People walk past the train lines in Togoshi Ginza, along one of the longest shopping streets in the capital Tokyo, on May 8, 2023. (PHOTO / AFP)

TOKYO – Japan's economy emerged from recession and grew faster than expected in the first quarter as a post-COVID consumption rebound offset global headwinds, shoring up hopes for a sustained recovery.

But mounting signs of a slowdown in US and European growth cloud the outlook for the export-reliant economy, heightening uncertainty on how soon the central bank can phase out its massive stimulus program.

"Consumption will continue to underpin growth as removal of COVID curbs boost tourism and service spending," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"But the economic recovery will be moderate as weak overseas demand will weigh on exports. It will be a tug-of-war between robust domestic demand and sluggish exports," he said.

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The world's third-largest economy grew an annualized 1.6 percent in January-March, government data showed on Wednesday, far exceeding market forecasts for a 0.7 percent gain and marking the first rise in three quarters.

Demand for goods isn't strong globally, so exports are weak. Industrial production is also soft, so we can't expect manufacturers to perform well ahead.

Toru Suehiro, Economist at Daiwa Securities

The growth followed a 0.1 percent fall in the final quarter of last year, which was revised down from a 0.1 percent rise. The decline marked two straight quarters of contraction, meeting the definition of a technical recession.

Private consumption, which makes up more than half the economy, grew 0.6 percent in January-March from the previous quarter, as the country's reopening from the pandemic boosted service spending. That beat forecasts of a 0.4 percent increase.

Capital expenditure also surprised, expanding 0.9 percent, confounding forecasts for a 0.4 percent fall.

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The strength in domestic demand offset weakness in exports, which slumped 4.2 percent in January-March, marking the first decline in six quarters.

External demand, or net exports, shaved 0.3 percentage point off gross domestic product (GDP), highlighting the strain on manufacturers from slowing overseas growth.

"Demand for goods isn't strong globally, so exports are weak. Industrial production is also soft, so we can't expect manufacturers to perform well ahead," said Toru Suehiro, an economist at Daiwa Securities.

Rising fuel and food costs, which drove Japan's consumer inflation above the central bank's 2 percent target, could also weigh on consumption unless wage hikes are sustained, analysts say.

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Inflation-adjusted wager-earners' remuneration fell 2.3 percent in January-March from a year earlier, more than a 1.8 percent drop in the previous quarter, highlighting the deepening pain on households from rising living costs.