A crane on a construction site is seen behind the national flag of Japan in Tokyo, Japan on August 12, 2016. REUTERS / Kim Kyung-Hoon / Files

The Japanese economy contracted at a slower pace than initially reported in the first quarter, due to more modest cuts in plant and equipment spending, but the coronavirus pandemic still dealt a heavy blow to aggregate demand.

The slower contraction provides relief to policymakers hoping that Japan’s economic recovery will not lag behind other major economies, which have deployed COVID-19 vaccines much faster to end the health crisis.

The revised decline is mainly due to a smaller decline in government and capital spending, both of which slowed less than initially thought during the quarter, offsetting a slightly larger drop in private consumption.

The economy fell 3.9% annualized in January-March, not as bad as the preliminary reading of a 5.1% annualized contraction, but still posting the first decline in three quarters, showed Tuesday Cabinet Office data.

The reading, which was better than economists’ median forecast for a decline of 4.8%, equates to a real quarter-on-quarter contraction of 1.0% from the previous quarter, down from a preliminary decline of 1.3%.

“Overall, investment spending and private consumption have remained weak, which showed weak domestic demand,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.

“The issue of vaccines is the most important thing for (economic) recovery,” he said, adding that the vaccination rate should reach around 50% to boost the country’s economic recovery prospects.

Capital spending fell 1.2% from the previous quarter, better than a preliminary decline of 1.4% and matching the median forecast of a loss of 1.2%. Public consumption fell 1.1%, smaller than a preliminary drop of 1.8%.

Private consumption, which accounts for more than half of gross domestic product, fell 1.5% from the previous three months, worse than the initial estimate of a 1.4% decline.

Net exports – or exports minus imports – subtracted 0.2 percentage point from revised GDP growth, while domestic demand lowered it by 0.8 percentage point, less than a preliminary contribution minus 1.1 percentage points.

The better-than-expected GDP revision comes after household spending and exports surged in April following a return in demand, although the gains were largely inflated by comparison with the deep drop caused by the ‘last year.

Inflation-adjusted wages, which are a barometer of household purchasing power, rose 2.1% in April year-on-year, the government said on Tuesday.

The government has come under political pressure to relax an already stretched budget target this year as the cost of tackling the health crisis accumulates, as it struggles to maintain growth while battling the pandemic. Read more

Some analysts expect the Japanese economy to post another contraction in the current quarter – pushing it back into a technical recession – as an extension of emergency coronavirus restrictions for Tokyo and other major regions hurts to domestic demand.

Our standards: Thomson Reuters Trust Principles.

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