By and  on May 18, 2011

TOKYO—Japan's economy contracted more than expected in the first quarter of the year, putting the country back into an official recession and reflecting the impact of the devastating earthquake and tsunami in March.

Japan's Cabinet Office said Thursday that Japan's January-March gross domestic product dropped 3.7 percent on an annualized basis. GDP declined 0.9 percent from the previous quarter on a seasonally adjusted basis.

Yoshiro Sato, an economist with Credit Agricole in Tokyo said the market was expecting a 0.5 percent drop on the quarter.

The country has registered two consecutive quarters of declining GDP and is technically in a recession at this point. But economists said they foresee a rebound in the third and fourth quarters as Japan rebuilds the northeastern region the quake hit.

In line with that view, economic and fiscal policy minister Kaoru Yosano said he expect Japan to post growth of close to 1 percent for the current fiscal year ending March 2012, according to wire reports.

Consumer confidence is taking a hit in the country. Earlier this week, the Japanese government said April's consumer confidence fell to a two-year low, falling at a seasonally adjusted rate of 5.5 percent to 33.1 in April.

Sato said the disaster's impact should be fully realized in the second quarter of the year.

"Similar to what happened in [the first quarter], private consumption will continue to be a major negative contributor with the combination of deteriorating consumer confidence and downward pressure on wages due to the damage to manufacturing industries likely weighing on consumption activities," he said.

Sato went on to state that April-June GDP should drop 4.6 percent in annualized terms before reconstruction efforts kick in later in the year.

Goldman Sachs economist Naohiko Baba voiced a similar outlook.

"We think depressed production due to supply chain damage will be at its strongest in 2Q 2011 and we see 2Q as the bottom for real GDP growth. The duration of decline in consumer sentiment will be a key point. We expect GDP to return to positive growth in 3Q, buoyed by reconstruction demand in both the public and private sectors," he said.  "We assume that production and exports will shift to mild growth facilitated by supply chain restoration, although power supply is an uncertain factor. One cloud on the horizon is our Global Leading Indicator. This leading indicator for Japanese exports has been losing momentum."

Although retailers saw large sales drops in March immediately following the quake, there are signs that trading conditions have improved since then. Just Thursday, the Japan Department Stores Association said its members' April sales declined 1.5 percent. That compares with a 14.7 percent drop in March.

Those numbers show that sales in western Japan are helping to compensate for bigger drops in the eastern part of the country. Sales in Osaka and Kobe grew 4.7 percent and 1.2 percent respectfully. Those in Tokyo fell 5.5 percent while those in Sendai, the area of the quake, slumped 25.8 percent.

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