Japan Sees Slight Drop in Its GDP

Japan’s economy contracted slightly in the first three months of this year, government data showed Monday, raising fears that the world’s second-biggest economy is sinking into another recession.

Gross domestic product fell 0.2% in the three months ended March 31 from the previous quarter, seasonally adjusted, the government said today. Economists had expected the economy to expand 0.1% after growing 0.7% in the fourth quarter.

Though the government says Japan started pulling out of its third-deepest recession in April 1999, the economy has shrunk four of eight quarters since, and economists say it may be going backward again.

“We’re probably in recession,” said Richard Jerram, chief economist at ING Baring Securities (Japan) Ltd. “I think in this second quarter the economy is shrinking, and probably will in the third as well.”

Bond prices rose and the yen was little changed after the report was released. The benchmark 10-year bond yield fell 1.5 basis points to 1.23%. The yen was recently trading at 121.05 to the dollar, from 120.93 just before the report was released.

The main Nikkei 225 stock index fell as much as 0.5% in the first minutes of trading.

The retrenchment may make it harder for Prime Minister Junichiro Koizumi, elected to the job just six weeks ago, to stick to his pledge to trim government spending and force Japan’s biggest banks to write off their worst loans without plunging the world’s second-biggest economy deeper into recession.

On Sunday, Koizumi said he can’t see the economy recovering soon and the government’s task will be to persuade the public to bear the pain of fixing the economy.

Though the usual remedy for a recession is to cut taxes, boost government spending or lower interest rates, “Koizumi is basically saying that’s not going to happen,” Jerram said. “That raises the specter of a very nasty recession.”

In the fiscal year ended March 31, the economy grew 0.9%, missing the government’s 1.2% target. The government may not meet its 1.7% target for this fiscal year either; economists surveyed by Bloomberg News expect growth of just 0.7%.

Business investment, the main source of economic growth the last two years, gave way in the first quarter, falling 1% from the fourth quarter, when it increased 6.7%. That was the first decline in three quarters.

Companies have put expansion plans on hold as exports, mainly to the U.S. and neighboring Asian countries, fall. The drop in sales and income means companies have less need, and less money, to expand and modernize their factories.

“The business side of things is extremely weak,” said James Malcolm, a senior economist at J.P. Morgan Securities (Asia) Ltd., before the figures were released. “We’re already looking at two quarters of economic contraction from the second quarter.”

Consumer spending, which accounts for about 55% of economic activity, was unchanged from the fourth quarter, after falling 0.6% in the fourth quarter. Japan’s near-record high jobless rate and slowing wage growth have prompted people to save rather than spend, keeping the brakes on growth.

Consumer spending hasn’t contributed to growth for the last three quarters.

Japan’s shrinking trade surplus also weighed on growth as demand from the U.S. and Europe slowed. Exports shrank 3.6%--the first decline in two years--while imports also fell 2.2%, the report showed.

Housing investment fell 5.2% in the first quarter from the previous quarter, and government spending was unchanged.