Japan’s economy rebounds on solid consumption, but omicron clouds outlook

Japan’s economy rebounded in the final three months of 2021 as falling coronavirus cases 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, heightening 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% in the previous quarter, government data showed Tuesday, falling short of a median market forecast for a 5.8% gain.

The increase was driven largely by a 2.7% quarter-on-quarter rise in private consumption, which accounts for more than half of Japan’s gross domestic product. The expansion compared with market forecasts of a 2.2% 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 COVID-19 cases driven by the omicron variant and geopolitical risks over Ukraine are 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%, against a market forecast of a 0.5% increase. External demand added 0.2 percentage point to GDP growth in the October-December period, 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 has 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.

The fourth-quarter growth wasn’t as strong as expected. While business investment and exports also contributed to the expansion as supply chain blockages eased and the worst of the virus’s delta wave passed, the gains weren’t as robust as expected.

Government spending also fell, though a stimulus package announced by Prime Minister Fumio Kishida in November is likely to ramp up public outlays this quarter.

Earlier reports on retail sales and industrial production showed the economy’s momentum weakening after the emergence of omicron at the end of last year.

Conditions then deteriorated quickly at the start 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.

A quasi-emergency allows local governments to push bars and restaurants to close early and stop serving alcohol. The measures were extended last week through early March for Tokyo and 12 other prefectures.

Some analysts expect the 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.

Overseas demand may not provide as much support this quarter either.

“Exports are likely to weaken a little as supply side snarls from southeast Asia keep domestic factories from operating,” said Yuichi Kodama at Meiji Yasuda Research Institute.