Japan's economy shrank at its fastest pace since World War Two in the first three months of this year, but economists expect it to start making a slow fragile recovery in the current quarter.
After being pummelled by a huge drop in exports that prompted drastic cutbacks in production, the economy is gaining some respite as companies gingerly increase output and the effects of a 15 trillion yen government stimulus package trickle down.
But growth is not likely to accelerate much as overseas demand will probably not be strong enough to spur substantial business investment.
Japan's economy contracted 3.8 per cent in the first quarter, slightly less than the preliminary reading and an average market forecast of 4 per cent, as capital expenditure and inventories fell at a slower pace than the government initially estimated.
“The revision was technical and doesn't change the overall picture. The economy has passed the worst phase but it is unlikely to return to peak levels before the global crisis," said Hiroshi Watanabe, senior economist at Daiwa Institute of Research.
Economists say slack in Japan's economy remains huge after it contracted for four straight quarters - its longest such spell.
During this period it shrank 8.8 per cent, not too far from a 10 per cent decline, which is used by some people as a definition of a depression.
But manufacturers have aggressively worked down inventories and Japanese industrial output looks set to stage a V-shaped recovery at least in April-June.
That has prompted economists to forecast economic growth of 0.5 per cent in the second quarter, although an unexpected tumble in machinery orders for April has underscored the weak outlook for capital spending.
“Capacity utilisation has dropped from around 80 percent to 50 per cent. Even if we assume that industrial output will continue to grow, it will only return to around 65 per cent in the next year," said Kazuto Uchida, manager of economic research at the Bank of Tokyo-Mitsubishi UFJ.
“That means companies will have to curtail capital spending at least for this year,” he said.
The GDP data showed capital expenditure in the first quarter fell 8.9 per cent, compared with a preliminary decline of 10.4 percent and a median estimate for a 9.1 per cent fall.
Reuters