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Economy

Japan's Q1 GDP revised up to 3.9% annualized contraction

Vaccination progress is set to drive growth in second half

More Japanese have been going out as a fresh pandemic wave has started winding down, and consumer spending looks set for a sharp rebound after June 20, when the renewed state of emergency ends.   © Reuters

TOKYO -- Japan's economy shrank a revised 1.0% in January-March, or an annualized pace of decline of 3.9%, the Cabinet Office said on Tuesday, with government spending falling less than expected due to new efforts against the coronavirus pandemic.

The figures were better than the initially estimated decline of 1.3% in gross domestic product, or an annualized rate of decline of 5.1%. The initial estimates were released on May 18.

The upward revision reflected the smaller-than-expected decline in government consumption. The government of Prime Minister Yoshihide Suga has started rolling out vaccination campaigns across the country, offering incentives to doctors and nurses to enlist their support and renting facilities for large-scale vaccination. Such activity may have limited the drop in government spending due to the suspension of subsidy programs for domestic tourism, said Yuichi Kodama, chief economist for Meiji Yasuda Research Institute.

Also contributing to the upward revision was an increase in business inventories. Inventory buildup needs to be taken with caution, however, as it could have been caused by slower sales. During the quarter, the government put the nation under a state of emergency between Jan. 8 and March 21 in response to a fresh wave of COVID cases. There is little reason to believe for now that the inventory buildup was caused by stronger sales expectations.

For the second quarter, from April to June, economists on average expect a modest 0.5% rebound in GDP, or an annualized rate of 1.84%, according to a survey by the Japan Center for Economic Research, a Nikkei affiliate.

Economic activity in the second quarter has been handicapped by a renewed state of emergency from April 25 to June 20.

But pedestrian traffic has shown signs of picking up lately as the pandemic wave has started winding down. The accelerated pace of vaccinations is also giving a much-needed boost to consumer confidence, Kodama said.

"Consumer spending is likely set for a sharp rebound after June 20. Retailers are also expected to launch sales campaigns around the time of the lifting of the state of emergency," Kodama said. "'Revenge consumption' has happened in other countries as well," he noted.

Depending on how vigorous spending is in the final 10 days of June, the economy could keep any decline to a minimum or even post positive growth, he said.

The full effects of any recovery in consumption are expected to show up in the third and fourth quarters. The economy is also likely to receive a tailwind from recovery in Europe, where vaccinations are also making progress. "Exports are likely to become the main driver of Japan's growth in the latter half of this year and toward next year, Kodama said.

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