

The decline presents a challenge to Prime Minister Fumio Kishida's drive to attain growth and wealth distribution under his new capitalism agenda, which has sparked fears of stagflation - a mix of tepid growth and rising inflation.

In January-March the 3 economy shrank at an annualized rate of 1.0%, compared to a 1.8% contraction seen by economists. The Cabinet Office data showed a drop of 0.2% compared to market forecasts for a 0.4% drop.

Private consumption, which makes up more than half of the economy, fell slightly against a 0.5% fall expected by economists, according to the data.

The weak reading may pressure Kishida to spend more with upper house elections pencilled in for July 10, following the 2.7 trillion yen $20.86 billion in extra budget spending compiled on Tuesday.

Many analysts think Japan's economy will rebound in the coming quarters, but the war in Ukraine and a slowdown in the Chinese economy don't help the recovery prospects.

Despite easing coronavirus curbs, doubts remain about the V-shaped recovery, while surging energy and food prices boosted by the weak yen could cap domestic demand.

Japan's export-reliant economy was struggling with little help from external demand, with net exports falling 0.4 percentage point off GDP growth, as the weak yen and rising global commodity prices inflated imports.

That was compared to a negative contribution of 0.3 percentage point seen by economists.

Capital spending increased by 0.5% compared to a 0.7% increase in the previous quarter, after a 0.4% increase in the previous quarter.