Japan's economy rebounds in second quarter, Covid-19 clouds outlook

Japan's economy rebounded more than expected in the second quarter after slumping in the first three months of this year, data showed, a sign consumption and capital expenditure were recovering from the Coronavirus (Covid-19) pandemic's initial hit.

But many analysts expect growth to remain modest in the current quarter as state of emergency curbs reimposed to combat a spike in infections weigh on household spending.

The world's third-largest economy grew an annualised 1.3% in April-June after a revised 3.7% slump in the first quarter, preliminary gross domestic product (GDP) data showed on Monday, beating a median market forecast for a 0.7% gain.

Still, the rebound was much weaker than that of other advanced economies including the United States, which marked a 6.5% annualised expansion in the second quarter, highlighting the fallout from Tokyo's struggle in containing the pandemic.

"There's not much to be optimistic on the outlook with a spike in infections heightening the chance of stricter curbs on activity," said Yoshihiki Shinke, chief economist at Dai-ichi Life Research Institute.

"Japan's economy stagnated in the first half of this year and there's a risk of a contraction in July-September. Any clear rebound in growth will have to wait until year-end," he said.

An unexpected rebound in April-June consumption also highlighted the dilemma the government faces, as citizens are becoming less responsive to voluntary, repeated stop-and-go requests to stay home.

"I have very mixed feelings about this GDP result. It shows that households' consumption appetite is very strong despite the state of emergency curbs," Economy Minister Yasutoshi Nishimura told reporters after the data's release.

"Our priority is to prevent the spread of the virus. It's very bad for the economy for this situation to drag on."

Consumption rose 0.8% in April-June from the previous quarter, confounding market forecasts for a 0.1% decline and rebounding from a 1.0% drop in January-March, the data showed.

Capital expenditure also increased 1.7% after falling 1.3% in the previous quarter. As a result, domestic demand contributed 0.6% point to GDP growth.

Exports rose 2.9% in April-June from the previous quarter in a sign the global recovery continued to underpin the world's third-largest economy.

"Private consumption grew unexpectedly and capital expenditure turned out to be firm. That said, the data left the impression that the economy's rebound from the first quarter slump was weak," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Japan's economy emerged from last year's initial blow from the pandemic thanks to robust exports, though slow vaccinations and repeated state of emergency curbs have hurt consumption.

A spike in Delta variant cases in Asia has caused supply chain disruptions for some Japanese manufacturers, which could weigh on factory output and add to gloom for an already fragile recovery.