Japan economy shrinks at record 15.2 percent pace

TOKYO -- Japan's economy contracted by a 15.2 percent annual pace in the first quarter -- its sharpest drop on record -- as exports plunged, companies slashed production and families cut back on spending, the government said Wednesday.

But the outlook is hopeful. Economists say the world's second-largest economy is most likely past the worst, and some predicted it would grow again in the April-June quarter amid signs of recovering factory output and aggressive stimulus steps by the government.

"I think the economy has passed the bottom and the recovery has begun in the current quarter," said Richard Jerram, chief economist at Macquarie Capital Securities in Tokyo.

Wednesday's data confirmed what many had been dreading. The drop in gross domestic product was the steepest since Japan began compiling such statistics in 1955. Compared to the previous quarter, GDP fell 4 percent. That's the fourth straight quarter that the economy shrank.

The latest results were markedly worse than other major economies. The euro zone logged a 2.5 percent quarterly decline, and the U.S. retreated 1.6 percent.

Like its Asian neighbors, Japan has been been pummeled by the unprecedented collapse in global demand triggered last year by the U.S. financial crisis. Manufacturers have had to suspend production, shut down plants and lay off thousands of workers, and the possibility of a rising jobless rate could drag on any nascent recovery.

"Weakness in the corporate sector is gradually spreading to households," Prime Minister Taro Aso told lawmakers in a parliamentary budget hearing Wednesday. "This is a very serious situation, so we need to respond appropriately."

Aso is banking on massive public spending to spark a turnaround. His newest $150 billion stimulus package includes various programs to bolster consumer spending: incentives to buy energy efficient appliances and cars, as well as help for the unemployed and small businesses.

The government's efforts are helping ensure that after likely hitting a low point last quarter, Japan's economy is cautiously stirring back to life.

Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs, predicts GDP will turn positive this quarter and then accelerate to 3 percent growth in the July-September period, lifted by rebounding demand from China and Japan's stimulus measures.

In hopeful signs, exports declines are easing and industrial production rebounded 1.6 percent in March -- with further gains projected for April and May.

On Wednesday, Mazda Motor Corp. said it was resuming full production capacity at its Japan plants next month as demand in Europe recovers on government stimulus measures.

But some economists question whether the expected recovery can last beyond the end of the year. Yamakawa warns that the "risk remains high for a slowdown" in the first half of 2010 as the impact of policy measures tapers off.

With the outlook for domestic demand so fragile, Japan's fortunes will once again rely on the health of its overseas markets to drive new growth.

Exports plummeted a record 26 percent in the first quarter from the fourth quarter, the government said.

In response, major exporters such as Toyota Motor Corp. and Sony Corp. have moved quickly to adjust by reducing shifts, suspending factory lines and cut workers. The jobless rate jumped to 4.8 percent in March, the highest in more than four years.

Capital expenditure -- business investment in factories and equipment -- fell 10.4 percent from the previous quarter, while consumer spending slipped 1.1 percent.

Unlike previous downturns, consumption has weakened much more than income, Jerram of Macquarie Capital Securities said.

"It seems that the public has basically panicked about job security to an extent that hasn't happened in previous cycles," he said.

For the last fiscal year through March 31, Japan's GDP contracted by a record 3.5 percent from the previous year, the Cabinet Office said. It expects the economy to shrink 3.3 percent this fiscal year.