Japan Suffers Record GDP Fall, Modest Rebound Ahead

Japan's economy shrank a record 4.0 percent in the first quarter as companies slashed investment and exports but economists see a return to modest growth in coming quarters even as the longer-term outlook remains murky.

CNBC.com

Recent signs of rebound in Japan's industrial production and some other global economic data have raised hopes that the world's second largest economy could post its first positive growth in April-June after four straight quarters of contraction to the end of March.

Still a recovery is likely to be fragile as thousands of jobs have been cut, dampening domestic consumption, and manufacturers worry that they may have to cut more staff and close more factories if the global recovery proves weak.

"The deterioration in domestic demand has just started. But external demand probably hit bottom in the first quarter. Both exports and output are expected to rise in April-June. So I'd expect positive growth in the current quarter, said Hiroshi Watanabe, senior economist at Daiwa Institute of Research.

"From July-September, stimulus packages will boost growth, so I expect the economy to continue recovering mildly for the rest of the year."

The fall in gross domestic product (GDP), the biggest in records going back half a century, was smaller than the 4.2 percent drop expected by economists and followed a similarly bleak revised 3.8 percent contraction in the previous three months.

The yen tracked slightly higher after the data, to 96.07 per dollar while the Nikkei share average edged up 0.6 percent with the data in line with expectations.

Japan's contraction was much bigger than in other developped countries, because of its heavy dependence on export industries for growth, even as the global crisis has slashed demand for Japanese cars and technology.

The U.S economy, ground zero of the financial crisis, sank 1.6 percent in the first quarter (6.1 percent annualised) while the euro zone economy contracted 2.5 percent.

Falls in capital spending and exports was the main culprit behind Japan's large contraction, contributing to contraction of 1.6 and 1.4 percentage point respectively.

Exports are seen reversing in April-June, as the global economy has shown some signs of improvement, but there are doubts about whether this is a return to sustainable growth.

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"Weaker-than-expect figures for capex and private consumption suggest the negative impact from the export plunge is spreading to domestic demand," said Hiroshi Shiraishi, economist, BNP Paribas.

"As such, the Japanese economy may return to growth temporarily but it could
suffer a contraction again afterwards." If the rebounds in output only reflect restocking after sharp inventory adjustments, that does not bode well for the export-driven Japanese economy, as domestic consumption is seen shackled by structural factors such as an ageing
population.

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