Japan, the world’s third largest economy, contracted sharply in the first three months of the year, after a tsunami and earthquake caused devastation in March.

Gross domestic product (GDP) shrank 0.9% in the first quarter, the Cabinet office said. That meant the annualised rate of contraction is 3.7%.

Japan is now in recession, after two consecutive quarters of decline.

Analysts say consumption and exports were worst hit.

The contraction was bigger than expected with most forecasts of the annualised rate at around 2%.

“Japan’s economy is expected to remain weak for the time being,” said Japanese Economics Minister Kaoru Yosano on Thursday.

However, Mr Yosano said that supply constraints are easing and reconstruction demand will likely spur growth.

“The economy has the strength to bounce back,” Mr Yosano said.

Pessimistic consumers

Naomi Fink of Japan strategies says the most worrying part of today’s data was the decline in private consumotion of 0.6%, as people cut their spending after the quake.

Private consumption accounts for almost 60% of the Japanese economy.

“It was already soft in the final quarter of 2010,” said Naomi Fink, Japan Strategist at Jefferies.

The earthquake, however, has further dampened sentiment.

The consumer confidence index fell to 33.1 in April, according to the Cabinet Office.

A reading below 50 suggests consumer pessimism.

“Judging by the drop in retail sales and household expenditures over March, consumption should be one of the greater contributors to negative growth in the first quarter,” said Ms Fink.

Damaged supply chains

The second biggest component of the world’s third largest economy is trade.

Exports made up 13.5% and imports 12.7% of GDP in 2009.

The massive quake and tsunami devastated exports, while the costs of imports rose due to high commodity prices.


Japan’s trade surplus fell by 34.3% in March compared with the same month a year ago.

“One issue on the export side is the ongoing struggle to restore damaged production lines and supply chains,” said Ms Fink of Jefferies.

“On the import side, the increase in demand for fossil fuels, to offset the drop in supply of nuclear energy, is unlikely to fade anytime soon,” she added.

Reconstruction demand

Once rebuilding gathers momentum, however, it should have a positive impact on the economy.

But that is only likely to happen towards the end of this year.

“I do not expect positive growth in the second quarter,” said Ms Fink.

The country’s central bank begins its two-day meeting on Thursday to discuss its monetary policy.

“Japan’s economic strength is gradually declining,” Bank of Japan (BOJ) Governor Masaaki Shirakawa told a parliamentary committee meeting on Tuesday.

Analysts say this signals that the central bank will stick to its ultra-loose monetary policy.

“The BOJ is likely to fine tune its existing policies,” said Ms Fink.

The bank has pumped billions of dollar into the financial system to stabilise the economy since the massive earthquake.

The BOJ is also expected to keep the rates unchanged at the lowest level in a range of 0.0% to 0.1%, to help stimulate the economy.

BBC News website