Japan’s economy rebounds on solid consumption, Omicron clouds 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, heightening challenges for policymakers in sustaining a fragile recovery.

The world’s third-largest economy expanded an annualized 5.4 percent in October-December after contracting a revised 2.7 percent in the previous quarter, government data showed on Tuesday, falling short of a median market forecast for a 5.8 percent gain.

The increase was driven largely by a 2.7 percent quarter-on-quarter rise in private consumption, which accounts for more than half of Japan’s gross domestic product (GDP). The expansion compared with market forecasts for a 2.2 percent gain.

“The data confirmed a consumption-led rebound in the final quarter as Covid-19 curbs were lifted,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

But the recovery could be short-lived as a surge in Omicron variant cases and geopolitical risks over Ukraine were likely to be drags on growth, Minami added.

“The economy will likely stall in January-March or it could even contract, depending on how the Omicron variant may affect service-sector consumption.”

Capital expenditure rose 0.4 percent, against market forecast for a 0.5 percent increase. External demand added 0.2 percent point to GDP growth in October-December, compared with market forecasts of a 0.3 point contribution.

Japan ended state of emergency curbs to combat the pandemic from October last year, which, coupled with a decline in Covid-19 cases, helped lift consumption through the end of 2021.

But a record spike in Omicron cases forced the government to impose loose curbs on most areas and keep borders closed, which likely dampened consumption since the outset of this year.

Rising Omicron infections have also forced some manufacturers to halt production, causing output disruptions and delivery delays at auto giants such as Toyota Motor Corp.

Some analysts expect Japan’s economy will decline in the current quarter as chip shortages, supply snags and slowing Chinese growth weigh on output, adding to the expected weakness in consumption.