Japan's economy likely grew and avoided slipping into recession this quarter but an extension of emergency measures to stem a rise in coronavirus infections has dented the growth outlook, a Reuters poll showed.
Just over a month before Tokyo is set to host the Olympic Games, the world's third-largest economy was seen expanding an annualised 0.5% this quarter.
This is less than a third of the 1.7% economists projected last month, according to the June 2-14 poll of 36 economists.
Japan's gross domestic product shrank by an annualised 3.9% in January-March, the first contraction in three quarters.
About 85% of analysts polled expected the next policy move by the Bank of Japan, which is set to meet this week, to be an unwinding of stimulus, but 90% don't expect that to happen until 2023 or later and the remaining 10% not until next year.
About two-thirds of economists, 23 of 36, expected the economy to grow this quarter.
The other 13 economists anticipated it would shrink, which would push it into recession - as marked by two quarters of contraction in a row.
Japan was last in recession during the second quarter of last year.
The poll found Japan's economy would grow at a much slower rate over the next two quarters than the US, which is said to be on track to recover all the output it lost due to the health crisis this quarter.
Japan's growth outlook is facing pressure from slowing economic activity and demand at home, both hit by the government's move to extend the coronavirus emergency curbs in Tokyo and other major areas up to June 20.
The economy is likely to expand around 4.8% on an annualised basis in the third quarter, below the 5.3% growth projected by economists last month and compared to a much higher annualised rate of 7% in the world's top economy.
Core consumer prices, which exclude volatile fresh food prices, are set to rise 0.2% this fiscal year, the poll also showed, down from 0.3% projected last month.
Japan's economy has suffered from a decline in private consumption, which accounts for more than half of GDP, as people forego spending on services amid coronavirus curbs and a late vaccine rollout.
28 of 37 economists said it was unlikely or very unlikely private consumption would recover to pre-coronavirus levels this year, while the other nine said it was likely or very likely to do so, the poll showed.
But if the health crisis subsides, the economy may be poised to see a sharp spending rebound, as people's savings have risen while the jobless rate remains below 3%, said Yuichi Kodama, chief economist of the Meiji Yasuda Research Institute.
"People's self-restraint is likely to continue, so a rebound may be delayed," Kodama said, adding that the spread of coronavirus variants posed a risk to the economy.
The poll also showed the Bank of Japan was expected to hold its short-term interest rate target at -0.1% and the 10-year Japanese government bond yield target around 0% at its policy meeting on June 17-18.