Daniel Leussink and Leika Kihara

TOKYO, Reuters – Japan’s economy recovered in the last three months of 2021 due to falling coronavirus infections. However rising raw materials costs and a rise in Omicron variant infection cloud the outlook.

Haruhiko Kuroda from the Bank of Japan also mentioned that the escalating tensions with Ukraine pose a risk to central bank’s prediction for moderate economic recovery.

According to data from government, world’s third-largest economic country grew by 5.4% annually in October-December, after contracting an additional 2.7% during the prior quarter. However, Tuesday’s data shows that it fell short of the 5.8% median market forecast.

As rising COVID-19 rates keep people from shopping, and as supply chain disruptions impact factory output, some analysts predict that the economy could slump yet again during this quarter.

Takeshi Minami (chief economist, Norinchukin Research Institute) stated that “the economy could stall or contract in January and March” depending on the impact of Omicron variant consumption.

Private consumption rose 2.7% quarter on quarter, driving economic growth. This account accounts for almost half of Japan’s Gross Domestic Product (GDP).

Japan had ended its coronavirus curbs last October, which led to an increase in consumer spending. This was more than the 2.2% market projections.

Also, capital expenditure rose by 0.4% in line with market predictions. Exports continue to enjoy the benefits of global recovery, with external demand increasing by 0.2%.

Wakaba Kbayashi, an economist with Daiwa Institute of Research, stated that service consumption saw a significant increase after the economy was re-opened.

Japan’s recovery is still behind other advanced economies. This forces the BOJ not to loosen monetary policy, even though other central banks are looking at interest rate increases.

Seasonally-adjusted, the country’s real GDP is still below its pre-pandemic levels of late 2019. It was around 54 trillion yen (4.69 trillion).

Omicron cases rose to record levels, prompting the government’s decision to relax restrictions in most areas and close borders. This likely led to lower consumption than expected.

Infections are also causing some auto manufacturers to stop producing, which has led to production disruptions and delayed delivery at giants like Toyota. Toyota Motor Corp. (NYSE:)

Japan’s fragil recovery continues to be threatened by increasing import costs.

Kuroda of BOJ stated that increasing tensions between Ukraine and Japan could lead to negative impacts on Japanese and global economic growth, if they cause a rise in commodity and fuel prices. Kuroda spoke before parliament Tuesday.

Hiroshi, senior economist at BNP paribas Securities (OTC:) Securities expects economic growth slowing to an annualised rate of 1-1.5% for January-March and even to decline.

He stated that “the economy’s recovery may delay into the later part of this year because the Ukraine crisis might drive up fuel prices and dampen corporate appetite to capital expenditure.”

“The government and the central banks have little left to offer in the way of stimulus measures. Both fiscal and monetary policy are at an end.

($1 = 115.3900 yen)