By Daniel Leussink

TOKYO (Reuters – Japan’s economy will expand at a slower rate than expected next quarter, partly due to Russia’s invasion of Ukraine. This was also due to its inflationary impact on global commodity prices and energy prices.

Due to high energy costs, the result has been a sudden fall in the yen. This is the worst month since November 2016 and it will lose nearly 6%.

The economy wouldn’t be affected by the decline of the Japanese yen until it falls to 130 USD. That’s roughly 60% of those polled. It’s not unusual for people to rate recent weakness in the currency as bad. Current exchange rates for the yen are 122 to one dollar.

As a result of rising prices for consumers and supply issues, the outlook for the economy has been difficult to project since February 24, when Russia launched its war in Ukraine.

According to the average forecast of almost 40 analysts, the world’s third largest economy would expand at 4.9% per year in the next quarter. This is below the 5.6% prediction for February.

The slower growth indicates that the economy is expected to rebound from its contraction in this quarter. It was forecasted to contract an annualised 0.3%. This is an improvement on the 0.4% growth that was predicted for January-March.

While consumer activity is usually robust in the second quarter, higher prices are now hurting consumers’ purchasing power, restraining the release of pent-up demand after COVID-19 curbs ended, said Hiroshi Namioka, chief strategist and fund manager at T&D Asset Management.

Namioka said that while there will be some growth in the quarter ahead of January-March it is unlikely to be as substantial as originally thought, given the current situation in Ukraine.

Fumio Kishida, the Japanese Prime Minister has ordered that his Cabinet prepare a second relief package for April in order to lessen the economic impact of the rise in raw material prices and global energy prices.

After an Omicron infection record, the Japanese government removed any remaining coronavirus restrictions earlier this month.

The weakness of the Japanese yen has historically given Japanese exports a tailwind, but economists who were surveyed weren’t discouraged.

When asked what the impact of the Japanese yen on the U.S. economy would be, 16 out 27 economists responded that it would cause more harm than the benefits if the yen fell below 130 against the dollar.

Sixteen people chose between 125-130 and 120-125 yen for each dollar. Three others chose 120-125. Three chose 115-120, one selected 120-125. One chose 120-125. Three chose 115-120, one chose 115-120, one chose 110 yen/dollar, and one chose stronger.

According to the poll, 2.6% of fiscal 2022’s GDP would be a growth after 2.3% expected in fiscal 2019.

The forecasts for both were slightly lower that what was predicted in the poll last month, which was done mainly before Russia’s intervention in Ukraine. Moscow refers to this as a “special operation”.

The poll found that core consumer prices (which exclude volatile fresh foods prices) will increase 1.6% in the next fiscal year after an 0.1% decrease this fiscal year.

This showed that prices were expected to rise in the months ahead, but about 85% said it was very unlikely or unlikely that Japan will slip into recession during the next two year.

15% of respondents said this was most likely, and none replied that it was highly likely.

(For more stories, see the Reuters economic poll: