Japan's economy shrinks beyond forecast after quake

Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade.

Gross domestic product contracted an annualised 3.7 per cent in the three months through March, following a revised 3 per cent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 per cent drop.

The March disaster hit an economy already weighed down by years of deflation and subdued consumer spending, and slashed profits at companies including Toyota Motor Corp as factories were shut. The economy, now the smallest size since 1991 unadjusted for price changes, may shrink further this quarter before rebounding later in 2011 as reconstruction kicks in.

“The contraction in the second quarter will probably be even bigger as consumer spending and exports slump,” said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co in Tokyo. “The economy will likely return to growth from the third quarter once the supply-chain disruption eases and reconstruction work begins.”

The Nikkei 225 Stock Average fell 0.4 per cent today on the worse-than-expected GDP data. The Nikkei has lost 8 per cent since the quake and tsunami, which left more than 24,000 dead or missing. The yen traded at 81.70 against the dollar at 3:48 pm in Tokyo, compared with 81.69 before the report was published.

The economic contraction may only be a “temporary phenomenon,” and two straight quarters of shrinkage “doesn’t necessarily mean the economy’s trajectory has changed,” Kaoru Yosano, the economy minister, told reporters today.

Economists typically define a recession as two consecutive quarters of contraction. The Japanese government instead determines recessions by having a committee of academics decide when recoveries and retreats begin and end. The revised fourth quarter gross domestic product figure showing a 3 per cent annualised contraction was more than double the previous estimate, after the government revised data going back to 1980, according to the Cabinet Office.

Capital investment dropped 0.9 per cent in the first quarter, the first decline in six quarters, today’s data showed.

“It’s hard to think that companies will become aggressive about increasing business spending when uncertainties remain strong,” said Junko Nishioka, chief economist at RBS Securities Japan in Tokyo.

Consumer spending fell 0.6 per cent in the January-March period from the previous three months, the second straight quarter of declines, today’s report showed.