Japan's economy is likely to be on a growth track from the current quarter, but analysts say surging commodity prices due to Russia's war in Ukraine will weigh on private consumption and become a headwind to its recovery from the coronavirus pandemic fallout.
After all COVID-19 curb measures to contain the surge of infections caused by the Omicron variant were lifted in late March, many analysts expect a strong increase in gross domestic product in the April to June quarter led by the services sector, following an annualized real 1.0 percent decline in the January to March period.
Annualized real GDP in the first quarter came to 537.92 trillion yen ($4.2 trillion), still lower than the October to December quarter of 2019, the last pre-pandemic quarter when it was 541.81 trillion yen, according to preliminary data released by the Cabinet Office on Wednesday.
The GDP growth forecasts by 36 economists averaged an annualized 5.18 percent expansion for the second quarter of 2022, and they forecast that growth will gradually lose momentum in the following quarters to 3.11 percent, 2.04 percent and 1.71 percent.
For the whole of fiscal 2022 from April, growth of 2.37 percent is expected, according to a poll by the Japan Center for Economic Research.
But many analysts including Yoshiki Shinke, senior executive economist at the Dai-ichi Life Research Institute, warn of being too optimistic about the outlook as the impact of the war that started on Feb. 24 will start to manifest in coming quarterly data.
"Price hikes in daily necessities including food will dampen consumer sentiment and weigh on private spending," Shinke said. "Once an expected rebound in the April-June quarter runs its course, the impact of rising prices will be easier to feel."
Japan's core consumer price index already gained 0.8 percent in March from a year earlier, the fastest pace in over two years, due to surging fuel and raw material costs.
For April, analysts expect the core CPI to further accelerate toward 2 percent, a long-elusive goal set by the Bank of Japan.
To help ease the pain of high prices, the Japanese government has crafted a 6.2 trillion yen emergency economic package, which includes subsidies to oil wholesalers to bring down retail gasoline prices.
But even with the relief measure for fuel prices, average Japanese households may face an extra expense of 60,000 yen ($465) in 2022, if the Japanese yen remains at a 20-year-low level against the U.S. dollar and fuel prices stay elevated, according to an estimate by Mizuho Research & Technologies Ltd.
For resource-poor Japan, recent rapid depreciation of the yen has partly contributed to price inflation. Saisuke Sakai, senior economist at Mizuho, said about a quarter of the estimated additional cost is attributable to the weaker yen.
"There are no major factors that will change the dollar-yen rate situation for the time being," Sakai said. "Increasing import costs will add burdens for companies and households."
The calculation was based on the dollar being traded at an annual average of 130 yen and the West Texas Intermediate crude oil price moving at around $108 per barrel.
The yen has weakened as the BOJ has kept interest rates at near zero as part of its accommodative monetary policy, while the U.S. Federal Reserve is expected to keep raising rates to tame inflation.
Recovery in consumption may also be slowed if Prime Minister Fumio Kishida's government takes anti-virus measures amid a future surge in COVID-19 cases, said Taro Saito, executive research fellow at the NLI Research Institute.
"Private consumption will not recover sustainably" if economic activities are repeatedly restricted, Saito said.
While other major economies have moved on to a "living with the coronavirus" phase, Japan has not. That has left the Japanese economy lagging behind those of the United States and European countries, the economist said.
Fallout from Japan's economic sanctions on Russia over the war in Ukraine is also something to be watched closely, Saito said, particularly whether Japan can secure energy supply, as Kishida has said Japan will "in principle" ban Russian oil imports.
"Since energy supplies would be lower, though to what extent is yet unclear, the economy may be disrupted," he said.
That could be a repeat of the power crunch Japan experienced in March, when some thermal power plants went offline due to an earthquake that hit Japan's northeast. Some manufacturers halted operations at factories to help save electricity.
In 2021, Russian oil accounted for 3.7 percent of Japan's total crude oil imports, while 8.7 percent of the total liquefied natural gas imports were from the resource-rich country, according to government data.
On the likelihood of Japan tightening its sanctions by phasing out or banning LNG imports from Russia, Deputy Chief Cabinet Secretary Seiji Kihara has said the government will "think about how to deal with it when it becomes necessary."
"There are plenty of concerns," said Shinke. "There is a fair chance of the GDP growth for fiscal 2022 falling below 2 percent."