— See Separate Tables For Details Of Individual Forecasts

TOKYO (MNI) – Japan’s gross domestic product in January-March is
expected to have posted a second consecutive quarter-on-quarter
contraction, down a real 0.4% on quarter, or an annualized 1.6%, hit by
the March 11 earthquake disaster, according to the median forecast of
economists surveyed by Market News International.

The Cabinet Office will release the Q1 GDP data at 0850 JST on
Thursday, May 19 (2350 GMT Wednesday).

In the final quarter of 2010, the economy contracted 0.3% q/q, or
an annualized 1.3% on what was believed, until just before the disaster,
to be a temporary dip in consumer spending and slower business
investment.

“If there had not been the earthquake, the Q1 GDP could have posted
growth,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research
Institute.

Industrial production in March tumbled at a record pace 15.3% from
the previous month as the disaster damaged production facilities and
disrupted supply chains for the automobiles and semiconductor
industries.

Economists said weak personal consumption, capital investment,
private-sector inventories and net exports all appeared to have
contributed to an expected fall in the Q1 GDP.

Personal consumption, the largest component of GDP with a 55%
share, is forecast to have declined 0.4% q/q, which would be the second
straight quarterly drop.

For a few weeks after the massive earthquake and tsunami hit
Japan’s northeastern Pacific coast, consumers across the nation reduced
spending out of respect for the victims. Power outages and fears of
spreading nuclear radiation leaks also made people cautious about
spending in general.

Household spending in March fell 8.5% from a year earlier, showing
the largest drop on record.

Consumer sentiment was recovering until early this year as the
slump in late last year was believed to be temporary.

Demand for automobiles tumbled in the October-December quarter,
after the government ended its subsidy program for buying low-emission
vehicles in September.

Spending on non-durable goods also fell during the last quarter of
2010 following unusually high demand for cigarettes before the tobacco
tax hike that took effect Oct. 1.

Meanwhile, capital investment is forecast by economists to have
marked the first drop in six quarters in January-March, down 1.3% from
the previous three months.

Shipments of capital goods, which are widely seen as a coincident
indicator for capital spending, fell 1.8% q/q in Q1, accelerating from
-0.4% in Q4 2010, according to the Ministry of Economy, Trade and
Industry.

Private inventories appeared to have pushed down the Q1 GDP by 0.2
percentage point.

Manufacturers had to use parts and materials which they had stocked
in order to continue production as the quake and tsunami damaged their
supply chains significantly.

Carmakers and electronics firms were also forced to suspend or
slash production as Tokyo Electric Power Co imposed rolling blackouts in
eastern Japan after the disaster severely cut its power generation
capacity and sparked the worst nuclear radiation crisis since the 1986
Chernobyl meltdown.

Net exports — exports minus imports — are forecast to have pushed
down the Q1 GDP by 0.1 percentage point, making a negative contribution
for the third straight quarter, due mainly to reduced production.

The Bank of Japan’s export index fell a seasonally adjusted 8.0% on
quarter in Q1, posting the largest drop since -17.0% marked in January
2009 at the height of the global credit crisis and recession triggered
by the collapse of Lehman Brothers.

Meanwhile, the need to rebuild disaster-hit areas in northeastern
Japan appears to have pushed up public demand but not enough to offset
sharp drops in other components of GDP, economists said.

The GDP deflator is expected to show a 1.9% fall on year in Q1,
which would be the six straight y/y drop and confirm that it will take
some more time before Japan can overcome years of deflation.

“The recent rise in imported crude oil prices is expected to have
pushed up the import deflator, lowering the GDP deflator,” said Taro
Saito, senior economist at NLI Research Institute.

Imported crude oil prices averaged $96.8 a barrel in Q1, up sharply
from $81.8 in Q4 of 2010.

Looking ahead, the April-June GDP will show an even larger drop
from the Q1, economists said.

Japan Research Institute forecasts the Q2 GDP will contract an
annualized 5.0%.

Industrial production — a coincident indicator for overall
economic growth — is expected to fall 5.1% q/q in Q2, worsening from
-2.0% in Q1, if output rebounds only 3.9% m/m in April and 2.7% in May,
as estimated by the government, and shows no growth in June.

skodama@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4838 **

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