Economy shrinks at record-setting pace

Annualized 15.2% drop in quarter reflects collapse in exports, output

by Takahiro Fukada

Gross domestic product plunged at a record annual pace of 15.2 percent in the three months to March as exports collapsed and businesses cut production, the government said Wednesday.

It was the biggest fall since records were first kept in 1955.

GDP for all of fiscal 2008 also saw its biggest ever fall of 3.5 percent.

The Cabinet Office said weak overseas and domestic demand caused the economy to contract for the fourth straight quarter, following an annualized 14.4 percent contraction in the October-December period.

Finance Minister Kaoru Yosano said the worst may be over.

Despite the record contraction, Yosano said the January-March quarter is already “past” and that it is time to look to the future.

“It’s important (we see) what has happened in April and May,” he said, referring to signs of improvement in some recent economic figures.

Some economists agree with Yosano and expect GDP in the April-June quarter to show positive growth.

“Although the figures are the lowest ever, they are within our expectations,” said Takahide Kiuchi, chief economist at Nomura Securities Co.

Kiuchi expects the Japanese economy to grow at an annualized pace of 3 percent to 5 percent in the April-June quarter as China and the United States rebound and exports to their economies recover.

Japan’s economic stimulus measures will also contribute to growth, he predicted.

Kiuchi also noted the economy has started entering a period of deflation. The domestic demand deflator, a key measure of domestic price trends, fell 0.9 percent, compared with a rise of 0.3 percent in October-December last year.

“In the January-March period, the gap has further widened,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “Certainly, the fall could not be stopped.”

While expecting exports to recover as China’s economy revives, Kumano said it remains extremely unclear how strong and how long the economic recovery will be amid the outbreak of H1N1 swine flu.

Export of goods and services plummeted 26 percent from the previous quarter, the largest fall on record. Private consumption declined 1.1 percent and private investment fell 10.4 percent.

Domestic demand contributed to lowering GDP by minus 2.6 percent and net exports of goods and services by minus 1.4 percent.

GDP, the broadest measure of economic activity, contracted 4.0 percent in January-March quarter from the previous quarter.

In nominal terms, before adjusting for inflation, the economy contracted 2.9 percent, or an annualized contraction of 10.9 percent.

The employment environment is becoming increasingly harsh, which may lead to a prolonged slump in consumer spending that accounts for about 55 percent of GDP.

Last month, the government predicted the economy would face a contraction of 3.3 percent in real terms in fiscal 2009. The economy will still need to expand about 0.7 percent each quarter to meet this forecast.

Information from Kyodo added