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 annualized 12.7 percent in October-December, government data showed on Monday, exceeding a median market forecast for a 9.5 percent gain.

    It was slower than the revised 22.7 percent surge in 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 percent, the first annual fall since 2009.

    But Japan’s October-December performance was stronger than US growth of 4 percent and a 2.8 percent slump in the euro zone.

    With two straight quarters of solid growth, Japan’s economy likely recouped 90 percent of pandemicinduced 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.”

    A global rebound in manufacturing activity gave exports and capital expenditure a much-needed boost as shipments to China’s rapidly recovering economy heated up.

    External demand, or exports minus imports, added 1.0 percent point to fourth-quarter GDP growth thanks to a 11.1 percent surge in exports.

    Capital expenditure also grew 4.5 percent, marking the first increase in three quarters, as companies proceeded with spending that had been put off last year due to the pandemic.

    Private consumption, which makes up more than half of the economy, rose 2.2 percent, slowing from the 5.1 percent increase in the previous quarter but exceeding market forecasts for a 1.8 percent gain.

    The outlook, however, remains highly uncertain as Japan lags western countries in rolling out vaccines.