The Japanese economy, the world's second largest, is technically in recession for the first time since the oil shock of 1974. Share prices around the world fell sharply yesterday in reaction to the news, while the yen fell to an eight-year low threatening the rest of Asia with a second currency crisis.
Japanese gross domestic product contracted at an annualised rate of 5.3 per cent during the quarter ending in March, the second consecutive quarter of negative growth. Analysts had forecast the economy, representing about 70 per cent of Asia's GDP, would shrink only 1.4 per cent.
The news depressed the world's stock markets, bringing heavy drops in Europe and early weakness on Wall Street, which recovered to close up 23.17 at 8834.94. Mr Jim Power, chief economist at Bank of Ireland warned he would now consider selling shares. "Safe haven is now the name of the game," he said.
The yen, which has been falling against the dollar for the past two months, crashed in early Tokyo trade to its lowest level since August 1990 after the first-quarter growth figures. The London share market showed a substantial loss of 1.41 per cent as dealers worried about the situation in Asia. The Dublin market followed suit, falling by 0.58 per cent.
Mr Power warned that it was possible that we were now looking at the beginning of a sharp global slowdown and falling stock markets.
"The big risk is that this feeds through to the US equity market, hitting consumers there - and then to European markets."
Economists blamed the Japanese recession on a loss of confidence after the eruption of economic turmoil in Asia and a string of collapses of domestic financial institutions late last year.
Some analysts fear there is a policy vacuum in Tokyo as much-criticised bureaucrats keep a low profile and ruling politicians gear up for an Upper House election on July 12th. Many believe that little progress is likely before the election. But many analysts also looked at what they saw as the silver lining on the GDP cloud, saying the data could force the government into a crisis mentality and speed up a resolution of Japan's mountainous bad loan problem.
The government's economic planning agency refused to use the word "recession", insisting the economy could still meet its target of 1.9 per cent growth this fiscal year. However, analysts said positive growth looked almost impossible to achieve.
"If there is negative growth this fiscal year, the Japanese economy will have contracted two consecutive years, making this the country's worst post-war recession," warned Mr Robert Feldman, economist at Morgan Stanley in Tokyo.
The GDP data were released after the Japanese equity markets had closed almost unchanged, but the yen fell again in Tokyo against the dollar. It ended at Y144 after briefly touching Y144.72, its lowest since August 1990. On Thursday it had been trading in Tokyo at Y141.69.
Mr Ryutaro Hashimoto, Prime Minister, insisted: "I don't think (the drop in the yen) reflects the state of the economy." The Bank of Japan said interest rates would not change, but, for the first time in nine policy meetings, the decision was not unanimous. Consumer demand was up only 0.1 per cent on the previous quarter, despite a Y2,000 billion (£10 billion) cut in income taxes in February.
Analysts said demand had been hit by rapidly decelerating growth in employee compensation. It has fallen from 3.6 per cent in the September quarter last year to 1.2 per cent in the last quarter. Incomes have been hit by record unemployment, falling bonuses and declining overtime payments.
