TOKYO—Japan’s economy contracted at a much-worse-than-expected 3.7% annualized rate in the January-March period, tipping the country into a recession as the March 11 earthquake and tsunami caused declines in consumer spending, business investment and private-sector inventories.

But the economy minister said the economy is likely to grow for the fiscal year on the back of reconstruction demand and added that there was no need now to come up with additional spending measures.

“I expect GDP to grow close to 1% in the current fiscal year,” Economic and Fiscal Policy Minister Kaoru Yosano said after the release of gross domestic product data. The current fiscal year runs until March 2012.

Japan’s real GDP for the January-March quarter fell 0.9% from the previous quarter, or an annualized rate of 3.7%, according to figures released by the Cabinet Office. On a quarter-to-quarter basis, GDP was down a price-adjusted 0.9%, down for the second consecutive quarter.

The contraction was almost double the annualized 2.0% drop expected by economists surveyed by Dow Jones Newswires. GDP, or the total value of goods and services produced by the nation, shrank a revised annualized 3.0% in October-December.

The first quarter decline was the sharpest since a record 18.3% contraction in January-March 2009, according to the data.

Two quarterly falls in GDP—an often-used definition of a technical recession—is also the first successive contraction since the four-quarter decrease from April 2008 through March 2009 amid the global financial crisis.

The data underline how the worst natural disaster to hit Japan in decades has foiled pre-quake expectations that the export-driven economy would escape a winter lull in the first quarter, as overseas demand improves.

A survey of 43 economists conducted before the March earthquake had produced a median forecast for an annualized growth of 1.73% for the first quarter.

During January-March, weakened domestic demand shaved 0.8 percentage point off Japan’s quarterly growth, the GDP data showed. Consumer spending dropped 0.6% on quarter, and business investment also fell 0.9% on quarter.

A government official said falls in spending on cars and services in the quarter, contributed to the decline in consumption for the period.

The March quake and tsunami hit the country’s relatively rural northeastern areas, destroying factories and power stations in the region, but its impact was felt nationwide as critical supply chains were paralyzed.

Production was disrupted at major manufacturers, notably in the automobile industry.

Toyota Motor Corp. has said that the natural disaster cut its operating profit for the fiscal year by ¥110 billion ($1.35 billion) from the forecast made in February as it had to idle all its domestic factories right after the quake and to repair damaged equipment at some plants.

Sentiment among Japanese consumers also plunged in the aftermath of the disaster, leading to less spending on luxury items and travel.

But a government official said overseas economies remained on a recovery path, and Mr. Yosano, the economy minister, held out hope that such demand would put Japan back on growth.

“The situation is totally different from the global financial crisis when demand evaporated. Therefore, a resilience in the Japanese economy is sufficiently strong,” he told a news conference.

And many economists also expect the economy to recover in the latter half of this year on the back of government spending to reconstruct the quake-hit northeast and as domestic manufactures are likely to restore their quake-battered supply chains, removing impediments to production and exports.

Still, many analysts think the downturn could deepen in April-June, as unresolved nationwide supply chain problems in the wake of the disaster continue to disrupt production.

“The effects of the disaster will likely be greater in April. Chances are the April-June quarter may show a severer impact,” said Hidehiko Fujii, chief economist at Japan Research Institute.

Mr. Fujii says the April-June GDP figures could be down an annualized 5.5%-5.9%.

Japan’s latest downturn has pressured the country’s authorities into boosting government spending and taking more monetary policy steps. A ¥4 trillion yen extra budget to finance initial reconstruction efforts was enacted earlier this month.

Government spending rose 1.0% in January-March amid disaster-relief efforts, its strongest gain in three quarters, but was not enough to offset weakness in private sector demand.

Weakness in Japan’s economy is in contrast to many other countries, which are moving toward ending stimulus policies adopted during the global financial crisis as their economies recover. In the first quarter, GDP in the 17-member euro bloc rose an annualized 3.3%, while that of the U.S. grew an annualized 1.8%.

The January-March GDP data show that as disruption to production forced many manufacturers to rely on their inventories to meet demand, private-sector inventories shrank during the period, cutting 0.5 of a percentage point off the quarterly GDP.

Exports, meanwhile, rose 0.7% for the first gain in two quarters, the data showed, confounding expectations for a on-quarter decrease.

Imports increased 2%, growing for the first time in two quarters amid high global oil prices.

The GDP deflator, the broadest gauge of price trends, fell 1.9% from a year earlier after declining 1.6% in October-December.

The supply problems in the world’s third-largest economy also hit some of Japan’s trade partners. U.S. manufacturing output fell 0.4% on month in April, the first decline in 10 months, as Japan’s disaster limited the supply of parts needed to assemble cars in the U.S.
—Tatsuo Ito, Takashi Mochizuki, Andrew Monahan, Megumi Fujikawa and Kosaku Narioka contributed to this article.

Source: online.wsj.com

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