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 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 fears of power shortages in the summer and an ongoing nuclear crisis also pose 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 that thought.
Gross domestic product fell 0.9 percent in January-March, nearly double the 0.5 percent forecast by analysts, translating into an annualised 3.7 percent decline compared with a 2.0 percent forecast, government data showed on Thursday. The economy shrank a revised 0.8 percent 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 percent 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. 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.