Japan First-quarter GDP Shrank 0.2% As Omicron Hit

Japan's economy shrank 0.2 percent in the first quarter of 2022, official data showed on Wednesday, hit by Covid-19 restrictions forced by an Omicron surge and the effect of higher prices.

The quarter-on-quarter figure for the January-March period was slightly better than the market consensus of a 0.4 percent contraction, and comes after the world's third-largest economy rebounded modestly in the final three months of 2021. But that recovery proved short-lived due to Covid restrictions put in place across Japan as Omicron took hold in January.

The rising cost of imports as energy prices surged and the yen fell to its lowest level against the dollar in 20 years also hit growth.

Economists expect the economy to recover again in the April-June quarter now that virus restrictions have been lifted, but caution there are some caveats.

"We see three headwinds to this expected recovery," said UBS economists Masamichi Adachi and Go Kurihara in a note ahead of the GDP data release.

"First is a rise in food and energy prices. Second is a drag from the lockdown in China," and third is the risk of a potential resurgence in virus infections, they said.

During the current earnings season, major Japanese firms like Sony and Nissan have offered cautious forecasts because of the uncertainty, particularly over supply chain disruption and the effect of lockdowns in China.

Wednesday's data showed the economy's rebound in the last quarter of 2021 was 0.9 percent, slightly weaker than an initial estimate of 1.1 percent growth.

Japan is battling a series of economic headwinds linked to the pandemic and Russia's attack on Ukraine, which has sent energy costs soaring.

The yen has also slumped against the dollar as the gap widens between Japan's ultra-loose monetary policy and tightening in the US as the Federal Reserve attempts to combat inflation.

Rising energy prices and other hikes are squeezing Japanese consumers and businesses, with Japan's household spending dipping 2.3 percent in March from a year earlier.

Analysts have warned that the pace of nominal wage increases in Japan is unlikely to track rising prices, dampening spending appetites.

Late last month, the government unveiled a 6.2 trillion yen economic package that includes handouts for low-income families to help cushion the impact of rising prices and energy costs on households. (AFP)