Japan's economy shrank a real 0.8 percent in the April-June quarter, the government said Friday, underscoring the challenges ahead for Prime Minister Junichiro Koizumi as he juggles structural reform and the weakening economy.
The quarter-on-quarter decline, measured in terms of gross domestic product, was the first fall in three quarters and translates into an annualized contraction of 3.2 percent, the Cabinet Office said.
A worldwide economic slump, particularly visible in the information technology industry, took its toll on the already teetering Japanese economy in the first three months of fiscal 2001.
"It will be extremely difficult for the economy to achieve the government's target of (annual 1.7 percent) economic growth," said Heizo Takenaka, minister in charge of economic and fiscal policy. "We have had a difficult start."
The economy must grow at a rate of 1.4 percent for each of the remaining three quarters to achieve the 1.7 percent target, an increasingly unrealistic goal.
"Negative figures will continue for another two quarters at least," said Peter Morgan, chief economist at HSBC Securities Ltd.
HSBC is looking to revise its projection for fiscal 2001 from a negative growth of 0.5 percent to negative 1 percent, he said, adding that any recovery remains largely dependent on the U.S. economy.
The Cabinet Office said nominal GDP -- before adjustments for inflationary and seasonal factors -- fell 2.7 percent from the previous quarter, translating into an annualized drop of 10.3 percent. This was the largest drop since 1980, the furthest back that current statistical methods can be applied, officials said.
GDP is equal to the total value of total goods and services produced within a nation's borders.
While Koizumi and the international community have emphasized that structural reform is necessary to achieve economic growth, economists say the slowdown poses formidable hurdles for Koizumi's proposed reforms.
Deflationary pressure has been intensifying with unemployment and bankruptcies remaining at record levels while share prices continue to fall. Falling demand and rising levels of real debt are squeezing companies' earnings, at the same time that low share prices are eroding banks' capital bases.
The main pillars of the promised reforms include getting rid of banks' massive bad loans and reducing government spending.
Shortly after the GDP figures were released, Koizumi approved preparations for a supplementary budget in an attempt to salvage the economy.
The size of the budget will not be decided before October, but Takenaka warned that anyone hoping for massive government spending would be disappointed.
"A bit of an increase in the scale of supplementary budget will only have a small effect on the economy," Takenaka said, adding that the extra budget should concentrate on policies to ensure medium- to long-term economic growth.
In the April-June quarter, domestic demand contributed minus 0.7 percentage point to the 0.8 percent contraction, while external demand contributed minus 0.1 percentage point.
Corporate capital investment -- which perked up the economy by 1 percent in fiscal 2000 -- fell 2.8 percent from the previous quarter, marking the second consecutive quarterly decline.
Housing investment plunged 8.8 percent, the biggest quarter-to-quarter fall since the April-June quarter of 1997, while government spending increased 0.8 percent and public investment fell 4.1 percent.
GDP amounted to 528.254 trillion yen in annualized terms, down from 532.502 trillion yen in the previous quarter.
Japan's exports shrank 2.9 percent, while imports fell 2.5 percent. The GDP deflator, the primary inflation barometer, also fell 1.1 percent from a year earlier.
Consumer spending maintained stronger-than-expected growth of 0.5 percent from the previous quarter, but economists said they suspect that seasonal adjustments contributed to the positive data.
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.