Japanese economy logs record contraction

By AFP

July 15, 2010 Updated May 20, 2009 at 12:01 AM CDT

Japan's economy shrank at the fastest pace on record in the first quarter as demand for its cars, electronics and other goods slumped amid a deepening global recession, data showed Wednesday.

The world's second-largest economy contracted by 4.0 percent in the three months to March compared with the previous quarter, logging an annualised drop of 15.2 percent, the Cabinet Office said.

It was the worst performance in the post-World War II era, eclipsing an annualised fall of 13.1 percent seen in the first quarter of 1974, when the economy was reeling from a global oil shock.

It was also the first time on record that the Japanese economy has contracted for four straight quarters.

"The downturn in the corporate sector is gradually affecting household spending. This is a severe situation," Prime Minister Taro Aso said in parliament.

Japan entered recession in the second quarter of 2008 as consumers around the world stopped buying big-ticket items during the economic downturn.

Experts say that Asia's biggest economy is probably through the worst of the slump, with exports showing signs of having bottomed out in March.

"The first quarter will definitely be the low point for Japan. The pace of economic contraction should moderate from the second quarter onwards," said Glenn Maguire, chief Asia economist at Societe Generale.

But prospects for a full-fledged recovery are still dim given weak domestic demand and the fragile state of overseas markets, analysts said.

Japan's economy saw plenty of false dawns during its so-called "lost decade" of stagnation and deflation in the 1990s, they noted.

Consumer spending -- which makes up more than half of the economy -- fell 1.1 percent in the three months to March from the previous quarter. Exports fell 26 percent while corporate capital investment dropped 10.4 percent.

"Japan has been penalised for being at the very top of the consumer goods pyramid," Maguire said.

Its cars and home electronics have typically been bought on credit by consumers in rich countries. With households adapting to the new economic reality, a swift pick up in demand is unlikely, he said.

"We're unlikely to see a recovery in final demand for the types of goods Japan produces until well into 2010 -- possibly even 2011," he added.

Japan's auto and high-tech giants have announced massive job cuts in recent months as they sink deep into the red due to the slump in exports.

The jobless rate hit a more than four-year high of 4.8 percent in March, heading towards a post-war high of 5.5 percent, last seen in April 2003.

Deflation is also creeping back with core consumer prices posting the first year-on-year fall in 18 months in March.

Japan was stuck in a deflationary spiral for years after its economic bubble burst in the early 1990s, eroding corporate earnings and encouraging consumers to delay their spending in the hope that prices would fall further.

In an effort to ease the current recession, the government has announced a series of economic stimulus packages, including a 15.4-trillion-yen (160-billion-dollar) injection unveiled last month.

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