Japan's economy to grow less than expected amid Ukraine crisis

Japan's economy to grow less than expected amid Ukraine crisis

The economy of Japan will grow at a slower pace than previously thought, due to Russia's invasion of Ukraine and its inflationary effect on global commodity and energy prices, according to a poll of economists on Thursday.

The yen, which is poised to mark its worst month against the dollar since November 2016, has fallen nearly 6% due to the pressure from high energy costs.

Almost 60% of the poll respondents said the economy wouldn't start to be affected by a decline in the yen if it fell past 130 to the dollar, a sign that most don't rate the yen's recent weakness as particularly bad. The yen is currently trading around 122 to the dollar.

Since Russia's war in Ukraine on February 24, the economic outlook has become more difficult to predict as consumer price rises and supply bottlenecks threaten a solid recovery in domestic demand.

The median forecast of nearly 40 analysts in the March 22 -- 30 poll shows that the world's third-largest economy is expected to expand an annualised 4.9% next quarter, which is less than February's prediction of 5.6%.

A slower expansion indicates that the economy will rebound after a contraction this quarter, when it was expected to shrink an annualised 0.3%. That is a improvement from a 0.4% expansion predicted for January-March last month.

While consumer activity is usually robust in the second quarter, higher prices are hurting consumers' purchasing power, restraining the release of pent-up demand after COVID 19 curbs ended, said Hiroshi Namioka, chief strategist and fund manager at T&D Asset Management.

There's likely to be a lot of growth in the coming quarter compared to January-March, but it's unlikely to be as strong as first thought given the situation in Ukraine, said Namioka.

Japanese prime minister Fumio Kishida has already ordered his cabinet to draw up another relief package by the end of April to reduce the economic blow from the surge in global energy and raw materials prices.

The government lifted remaining coronaviruses curbs across Japan earlier this month after Omicron infections subsided after an earlier record surge.

Economists surveyed have not been put off by the weakness of the yen, which has traditionally given Japanese exports a tailwind.

Asked what yen level versus the U.S. dollar would hurt the economy, 16 of 27 economists said that the damage would exceed the merits when the yen falls below 130 to the dollar.

Six chose a range of 125 -- 130 yen to the dollar, while one picked 120 - 125 yen, three opted for 115 - 120 and another chose stronger than 110 yen per dollar.

The economy would grow by 2.6% in fiscal 2022, beginning in April, after an expected 2.3% growth this fiscal year, according to the poll.

The poll showed that both predictions were slightly lower than what was expected in the last month's poll, which was conducted mostly before Russia's action in Ukraine. In addition to that, Core consumer prices, which exclude volatile fresh food prices, will rise 1.6% next fiscal year and 0.8% in fiscal 2023, after a small 0.1% increase this fiscal year, the poll showed.

It was predicted that price growth would pick up in the coming months, but 85% of analysts said that Japan's economy could slip into recession over the next two years is unlikely or very unlikely.

The remaining 15% said it was likely that it would happen, while none answered it was very likely.