TOKYO (MNI) – Japan’s economy contracted 0.9% quarter-on-quarter in
the January-March quarter, worsening from the downwardly revised 0.8%
drop for the October-December quarter (from -0.3%), the Cabinet Office
said on Thursday.

The larger-than-expected contraction of the Japanese economy for
the second consecutive quarter was due to weak capital investment and
private consumption, as well as a drop in net exports, in the aftermath
of the March 11 earthquake and tsunami, the government said.

Gross domestic product dropped at an annualized pace of 3.7% in the
first quarter,down from a revised -3.0% annualized drop in the fourth
quarter (revised from -1.3% annualized).

The Q1 contraction was larger than the MNI survey median that
called for a 0.5% quarter-on-quarter fall, or an annualized rate of
1.8%. Economists’ forecasts ranged from flat q/q to -1.1%, or at an
annualized pace of -0.1% to -4.3%.

Private economists expect the April-June GDP to show an even larger
contraction, supply chain disruptions caused by the March 11 disaster
have significantly weighed on manufacturing production.

Q1 domestic demand fell 0.8% q/q after a revised 0.7% fall in the
fourth quarter of 2010.

Domestic demand cut 0.8 percentage point from Q1 GDP, down from
-0.7 point contribution the previous quarter.

Within domestic demand, private consumption, which makes up about
55% of GDP fell again, but not as much as in Q4. Consumer spending
dropped 0.6% q/q in Q1 vs -1.0% in Q4, contributing -0.3% percentage
point to Q1 GDP (vs. -0.6 point in Q4).

Capital spending, however, fell 0.9% in Q1, reversing from the 0.1%
gain in Q4, marking the first quarterly drop in six quarters. Capex
contributed -0.1 percentage point to Q1 GDP (vs. 0.0 point in Q4).

Changes in private inventories cut an additional 0.5 percentage
point from Q1 GDP after contributing 0.0 percentage point in the fourth
quarter.

Housing construction rose 0.7% in the first quarter, after rising
3.2% q/q in Q4. This category’s made no contribution to overall GDP in
Q1.

Net exports subtracted 0.2 percentage point from the Q1 GDP after
pushing down the growth rate 0.1 percentage point in Q4.

Exports were up 0.7% on quarter, posting the first quarterly rise
in two quarters, after -0.8% in the previous quarter. Imports rose 2.0%
q/q, marking the first quarterly rise in two quarters (vs -0.3% in Q4).

From a year earlier, Q1 GDP fell 1.0%, posting the first y/y
drop in five quarters, after rising 2.2% in Q4.

Japan’s economy grew 2.3% in fiscal 2010 ended on March 31, marking
the first growth in three years, after falling 2.4% in fiscal 2009 and
4.1% in fiscal 2008.

In nominal terms, Q1 GDP fell 1.3% q/q, or an annualized -5.2%, the
second consecutive drop.

Deflation accelerated in the first quarter, the GDP data showed.

The GDP deflator was down 1.9% from a year earlier after falling
1.6% in the fourth quarter.

The domestic demand GDP deflator fell 1.0%, the same rate as in the
previous quarter.

The Bank of Japan said on Apr. 28 that the board revised down its
fiscal 2011 real GDP forecast to +0.6% from its January projection of
+1.6%.

The board’s median GDP forecast for fiscal 2012 was revised up to
+2.9% from +2.0% forecast in January.

The expected economic growth is far above Japan’s potential
economic growth rate, which is estimated to be around 0.5%.

A BOJ’s two-day policy-setting meeting will kick off at 1400 JST
(0500 GMT) today and the meeting results are due out after 1230 JST
(0330 GMT) on Friday.

tokyo@marketnews.com
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