Tetsushi and Daniel Leussink

TOKYO (Reuters – Japan’s economic performance fell in three months, as COVID-19 curbs impacted the service sector. The Ukraine war and high commodity prices also created problems for both consumers and businesses.

Fumio Kinio Kishida, Prime Minister of Japan, is facing a major challenge in his drive for growth and distribution of wealth. This agenda of “new capitalism” has stoked fears about stagflation (a combination of low growth and high inflation).

This is the world’s No. The No. 3 economy in the world shrank by 1.0% annually between January and March, according to gross domestic product (GDP). This compares with a 1.8% contraction that economists had expected. According to the Cabinet Office data, it translated into 0.2% quarterly decline, which was in line with market expectations for 0.4%.

Data showed that the private consumption which is more than half of GDP, was slightly lower than the 0.5% predicted by economists.

A weaker reading could force Kishida into spending more, with elections to the upper house scheduled for July 10. This is in addition to an additional budget spending of 2.7 trillion Japanese yen (20.86 billion dollars) compiled Tuesday.

Analysts expect Japan’s economy will rebound over the next quarters but war in Ukraine, and slowdowns in China could dim those recovery prospects.

Although coronavirus restrictions have been relaxed, there are still doubts about the V-shaped recovery. However, rising energy prices and food prices could be capped by the weakening yen.

Japan’s export-dependent economy was little helped by external demand. Net exports slowed GDP growth by 0.4 percent, due to the weakening Japanese yen, and rising global commodity prices, which inflated imports.

This compares to the 0.3 percentage points of negative contributions seen by economists.

After a 0.4% rise in quarter before, capital spending increased 0.5%.

($1 = 129.4400 yen)