Quake knocks Japan into recession

Tokyo - Japan's economy shrank much more than expected in the first quarter and slipped into recession after the triple blow of the March earthquake, tsunami and nuclear crisis hit business and consumer spending and tore apart supply chains.

The Bank of Japan (BOJ) expects the economy to resume growing in the second half of the year, but some economists say the surprisingly grim gross domestic product (GDP) figures in the first quarter increase the risk that the pace of recovery will be slower than anticipated.

Manufacturers are moving to repair supply chains, but there are fears of power shortages in the summer and an ongoing nuclear crisis poses risks, economists say.

The negative surprise came as inventories fell and imports jumped following losses in factory output. Still, economists expect the BOJ to keep monetary policy steady when it ends a two-day meeting on Friday, while declaring readiness to ease further if the quake's impact proves more lasting than anticipated.

Gross domestic product fell 0.9% in January-March, nearly double the 0.5% forecast by analysts, translating into an annualised 3.7% decline compared with a 2.0% forecast, government data showed on Thursday.

The economy shrank a revised 0.8% in the fourth quarter of last year, so a second consecutive quarter of contraction puts Japan in recession. Analysts also project the economy will shrink again in April-June as supply bottlenecks triggered by the March catastrophe continue to weigh on output and exports.

Most economists still see growth resuming in the second half of the year as supplies are gradually restored and reconstruction spending kicks in, though there are still risks to such a scenario, including the possible power shortages.

Economics Minister Kaoru Yosano sought to reinforce that view, saying the economy was going through a temporary rough patch.

"The economy has the strength to bounce back," Yosano told a news conference after the data release, saying the economy should grow nearly 1% in the current fiscal year to March 2012.

Yosano also sided with the central bank, which said it had done enough to support the economy when it eased policy just days after the quake, doubled its asset-buying scheme and pumped record amounts of cash into the banking system.

"The Bank of Japan is taking utmost measures allowed under the BOJ law. I have nothing to request from them," Yosano said.

Demand still there

Yosano stressed that in contrast with the deep and severe recession during the global financial crisis, the post-quake slump in output was caused by supply concerns and there was still demand for Japanese goods and services.

Currency and government bond markets showed little reaction to Thursday's data as the negative surprise did not shift investors' expectations.

Economists said, however, that the data highlighted how difficult it will be for the world's third-largest economy to recover from a tsunami so powerful that it turned entire villages into piles of tinder and left large fishing vessels strewn atop buildings like children's toys.

The 0.9% contraction in the first quarter of this year was the largest since a record 4.9% plunge in the first quarter of 2009 as the financial crisis raged. It will be a challenge for the economy to return to where it was before the natural disaster, with many economists predicting only a sluggish and gradual recovery later this year.

"The effect of the disaster was very significant and it will take a long time to get back to previous levels," said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute.

Shimamine said growth should resume in July-September, but there was a risk any recovery could come even later, though there was no need for further monetary easing.

"The Bank of Japan has done what it needs to do in terms of emergency action, so I don't think these figures will prompt any further action."

Some economists said, however, the initial damage to the economy was so severe that it might still need extra help.

"The size of the downturn highlights the need for much more fiscal and monetary support than has been forthcoming," said George Worthington, chief Asia-Pacific economist with IFR Markets in Sydney.

Among the biggest damper to growth was inventories, which shaved 0.5 percentage point from GDP, the largest negative contribution since the second quarter of last year.

Private consumption, which accounts for about 60% of the economy, also fell 0.6%, hit by a slump in automobile sales and worsening of sentiment.

Corporate capital spending fell 0.9% against a market forecast of a 1.2% decline.

Separate data showed capacity utilisation in March fell 21.5% in March, declining at a record pace, as the quake crippled manufacturing activity.

The annual GDP deflator was minus 1.9% in the first quarter, larger than minus 1.6% for the fourth quarter, suggesting the incredible loss of output wasn't enough to narrow the gap between supply and demand.

Looking beyond the first quarter, recent data supports the central bank's base scenario of a gradual recovery.

Businesses polled by Reuters in May were markedly less pessimistic than in April, when sentiment plunged after the quake, while official data showed earlier this week manufacturers expecting more orders to keep coming in after a surprising rise in March.

Carmakers, among the hardest-hit by the disaster because of their reliance on elaborate supplier networks, are making progress in restoring production.

Honda Motor said this week the recovery in parts supplies was speeding up, while Nissan Motor said it was aiming to bring production back to pre-quake levels ahead of its October target.