Japan's economy rebounded in the last part of 2021, as virus cases slowed and restrictions were eased, spurring demand before the Omicron wave hit the country, data showed on February 15.

The world’s third-largest economy grew 1.3 per cent in the three months to December, rebounding from a revised contraction of 0.7 per cent in the previous three months, as virus cases surged.

The quarter-on-quarter figure released by Japan’s cabinet office on February 15 was slightly lower than market expectations of 1.5 per cent, and was driven by a sharp recovery in spending after the lifting of emergency virus restrictions in October.

The data also showed the economy grew 1.7 per cent in real terms in 2021, the first annual expansion for the economy in three years.

After a spike in virus cases in the summer of 2021, when Japan hosted the Olympics with virtually no spectators, the government lifted restrictions in October, prompting private consumption to grow 2.7 per cent quarter-on-quarter.

That growth is unlikely to have lasted however, with a wave of Omicron cases spurring new restrictions in January.

The restrictions, which mainly target nightlife and are far less strict than a blanket lockdown, will be in place until early March.

Japan is facing “more damage than expected from the Omicron variant”, said Masamichi Adachi, UBS Securities Chief Economist for Japan.

“Self-restraint by consumers has been greater than expected and the pace of booster vaccinations is very slow,” he said ahead of the release of the latest data.

“While the damage from Omicron appears to be less severe than feared for global economy, Japan may be an exception,” Adachi told AFP.

“Still, we are expecting that the Japanese economy will resume a solid recovery this year after disappointing stagnation in 2021,” he said, adding that “the timing of the rebound is just delayed”.

Tom Learmouth, Japan economist at Capital Economics, also said the road bump created by the Omicron variant would likely only temporarily derail growth.

“While Omicron will cause Japan’s economy to only tread water this quarter following a rebound in the fourth quarter [of 2021], output should soon resume its recovery and get back on its pre-virus trend by the end of the year,” he said in a note.

“With daily cases now falling and the booster rollout finally up to speed, fair winds should return in” the second quarter of this year, he added.

“Assuming no new variants of concern emerge, after broadly unchanged output in the first quarter, we’re expecting a 1.5 per cent quarter-on-quarter rise in GDP [gross domestic product] in the second quarter and a further 1.0 per cent rise in the third quarter to put the economy back on its pre-pandemic trend.”

For 2021, the 1.7 per cent expansion reversed the trend seen in both 2020 and 2019, with private consumption including household spending up for the year, despite the summer virus spike and emergency restrictions.

Private non-residential investment was down however, as a chip shortage and supply chain issues weighed on factory output.

Last year, Japanese Prime Minister Fumio Kishida announced a record $490 billion stimulus to shore up the country’s patchy pandemic recovery.

But the effect of the spending is only likely to begin being felt from the first quarter of 2022, economists said.