Japan's economy grew at an annualized real 0.6 percent in October-December, helped by a sustained recovery in private consumption in the aftermath of antivirus curbs, but the first expansion in two quarters was far weaker than expected, government data showed Tuesday.
Adjusted for inflation, real gross domestic product increased 0.2 percent from the previous quarter, according to the Cabinet Office's preliminary data.
The average market forecast was for a 1.7 percent annualized expansion in a Kyodo News survey.
Japan's economic growth was also limited by a drop in private inventories, a negative for GDP which is the measure of the total value of goods and services produced in a country.
Accelerating inflation in Japan has already begun to dent consumer sentiment with more price hikes expected in the current quarter to March. But pent-up demand for services has supported consumption as the economy has emerged from coronavirus restrictions.
"We expected a rebound in October-December after an unexpected contraction in the previous quarter but growth is not robust. Still, the data is consistent with the view that the economy is recovering moderately," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting.
"On the one hand, demand is strong for accommodation and leisure, as well as inbound tourism, but we have rising prices and costs that are expected to remain elevated. So it's a tug of war," Kobayashi said.
Private consumption, which makes up over half of the economy, gained 0.5 percent as consumers increasingly dined out and traveled, while demand for durable goods was also strong. It was the third straight quarter of increase.
Capital spending fell 0.5 percent, after two straight quarters of strong gains, as semiconductor-related investments decreased. Companies had ramped up investment in equipment to manufacture chips, used in a wide range of products from electronics to cars, to cope with robust demand.
In nominal terms, however, the relevant figure increased, meaning companies shouldered higher costs for machinery and construction, economists said.
The revival of inbound tourism following the easing of COVID-19 border controls, which were among the most stringent and long-lasting of Group of Seven nations, also helped boost the economy, with spending by foreign visitors in Japan treated as exports in the GDP figure.
Exports rose 1.4 percent while imports dipped 0.4 percent. Public investment decreased 0.5 percent.
In 2022, the world's third-largest economy grew 1.1 percent in real terms.
Japan's central bank has diverged from its global peers in the United States and Europe which have aggressively moved interest rates higher as they fight high inflation.
Such monetary tightening, however, has raised recession fears, boding ill for the Japanese economy which has its growth driven primarily by exports. Slower growth is also expected for China, which was held back by the fallout from the nation's stringent "zero-COVID" policy.
More price hikes are expected in the current quarter as companies have to pass on surging import costs of energy and raw materials, amplified by a weaker yen.
"Pent-up demand and expectations for pay rises have been supporting private consumption but if wages don't grow as much as consumers expect (after annual negotiations between management and labor unions), this will become a drag on spending," said Naoko Ogata, a senior economist at the Japan Research Institute.
"Private consumption has been recovering and it has become less susceptible to every rise and fall in COVID-19 cases so the worst time is over. But spending has yet to reach pre-pandemic levels and rising prices are hitting those with low incomes particularly hard," Ogata added.
Nominal GDP grew 1.3 percent, or at an annualized rate of 5.2 percent, in the last quarter of 2022.
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