Japan's economy shrank an annualized real 0.8 percent in July-September, compared with the 1.2 percent previously reported, as domestic demand was slightly stronger, although its recovery from the COVID-19 fallout lacked vigor, government data showed Thursday.

Real gross domestic product, adjusted for inflation, shrank 0.2 percent on a quarterly basis, revised upward from minus 0.3 percent. After the Cabinet Office revised past data, the world's third-largest economy marked its first shrinkage in two quarters, instead of four quarters.

Japan has seen the size of its economy return to pre-pandemic levels, but its recovery has been slower than other economies.

The July-September quarter saw imports surge on higher energy costs and a sharp weakening of the yen that inflated the value of inbound goods. Growth in imports works as a negative for GDP, which measures the total value of goods and services produced in a country.

Domestic demand grew 0.42 percent in the revised data, slightly up from 0.36 percent seen earlier, contributing to the upward GDP revision, a Cabinet Office official said.

Inflation has been accelerating in Japan, with core consumer prices reaching levels unseen in decades. But pent-up demand following the removal of antivirus curbs helped support private consumption.

Still, private consumption, which accounts for more than half of the economy, grew a mere 0.1 percent, much slower than an earlier reading of 0.3 percent growth.

Capital spending remained unchanged, up 1.5 percent, reflecting a strong appetite among Japanese firms to step up investment to boost output capacity and prepare for the post-COVID era.

Public investment increased 0.9 percent, revised downward from a 1.2 percent expansion

Imports jumped 5.2 percent, unchanged from their earlier reading, while exports were up 2.1 percent, faster than the 1.9 percent previously reported.

"Companies increased their inventory, which is a plus for GDP in preparation for strong demand as activity picks up," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co., adding that the latest GDP figures did not change his view on the economy.

"Companies have been increasing their spending, a trend that will likely continue if their current plans do not change. Consumption will likely be supported by people spending more on services by dining out and going on trips with antivirus curbs lifted," Kobayashi said.

In the current quarter ending this month, economists expect a return to positive growth. Intense yen-selling pressure has eased as financial markets pare back expectations of aggressive rate hikes by the U.S. Federal Reserve.

But the prospect of slowing global growth caused by monetary tightening to fight surging inflation bodes ill for the Japanese economy, as the United States and China, which has its own growth concerns due to its strict COVID policy and real estate troubles, are the country's two biggest trading partners.

The Cabinet of Prime Minister Fumio Kishida has approved an economic package to mitigate the pain of rising prices on households, backed by a roughly 29 trillion yen extra budget for the current fiscal year. Its program to reduce utility bills by 5,000 yen a month per household will not kick in until January.

"Rising inflation is a concern because it apparently weighed on consumption in July-September and this will continue heading into next year. We can't expect robust growth in exports, either," Kobayashi added.

Nominal GDP shrank an annualized 2.9 percent, much faster than 2.0 percent. It decreased 0.7 percent on a quarterly basis, rather than 0.5 percent.

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