Tokyo, June 11 (Bloomberg) -- Japan's economy unexpectedly shrank in the first quarter as business spending and exports slumped, leaving the nation on the brink of recession barely two years after its last one ended.
Gross domestic product fell 0.2 percent in the three months ended March 31 from the previous quarter, seasonally adjusted, the government said. Economists, who had forecast 0.1 percent growth, are predicting a contraction in the second quarter.
A prolonged recession may derail Prime Minister Junichiro Koizumi's plan to cap government spending and force banks to write off at least 13 trillion yen ($107 billion). Those policies helped Koizumi win an election six weeks ago and convince investors he could pull Japan out of an 11-year economic slump.
``If you get no policy response and a deep recession, you'll get a large increase in the number of bankruptcies and even more problems for the already-distressed financial system,'' said Richard Jerram, chief economist at ING Baring Securities (Japan) Ltd.
The yen and stocks fell as investors bet a return to recession will trim company earnings and spending, forcing the central bank to keep interest rates near zero and pump more money into the economy.
The yen slid to 121.57 to the dollar from 120.93 just before the report was released, and was down 0.8 percent from yesterday's close. The benchmark 10-year bond yield fell 2 basis points to 1.225 percent. The main Nikkei 225 stock average fell 1.5 percent, led down by Advantest Corp.
`Nasty Recession'
Koizumi yesterday said the next six to 12 months will be ``extremely tough,'' and the public will have to bear some of the pain of fixing the economy. ``It's very straightforward: We are falling into recession,'' said Jesper Koll, chief economist at Merrill Lynch Japan. ``There will have to be short-term pain for long-term gain.''
The economy grew 0.9 percent in the fiscal year ended March 31, missing the government's 1.2 percent target. The government may not meet its 1.7 percent target this fiscal year either -- economists surveyed by Bloomberg News expect growth of just 0.7 percent. Economy and Fiscal Policy Minister Heizo Takenaka said it will be ``extremely difficult'' to meet that target.
All nine economists surveyed by Bloomberg News today expect the economy to contract in the second quarter, ending June 30, with some expecting the economy to keep shrinking for the rest of the year. Koizumi's pledge to cap government spending will rob Japan of one of its main sources of growth. Government investment rose 5.2 percent in the first quarter, contributing 0.4 percentage points to growth.
That's come at a price. Ten years of borrowing and spending have swelled Japan's debt, which is expected to reach 666 trillion yen, or 130 percent of GDP, by March next year. The increase in debt has cost Japan its top-notch ``AAA'' ratings from both Moody's Investors Service and Standard & Poor's.
Weak Business Investment
Business investment, the biggest source of economic growth over the past two years, gave way in the first quarter, falling 1 percent from the fourth quarter, when it increased 6.7 percent. 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.
Kyocera Corp., the largest maker of ceramic casings to protect semiconductors, and Sanyo Electric Co., the maker of almost half the world supply of mobile-phone batteries, aren't expecting to expand this year amid falling orders, particularly for computers and other high-technology goods. Slowing growth in sales of mobile phones and home computers has sapped demand for components. Kyocera, which expects net income to fall by more than half this fiscal year, will trim capital spending by almost 25 percent.
Sanyo expects profit to fall in the first half of the current year and to be little changed for the full year as flagging demand for electronics parts heightens price competition. ``We're seeing some effects of the slowing down of the economy,'' said Derek Wentz, a Sanyo spokesman.
Consumer Spending
Consumer spending, which makes up about 55 percent of GDP, was unchanged from the fourth quarter. Spending had been expected to contribute to growth for the first time in nine months as a law came into effect on April 1 charging people who buy a new television, refrigerator, air conditioner or washing machine a fee to dispose of their old appliance. To avoid paying the fee, many Japanese consumers stocked up on appliances in February and March. With that past, spending may keep stalling. At Yodobashi Camera Co., one of Japan's largest discount electronics chains, sales flattened in April after doubling in February and March.
Japan's near-record jobless rate and slowing wage growth have prompted people to save rather than spend, keeping the brakes on growth.
A shrinking trade surplus also weighed on growth as demand from the U.S. and Europe slowed. Net exports -- imports subtracted from exports -- shaved 0.2 percentage points off of growth last quarter. Exports shrank 3.6 percent, the first decline in two years, and imports fell 2.2 percent, the report showed. Housing investment fell 5.2 percent in the first quarter from the previous quarter, and government spending was unchanged. Growth in the fourth quarter of last year was revised to 0.6 percent from an initial estimate of 0.7 percent.