TOKYO: Japan’s economy expanded more than expected in the fourth quarter, extending the recovery from its worst postwar recession thanks to a rebound in overseas demand that boosted exports and capital spending.

But the recovery slowed from the third quarter’s brisk pace and new state of emergency curbs cloud the outlook, underscoring the challenge policymakers face in preventing the spread of COVID-19 without choking off a fragile recovery, especially in the battered consumer sector.

“Conditions are such that Japan will not be able to avoid negative growth in the first quarter,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research. “There is a high possibility that there will be a repeating cycle of coronavirus infections spreading and being contained this year, which means that consumption is not likely to recover at the expected pace.”

The world’s third-largest economy grew an annualised 12.7% in October-December, government data showed on Monday, exceeding a median market forecast of 9.5%.

It was slower than the revised 22.7% surge the previous quarter, when the economy got a lift from pent-up demand after a previous state of emergency was lifted in May.

For the full coronavirus-stricken year, Japan’s economy contracted 4.8%, the first annual fall since 2009.

But Japan’s October-December performance was stronger than US growth of 4% and a 2.8% slump in the euro zone. With two straight quarters of solid growth, Japan’s economy likely recouped 90% of pandemic-induced losses, analysts say.

“Japan’s recovery proceeded at a much faster pace than initially expected,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“There’s still some distance toward a full normalisation, but economic activity is recovering toward pre-pandemic levels.”

Japanese shares surged to close at over 30-year highs on rising expectations for a rebound in corporate earnings and economic growth.

Japan’s stronger-than-expected GDP data comes amid signs the pandemic’s hit to other Asian economies toward the end of last year was not as severe as first feared.

Figures released on Monday showed that GDP in Singapore and Thailand shrank less than expected in the fourth quarter. .

A global rebound in manufacturing gave Japan’s exports and capital expenditure a much-needed boost on strong shipments to a rapidly recovering Chinese economy.

External demand, or exports minus imports, added 1.0% point to fourth-quarter GDP growth thanks to a 11.1% surge in exports buoyed by shipments of electronic parts and autos to China.—Reuters