Japan’s economy contracted less than initially estimated at the beginning of this year, with revised figures showing consumer spending held up in the first quarter of the year even as the country suffered from its worst outbreak of the pandemic yet.

Gross domestic product shrank an annualized 0.5% in the three months through March, updated numbers from the Cabinet Office showed Wednesday. Consumption continued to grow in the quarter despite a raft of omicron-related restrictions on business operating hours during a large part of the period.

While the smaller contraction points to the start of a consumption pickup that should run through this quarter, it still leaves Japan’s economy below its pre-pandemic size, a factor that is likely to keep the government and the Bank of Japan continuing support for the recovery.

The result compares with economists’ estimated 1.1% decline and an initial reading of minus 1%. A revision in inventories was the largest factor helping reduce the slide, though that points to a buildup of unsold goods and materials that could weigh on growth this quarter.

While the release of pent-up demand after the lifting of virus curbs is likely to help fuel a rebound this quarter, economists also flag the risk of the recovery being limited by soaring energy and food prices inflated by a yen that set fresh two-decade lows on Tuesday.

"Consumption picked up somewhat, but inflation will weigh on it from here as I don’t think people are getting 'tolerant' of price hikes,” said economist Takeshi Minami at Norinchukin Research Institute. "I think the recovery will be modest in the second quarter. We will see the impact of China’s lockdowns on exports.”

Consumer prices excluding fresh food increased 2.1% in April from a year earlier, the quickest pace since 2008 after excluding tax hike effects. While that’s still much weaker than price growth in most other large economies, the costs of fuel, energy and some daily necessities are rising at a much faster pace and squeezing the budgets of households and businesses.

Unlike other major central banks, though, the BOJ under Gov. Haruhiko Kuroda is sticking with its monetary stimulus to support growth rather than combating inflation, a factor that is contributing to the yen’s weakness. To help households and businesses deal with inflation, Kishida unveiled a package of spending measures in April.

Data released Tuesday showed pent-up demand outweighed concerns over the impact of inflation on real incomes in April, supporting the consensus view that the economy is rebounding this quarter. But analysts warn that once that demand runs out, price gains may cool consumption if wage gains fail to keep up with rising living costs.

"A pile-up of inventories was the main reason for the revision — and this suggests a slowdown in production ahead as firms work through unsold goods,” said Yuki Masujima, economist at Bloomberg Economics.

The slide in the yen is also complicating the outlook. The weaker currency already contributed to a bigger import bill in the first quarter that resulted in net trade dragging on the economy.

Further falls in Japan’s currency are likely to amplify import costs even more this quarter and with the impact of China’s lockdowns set to weigh on exports, trade conditions don’t look so favorable for the current period.

Capital expenditure was also revised down heavily after a report last week showed companies invested at a slower pace in the first three months of the year. That indicates corporate confidence in the outlook is weaker than thought, another factor that suggests the rebound this quarter may be tepid at best.