(Bloomberg) -- Japan’s economy contracted less than initially estimated at the beginning of this year, as its recovery from the pandemic started to regain traction at the end of the first quarter.
Gross domestic product shrank an annualized 0.5% in the three months through March, revised figures from the Cabinet Office showed Wednesday. An upward revision in inventories was a key factor behind the better numbers. Economists had expected a 1.1% decrease, compared with an initial reading of -1%.
An upward revision in private inventories was one of the main factors helping narrow the contraction. Business spending was revised down after a report last week showed companies invested at a slower pace in the first three months of the year.
For now, analysts are expecting the economy to return to modest growth in the second quarter, as consumers regain confidence in venturing out to spend money following the lifting of the omicron wave restrictions.
The updated report on the economy Wednesday comes with the main downside risks having largely shifted from the pandemic to cost-push inflation exacerbated by a sliding currency. Continued fallout from Russia’s war on Ukraine and China’s slowdown are other causes for concern.
Data released Tuesday showed pent-up demand outweighed concerns over the impact of inflation on real incomes in April. But analysts warn that once that demand runs out, price gains may cool consumption if wage gains fail to keep up with rising living costs.
The yen’s drop to fresh 20-year lows is amplifying some of the higher prices. While a cheaper currency is expected to be a boon for exporters and overseas tourists as Japan gradually reopens its borders, it makes imports of food and energy more expensive and pushes up basic living costs.
So far, the Bank of Japan is sticking with its dovish policy stance of ultra-low rates to support the economy, while its peers raise interest rates to cool inflation. That policy difference with the US is helping the yen weaken further.
What Bloomberg Economics Says...
“Looking ahead, we expect GDP to rebound in 2Q on pent-up consumer demand after virus-related restrictions were lifted in March. But there are downside risks. Higher import prices are squeezing household budgets.”
-- The Asia economist team
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(Adds more details from the release)
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