Japan back in recession as earthquake cuts consumption

image captionJapan is struggling to restore damaged production lines

Japan's economy, the world's third largest, has slid back into recession after the devastation caused by the earthquake and tsunami in March.

Gross domestic product shrank 0.9% in the first three months of the year, the Cabinet office said, giving an annualised rate of contraction of 3.7%.

Analysts say consumption and exports were worst hit.

Japan's economy has now contracted for two quarters in a row, the generally accepted definition of a recession.

Japan sank into a recession during the global financial crisis, but had emerged from it in 2009.

The contraction in the first three months of this year was bigger than expected, with most analysts expecting the annualised rate would show a contraction of about 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 were easing and reconstruction demand was likely to spur growth.

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

Pessimistic consumers

Naomi Fink, Japan Strategist at Jefferies, said the most worrying part of the latest data was the decline in private consumption of 0.6%, as people cut their spending after the earthquake.

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

"It was already soft in the final quarter of 2010," said Ms Fink.

The earthquake, however, has further dampened sentiment.

The consumer confidence index fell to 33.1 in April, according to the Cabinet Office, where 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 gross domestic product in 2009.

The massive earthquake 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.

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

The BOJ is 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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