Japan's economy contracted in the first three months of this year, according to the latest government data today, raising fears that the world's second biggest economy is slipping into its fourth recession in a decade.
Gross domestic product, the broadest measure of economic activity, dipped 0.2% in January to March from the last quarter, or an annualised drop of 0.8%, after a revised 0.6% growth in the October-December period.
The data, worse than the 0.2% rise expected by economists, showed business investment slipping following a cooling in exports to key markets such as the US and Asia, while consumer spending stalled and prices fell.
'It seems everything has weakened slightly. I'm a bit worried,' said Finance Minister Masajuro Shiokawa. 'But I do feel the actual economy has more strength than the figures show.'
The gloomier picture threatens to trip up Prime Minister Junichiro Koizumi's reforms aimed at reining in government debt, and could give more resonance to calls for a return to the kind of government spending that has landed Japan with the industrialised world's worst debt burden - the exact policy Koizumi had hoped to stamp out when he took office six weeks ago.
Economics Minister Heizo Takenaka described the figures as a sad reality which underscored the need for structural reforms rather than government spending.
Japan's economy last contracted in the July-September quarter of 2000 when GDP shrunk by 0.7%.
Private consumption, which takes up about 60% of the economy, was unchanged. Economists had expected a stronger figure due to a technical factor as shoppers rushed to replace big ticket items before April when a new recycling law came into effect and raised the cost of throwing out old appliances.
The economy was also dragged down by flagging exports, which fell by 3.6%, the first drop since January-March 1999.
A 1% decline in corporate capital spending, the second largest component of the economy and a key driving force of growth in recent years, also cut into the quarter and is considered one of the biggest risks going forward.
The prospect of Japan on the brink of another recession little more than a year after its last one drove up long-term interest rates on speculation that the Bank of Japan will keep its zero interest rate policy in place for some time.
If April to June GDP contracts, Japan would enter its fourth recession since 1990. In 1992, GDP fell for two straight quarters, in 1993 it contracted for three straight quarters and in 1999 it fell for another two straight quarters.
