Japan struggles to restore damaged production lines Japan’s economy contracted in the first three months of the year sending the country into a technical recession.
Gross domestic product (GDP) shrank 0.9% between January and March from the previous three months, the Cabinet office said.
The decline was worse then the expected figure of 0.5%.
Analysts say the 11 March earthquake and tsunami have impacted every aspect of the economy, but especially consumption and exports.
The contraction indicates that the economy is in a recession, defined as a decline in GDP for two consecutive quarters.
The economy shrank 3.7% from the previous year. Analysts had expected it to be a 2% contraction.
Private consumption which accounts for almost 60% of the Japanese economy declined as well, falling about 0.6% as people cut their spending after the quake.
“It was already soft in the final quarter of 2010,” said Naomi Fink, Japan Strategist at Jefferies.
The earthquake, however, has further dampened sentiment.
Source: Japan Cabinet Office (2009)
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.
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 economic strength is gradually declining.”
Masaaki Shirakawa Governor, Bank of Japan
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.
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.
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