(Bloomberg) — Japan’s economy contracted less than initially estimated at the beginning of this year, as its recovery from the pandemic started to regain traction at the end of the first quarter.

The annualized decline in gross domestic product was 0.5% for the three months to March, according to revised data from Cabinet Office Wednesday. The key reason for the improvement was an upward revision of inventories. The economists expected 1.1% less than the initial reading of 0.1%. 

The main factor that contributed to the reduction in the contraction was an upward revision of private inventories. A report released last week revealed that businesses invested less in the first three-months of this year. 

At the moment, analysts expect the economy will return to modest growth during the second quarter as consumers gain confidence and start to spend again after lifting the omicron waves restrictions.

According to Wednesday’s updated economic report, the major downside risks have shifted away from the current pandemic and towards cost-push inflation. This is aggravated by the sliding currency. Continued fallout from Russia’s war on Ukraine and China’s slowdown are other causes for concern.

According to data released Tuesday, the demand for goods and services was higher than concerns about inflation’s impact on real incomes. Analysts warn, however that once this demand is exhausted, price increases may slow consumption if wages don’t keep pace with increasing living expenses. 

The yen’s drop to fresh 20-year lows is amplifying some of the higher prices. As Japan slowly opens its borders to foreign tourists and exporters, a more affordable currency can be a blessing. However, this makes it harder for people to import food and energy and raises basic living costs. 

The Bank of Japan has remained dovish in its policy of keeping rates low to help the economy. However, its counterparts have raised interest rates to lower inflation. This policy disagreement with the US has helped the yen to weaken even more.

Bloomberg Economics says…

“Looking ahead, we expect GDP to rebound in 2Q on pent-up consumer demand after virus-related restrictions were lifted in March. There are also downside risks. Higher import prices are squeezing household budgets.”

— Asia’s economist team

You can find the entire report here.

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