Japan's economy stages modest bounce from Covid jolt, global outlook darkens

Japan's economy rebounded at a slower-than-expected pace in the second quarter from a Covid-induced slump, data showed on Monday, highlighting uncertainty on whether consumption will grow enough to bolster a much-delayed, fragile recovery.

While rising consumption propped up April-June growth, the outlook has been clouded by a resurgence in infections, slowing global growth, supply constraints and rising raw material prices that are boosting households' living costs.

"Consumption and capital expenditure will continue to drive growth in July-September. But momentum may not be that strong as rising inflation is cooling household spending," said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

"While domestic demand may continue to expand, falling exports could put a brake on Japan's recovery," he said.

The world's third-largest economy expanded an annualised 2.2% in April-June, government data showed, marking the third straight quarter of increase but falling short of median market forecasts for a 2.5% gain. It followed a revised 0.1% rise in gross domestic product (GDP) in January-March, when surging Covid cases hurt spending.

The growth was driven largely by a 1.1% gain in private consumption, the data showed, as businesses re-opened after the lifting of pandemic-related curbs on economic activity.

The rise in consumption, however, was smaller than market forecasts for a 1.3% increase. Wage earners' remuneration during April-June, adjusted by inflation, fell 0.9% from the previous quarter, a deeper drop than a 0.1% fall in January-March in a sign rising living costs were hurting household income.

Capital expenditure, another key driver of April-June growth, increased 1.4% from the previous quarter, exceeding a median market forecast for a 0.9% expansion, the data showed.

Domestic demand added 0.5% point to GDP growth, while external demand neither added to, nor shaved off from growth.

Japan has lagged other major economies in fully recovering from the pandemic's hit due to weak consumption, blamed in part on curbs on activity that lasted until March.

That has turned the Bank of Japan (BOJ) into an outlier in the global monetary tightening phase sweeping across many economies amid surging inflation.

Policymakers hope pent-up demand will underpin consumption until wages rise enough to make up for increasing living costs. But there is uncertainty on whether companies will hike salaries amid heightening risks of slowing global demand, analysts say.

The BOJ has stressed its resolve to maintain ultra-loose monetary policy even as inflation exceeded its 2% target for three straight months in June, to ensure the economy makes a sustained recovery driven by solid consumption and wage growth.