Japan's household spending fell in March for the first time in three months, though the 2.3% drop was smaller than expected, as consumers remained cautious despite some easing of COVID-19 curbs.

While lower coronavirus risks have boosted consumer activity since April, rising living costs may cramp Japan's consumption-led recovery for the rest of 2022, analysts say. Inflation is at a multiyear-high in the world's third-biggest economy, fanned by the war in Ukraine and the yen's skid to 20-year lows.

Government data on Tuesday confirmed the March spending drop versus the same month a year earlier. The decrease was narrower than Reuters' median market estimate for a 2.8% drop, and followed 1.1% growth in February.

The first fall since December was also partly due to a tough comparison with March 2021, when spending surged 6.5%, a government official told a media briefing. Some items such as mobile devices, cars and takeaway foods saw robust demand, the official said.

Service spending on dining and travel agencies also slightly increased year-on-year, he said.

Meanwhile, spending on fresh foods and home appliances decreased from a year earlier, and consumption still remained below pre-pandemic levels in March, according to the data.

Household spending in the January-March quarter was down 1.8% from the previous quarter, the data showed, as curbs to combat the omicron variant lasted until late March.

"Japan has constantly lagged behind other countries in economic reopening, where consumption is still hugely swayed by infection trends and hindered from recovering further," said Takeshi Minami, chief economist at Norinchukin Research Institute.

On a seasonally adjusted, month-on-month basis, spending rose 4.1% in March, which was the first rise in three months and stronger than the forecast 2.6% growth.

"So-called revenge spending on previously restricted areas likely covered the dip from consumer price hikes," said Minami, referring to households jumping on early opportunities to spend after the lifting of COVID-19 curbs on in-person services.

"However, as energy costs such as electricity bills as well as food prices have been rising, the upcoming rebound in consumption might end up not as strong as expected," he said.

With households facing bigger bills, in March, real wages fell for the first time in three months as inflation outstripped steady nominal wage growth.

"For a while, we’ll see pent-up demand driving spending, but inflation is certainly putting a lid on consumption and it will offset some of the recovery momentum,” said Yuichi Kodama, chief economist at the Meiji Yasuda Research Institute. "After taking price gains into account, incomes are declining. So from the summer, I think consumption will become sluggish.”

Prime Minister Fumio Kishida announced a package of spending measures last month to help households and businesses deal with rising costs and shore up the recovery and public support ahead of summer elections. Russia’s invasion of Ukraine and lockdowns in China are boosting imported inflation.

Soaring costs have been exacerbated by a weakening yen, which has reduced the purchasing power of households and firms for imported goods and products.

The softness of the currency is set to continue, with the Bank of Japan vowing to keep up its monetary easing to support economic growth, in contrast to the most other developed world central banks, which are raising interest rates to tackle inflation.

The BOJ says anemic pay rises for workers are among the reasons why Japan hasn’t been able to generate self-sustaining inflation.

Economists expect the world's third-largest economy to have contracted an annualized 0.7% in the January-March period, followed by a 5.1% rebound in April to June, according to the latest Reuters poll.