TOKYO: Japan’s economy shrank in the first three months of this year as soaring import costs inflated by a weaker yen weighed on trade, and restrictions triggered by the Omicron variant of the coronavirus stunted consumer spending.

Gross domestic product (GDP) contracted at an annualised pace of 1% in the quarter through March, the cabinet office reported. Economists had expected a decline of 1.8%.

The setback to Japan’s already sluggish recovery from the pandemic stemmed from the deterioration in overall trade as import prices surged, exacerbated by the war in Ukraine and the slide in the currency.

The monthly trade balance has been in the red since August after supply-chain snarls and returning global demand started pushing up commodity prices.

“It’s hard to be optimistic about the outlook of Japan’s economy now. We don’t have any driving force for growth,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. “Businesses will be cautious about investing in this uncertain environment.”

Consumer spending also stalled as quasi-emergency curbs cut business hours and restricted activity during the record virus wave.

The fourth quarterly contraction of the pandemic leaves Japan lagging behind its global peers in regaining lost ground.

While more recent figures show an uptick in spending and foot traffic after infections dropped and restrictions were lifted, the release of pent-up demand that would fuel a rebound this quarter is likely to be limited by the impact of the elevated energy and import prices.

China’s slowdown induced by its strict virus lockdowns also clouds the prospects for a robust rebound as it weighs on global trade and renews pressure on supply chains.

“Looking ahead, we expect GDP to rebound in the second quarter, driven by pent-up demand after the virus curbs were lifted on March 21.

“Even so, higher commodity prices and the impact of China’s Covid lockdowns on exports pose downside risks to the outlook,” said economist Yuki Masujima.

Prime Minister Fumio Kishida has already taken action to try to ease the pain of surging prices and keep the recovery on track with measures announced at the end of April and funded by an extra budget unveiled Tuesday.

He needs to keep showing he has a sufficiently steady hand on both the economy and virus control to help him maintain his relatively high support ratings heading into an election planned for July.

Still, it remains to be seen if he has done enough to tackle the impact of rising prices that could cool a hoped-for recovery this quarter.

Japan’s benchmark inflation gauge is forecast to jump toward 2% in a report due tomorrow as energy prices soar and the effect of cheap mobile phone fees fades out.

Cost pressures for companies rose at a double-digit pace for the first time since 1980 in April, intensifying pressure on firms to pass on higher costs to consumers.

The economy remains far behind its peers in recovering from the pandemic but should at least regain its pre-Covid level in the second quarter if consumption and business investment strengthen, according to Mari Iwashita, chief market economist at Daiwa Securities Co.

“The third quarter will be the key for the Japanese economy,” she said.

“If it can keep growing with an expansion in consumer spending that will enable it to finally leave the pandemic behind and get back on a solid recovery path.”

 - Bloomberg