Japan economy's rally from Covid-19 slump slower than expected

TOKYO • Japan's economy rebounded at a slower-than-expected pace in the second quarter from a Covid-19-induced slump, data showed yesterday, highlighting uncertainty on whether consumption will grow enough to bolster a much-delayed, fragile recovery.

While rising consumption propped up growth in the April to June period, the outlook has been clouded by a resurgence in infections, slowing global growth, supply constraints and rising raw material prices that are boosting households' living costs.

"Consumption and capital expenditure will continue to drive growth in July to September. But momentum may not be that strong as rising inflation is cooling household spending," said chief economist Atsushi Takeda of Itochu Economic Research Institute. "While domestic demand may continue to expand, falling exports could put a brake on Japan's recovery."

The world's third-largest economy expanded an annualised 2.2 per cent in April to June, government data showed, marking the third straight quarter of increase but falling short of median market forecasts for a 2.5 per cent gain. It followed a revised 0.1 per cent rise in gross domestic product in January to March, when surging Covid-19 cases hurt spending.

The growth was driven largely by a 1.1 per cent gain in private consumption, the data showed, as businesses reopened after the lifting of pandemic-related curbs.

The rise in consumption, however, was smaller than market forecasts for a 1.3 per cent increase. Wage earners' remuneration during the April to June period, adjusted by inflation, fell 0.9 per cent, a deeper drop than the 0.1 per cent fall in January to March, in a sign that rising living costs were hurting household income.

Capital expenditure, another key driver of growth, increased 1.4 per cent from the previous quarter, exceeding a median market forecast for a 0.9 per cent expansion, the data showed.

Domestic demand added 0.5 percentage point to GDP growth, while external demand neither added to nor shaved off growth.

Japan has lagged behind other major economies in fully recovering from the pandemic's impact due to weak consumption, blamed in part on curbs on activity that lasted until March. This has turned the Bank of Japan (BOJ) into an outlier in the global monetary tightening phase in many economies amid surging inflation.

Policymakers hope pent-up demand will underpin consumption until wages rise enough to make up for increasing living costs. But it is uncertain if companies will raise salaries amid risks of slowing global demand, analysts say.

The BOJ has resolved to maintain ultra-loose monetary policy, even as inflation exceeded its 2 per cent target for three straight months in June, to ensure the economy makes a sustained recovery driven by solid consumption and wage growth.

REUTERS