Japan emerges from recession on post-COVID consumer rebound

Japan's economy emerged from recession and grew faster than expected in the first quarter as a post-COVID consumption rebound offset global headwinds, shoring up hopes for a sustained recovery.

But mounting signs of a slowdown in US, European and Chinese growth cloud the outlook for the export-reliant economy, heightening uncertainty on how soon the central bank can phase out its massive stimulus programme, reports Reuters.

"Consumption will continue to underpin growth as removal of COVID curbs boost tourism and service spending," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"But the economic recovery will be moderate as weak overseas demand will weigh on exports. It will be a tug-of-war between robust domestic demand and sluggish exports," he said.

The world's third-largest economy grew an annualised 1.6 per cent in January-March, government data showed on Wednesday, far exceeding market forecasts for a 0.7 per cent gain and marking the first rise in three quarters.

The growth followed a 0.1 per cent fall in the final quarter of last year, which was revised down from a 0.1 per cent rise. The decline marked two straight quarters of contraction, meeting the definition of a technical recession.

Private consumption, which makes up more than half the economy, grew 0.6 per cent in January-March from the previous quarter, as the country's re-opening from the pandemic boosted service spending. That beat forecasts of a 0.4 per cent increase.

Capital expenditure also surprised, expanding 0.9 per cent, confounding forecasts for a 0.4 per cent fall.

The strength in domestic demand offset weakness in exports, which slumped 4.2 per cent in January-March, marking the first decline in six quarters.

External demand, or net exports, shaved 0.3 per cent percentage point off gross domestic product (GDP), highlighting the strain on manufacturers from slowing overseas growth.

"Demand for goods isn't strong globally, so exports are weak. Industrial production is also soft, so we can't expect manufacturers to perform well ahead," said Toru Suehiro, an economist at Daiwa Securities.

Rising fuel and food costs, which drove Japan's consumer inflation above the central bank's 2 per cent target, could also weigh on consumption unless wage hikes are sustained, analysts say.

Inflation-adjusted wager-earners' remuneration fell 2.3 per cent in January-March from a year earlier, more than a 1.8 per cent drop in the previous quarter, highlighting the deepening pain on households from rising living costs.