Japan's economy rebounds on solid consumption, Omicron clouds outlook

Some analysts expect the economy to contract again in the current quarter as rising Covid cases and supply chain disruptions hit factory output

Japan's economy rebounded in the final three months of 2021 as falling coronavirus cases helped prop up consumption, though rising raw material costs and a spike in new Omicron variant infections cloud the outlook.

Some analysts expect the economy to contract again in the current quarter as rising COVID-19 cases and supply chain disruptions hit factory output, heightening challenges for policymakers in sustaining a fragile recovery.

The world's third-largest economy expanded an annualised 5.4% in October-December after contracting a revised 2.7% in the previous quarter, government data showed on Tuesday, falling short of a median market forecast for a 5.8% gain.

The increase was driven largely by a 2.7% quarter-on-quarter rise in private consumption, which accounts for more than half of Japan's gross domestic product (GDP). The expansion compared with market forecasts for a 2.2% gain.

"The data confirmed a consumption-led rebound in the final quarter as COVID-19 curbs were lifted," said Takeshi Minami, chief economist at Norinchukin Research Institute.

But the recovery could be short-lived as a surge in Omicron variant cases and geopolitical risks over Ukraine were likely to be drags on growth, Minami added.

"The economy will likely stall in January-March or it could even contract, depending on how the Omicron variant may affect service-sector consumption."

Capital expenditure rose 0.4%, against market forecast for a 0.5% increase. External demand added 0.2% point to GDP growth in October-December, compared with market forecasts of a 0.3 point contribution.

Japan ended state of emergency curbs to combat the pandemic from October last year, which, coupled with a decline in COVID-19 cases, helped lift consumption through the end of 2021.

But a record spike in Omicron cases forced the government to impose loose curbs on most areas and keep borders closed, which likely dampened consumption since the outset of this year.

Rising Omicron infections have also forced some manufacturers to halt production, causing output disruptions and delivery delays at auto giants such as Toyota Motor Corp.

Some analysts expect Japan's economy will decline in the current quarter as chip shortages, supply snags and slowing Chinese growth weigh on output, adding to the expected weakness in consumption.

(Reporting by Leika Kihara and Daniel Leussink; Additional reporting by Tetsushi Kajimoto and Kantaro Komiya; Editing by Sam Holmes)