Japan suffers record fall in GDP

Japan's economy shrank at a record pace in the first quarter and its ability to turn some modest growth ahead into a lasting recovery will hinge on how soon the global economy can heal.

The world's No.2 economy contracted 4.0 per cent in January-March, probably hitting a low point in a year-long recession. A pick-up in exports and output late in the quarter and Tokyo's stimulus spending in the pipeline suggest a mild rebound.

However, today's data showed domestic demand and investment crumbled, leaving Japan as dependent as ever on recovery in demand from its main export markets in the United States, Europe and China.

There is growing optimism among investors, largely fuelled by improving sentiment indicators, that sharp contractions in the U.S. and euro zone economies in the past quarter marked the low point in the worst global recession in more than six decades.

In China, officials have been increasingly confident that an 8 per cent growth target set for this year can be achieved with the help of Beijing's massive stimulus package.

Yet the first-quarter data also show the world economy will be crawling rather than bouncing back from a very deep hole, suggesting the road to recovery will be long and bumpy and casting a pall over Japan's longer-term prospects.

TEMPORARY BOUNCE?

Economists point out that the pain long felt by Japanese exporters was only now starting to ripple out through the economy as companies slash jobs and investment, and that exports may fail to provide enough fuel to sustain growth.

"Weaker-than-expected figures for capex and private consumption suggest the negative impact from the export plunge is spreading to domestic demand," said Hiroshi Shiraishi, economist at BNP Paribas. "As such, the Japanese economy may return to growth temporarily, but it could suffer a contraction again afterwards."

The first-quarter slump was slightly smaller than economists' 4.2 per cent forecast, but followed a downward revision, to 3.8 percent, for the fourth-quarter decline. That compares to 2.5 per cent euro zone contraction and a 1.6 per cent decline in the United States.

Analysts polled by Reuters earlier this month saw Japan's economy expanding by a symbolic 0.1 per cent in April-June and returning to growth sooner than the United States or euro area.

Uncertainty about the economic scenario in the months ahead was again highlighted by yesterday's data cocktail with an improvement in a German investor sentiment gauge coinciding with a disappointingly weak report on the U.S. housing market.

German investors and analysts grew much more optimistic in May, but a report showing US housing starts and permits fell to record lows in April revived concerns about the health of the market that touched off the financial crisis in 2007.

Investors, grappling with the glass half-full or half-empty dilemma, have kept stock markets hovering near the peaks reached after a 3-month rally but lacking momentum to push much higher.

MARKETS PAUSE

On Wednesday, Asian stock markets were little changed .MIAPJ0000PUS after Wall Street shares .DJI ended marginally lower, with investors shifting money to defensive sectors and trimming exposure to emerging markets.

European markets were expected to head lower.

News from companies and banks followed a similar promising-disappointing pattern.

In a sign that the battered banking sector may finally be emerging from crisis mode, several major banks were seeking permission to repay billions of dollars they borrowed from the government. JPMorgan Chase & Co expects repayments to begin within the next couple of weeks.

Bank of America also said it raised $13.47 billion in a share issue, marking a major step to meeting the US regulators' capital requirements.At the same time, U.S. technology bellwether Hewlett-Packard tempered its outlook for full-year revenue and said it will lay off a further 2 percent of its workers, citing falling demand for its printers, computers and services. [ID:nN19414562]

There were even some sobering signals from China, widely seen as most advanced on the road to economic recovery.

David Dollar, head of the World Bank's office in China, said market enthusiasm about the upturn in the world's third-largest economy was premature and it still needed a revival in private investment to cement a full recovery.