2011-05-19 08:49

TOKYO -?Japan's economy shrank in the first quarter at nearly double the pace expected, effectively slipping into recession as the devastating earthquake in March hit business spending and private consumption.

Gross domestic product fell 0.9 percent in the first quarter, much more than a median market forecast for a 0.5 percent contraction.

That translates into an annualised decline of 3.7 percent against a forecast of a 2.0 percent fall, Cabinet Office data showed on Thursday.

The second straight quarter of contraction puts Japan effectively into recession with analysts projecting the economy to shrink again in April-June as supply constraints triggered by the March catastrophe continue to weigh on output and exports.

Japan's economy is expected to recover later this year, helped by reconstruction efforts and government spending, though risks remain as electricity shortages in the summer could delay a recovery in factory output, analysts say.

"Maybe the economy could grow slightly in second quarter, but the problem is the pace of the recovery. The pace could be very slow and very far away from normalisation," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo.

"I worry about the second quarter, which is the beginning of the new fiscal year. Many companies could revise down their capital expenditure plans." ? ?

Net exports shaved 0.2 percentage point off GDP, against the median estimate that it would trim 0.1 point off growth.

Private consumption, which accounts for about 60 percent of the economy, was down 0.6 percent against the median forecast of a 0.5 percent decline, marking the second straight quarter of decrease.

Corporate capital spending fell 0.9 percent against the market forecast of a 1.2 percent decline.

Japan is facing its worst crisis since World War Two after the 9.0 magnitude earthquake and a deadly tsunami battered its northeast coast on March 11, leaving more than 24,000 dead or missing and crippling a nuclear plant.

The Bank of Japan is expected to keep monetary policy steady on Friday but stress its readiness to ease further if the quake's damage to the economy proves bigger than expected.

The central bank has said that once supply constraints ease, the economy will recover moderately because demand for goods has not evaporated. Unless this view comes under threat or a renewed yen spike hurts business sentiment, it is expected to hold off on easing policy further.