Japan's economy in the October-December period grew a real 1.3 percent from the previous quarter, or an annualized 5.4 percent, as personal consumption recovered with the end of a COVID-19 state of emergency amid low infections, government data showed Tuesday.

Real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, increased for the first time in two quarters following a 2.7 percent contraction in the previous quarter, according to the preliminary data released by the Cabinet Office.

People wearing face masks walk on a street lined with bars and restaurants in Tokyo's Shimbashi area on Dec. 3, 2021. (Kyodo)

The annualized figure was worse than the average projection of a 5.5 percent expansion in a poll of private-sector economists conducted by Kyodo News.

Private consumption rose 2.7 percent, up for the first time in two quarters. More people went to restaurants and bars, and took trips after the state of emergency was fully lifted on Oct. 1, as the number of new coronavirus cases remained at low levels.

During most of the previous quarter, Tokyo, Osaka and some other areas were under the state of emergency due to a resurgence of infections. People were asked to stay at home, and restaurants and bars were requested to close early and refrain from serving alcohol.

In the reporting quarter, car purchases also expanded in line with a recovery of vehicle output as the effects of a global semiconductor shortage and parts supply disruptions in Southeast Asia caused by the pandemic eased.

"Real GDP has almost recovered to its pre-pandemic level," economic revitalization minister Daishiro Yamagiwa told a press conference, with annualized GDP in the October-December period at 541.39 trillion yen ($4.7 trillion), compared with 542.24 trillion yen in the same quarter of 2019.

Looking forward, however, many analysts predict that the economy could contract in the current January-March period due to the rapid spread of the highly contagious Omicron variant of the coronavirus since around the end of last year, cooling consumer sentiment again.

Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co., said that consumer spending in this year's first quarter is "highly likely to shrink from the October-December period due to Omicron," even if the number of virus infections subsides in March.

Other than Omicron, Kobayashi cited rising prices in Japan as well as possible aggressive interest rate hikes by the U.S. Federal Reserve that could be followed by rate increases by other central banks as major risk factors for the Japanese economy.

In addition, geopolitical tensions intensified by Russia's military build-up near the border with Ukraine are also likely to cloud the country's economic outlook, he said.

In the October-December period, exports grew 1.0 percent, marking the first rise in two quarters, pushed up by brisk shipments of chip-making equipment and construction machinery.

Imports decreased 0.3 percent, down for the second straight quarter, partly due to a drop in the government's procurement of COVID-19 vaccines, which also brought down government spending by 0.3 percent.

Business investment, a key pillar of domestic demand, rose 0.4 percent on the back of solid demand for digital- and semiconductor-related investment, following a 2.4 percent decline in the July-September period.

Private residential investment fell 0.9 percent, decreasing for the second straight quarter, and public investment dropped 3.3 percent, down for the fourth quarter in a row, both partly affected by a surge in construction and manpower costs, a government official told reporters.

In nominal terms, unadjusted for price changes, Japan's economy expanded 0.5 percent, or an annualized 2.0 percent, in the last quarter of 2021.

In the whole of 2021, the Japanese economy expanded 1.7 percent in real terms, growing for the first time in three years, following a 4.5 percent decline in 2020.

"Given that the U.S., Chinese and European economies have already returned to their pre-pandemic levels, it is clear that Japan's recovery in 2021 was weak," Kobayashi said, adding that reduced car output due to the supply issues and the slow start of the nation's vaccine rollouts weighed on the economy.

Revised GDP data are scheduled to be released on March 9.


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