Japanese Economy Shrinks at 15.2% Annual Pace in 1Q

The only bit of cheer coming out of Japan’s dreadful economic report is that the first quarter decline in GDP of 15.2% annualized, the worst every recorded, was slightly less awful than expected. The forecasters surveyed by Bloomberg expected a fall of 16.1%. However, the fourth quarter contraction was revised upwards from 13.2% to 14.1%.

From Bloomberg:

Exports plunged an unprecedented 26 percent last quarter, forcing companies from Toyota Motor Corp. to Hitachi Ltd. to cut production, workers and wages….

“There was a collapse across the board,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo…

GDP fell 4 percent on a non-annualized basis, more than double the U.S.’s 1.6 percent slide. It’s also worse than Europe’s record 2.5 percent contraction. Without adjusting for price changes, Japan shrank 2.9 percent last quarter.

Weaker domestic demand was the biggest contributor to the decline, shaving 2.6 percentage points off GDP, the most since 1974. Net exports — the difference between exports and imports — was responsible for 1.4 percentage points of the drop.

Consumer spending slid 1.1 percent and business investment plunged a record 10.4 percent. Economists say companies will keep cutting spending because the decline in demand has left factories and workers underused.

“There is a huge problem of over-capacity,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “That means capital spending is not likely to pick up.”

The Financial Times put a “the bottom could be in” spin on the news:

However, with government spending growing, inventories falling and exports expected to stabilise after falling a record 26 per cent between January and March, many analysts believe that the worst is over and the economy could already have returned to growth in the current quarter.

Drastic production cuts by Japanese manufacturers have finally succeeded in outpacing the collapse in demand, Wednesday’s data showed, with destocking of inventories contributing a negative 0.3 percentage points to GDP growth in the first quarter.

While such inventory reduction made the headline GDP figure look even worse, it means that companies are making progress in clearing their decks and should soon be able to increase production to meet actual demand.