Japan's economy contracts for third straight quarter

Japan's economy contracted for a third straight quarter as consumer spending and factory production continued to suffer in the aftermath of the March earthquake and tsunami.

Real gross domestic product - a measure of the value of all goods and services produced domestically - contracted at an annualised rate of 1.3% in the April-June quarter, the Cabinet Office said today.

The figures did provide a glimmer of optimism as a much bigger contraction was expected. A Kyodo News agency survey of analysts had forecast the economy to shrink 2.6%.

The March 11 earthquake and tsunami killed thousands of people and wiped out large parts of Japan's northern coast. The disasters damaged many factories in the region, causing severe shortages of parts and components for manufacturers across the country, including car makers.

The tsunami also crippled a nuclear power plant and caused widespread power shortages, especially in the Tokyo region, adding to the headaches faced by businesses and households.

The Cabinet Office said GDP fell 0.3% quarter on quarter. Consumer spending, which accounts for some 60% of the economy, dipped 0.1%. Capital investment by companies was up just 0.2% from the previous quarter.

The figures showed that the nation's economy slumped in wide range of areas and still needs close attention, Finance Minister Yoshihiko Noda said.

"We must steer the economy very carefully because we still have downside risks including the problem of the rising yen," he told a news conference.

Japan's economy was struggling even before the disaster. The country lost its place as the world's No 2 economy to China last year. It has faced a slew of problems including years of deflation, a rapidly ageing and shrinking population and ballooning public debt.

Japanese companies have increasingly relied on overseas markets to drive growth and offset lacklustre demand at home. But exports dropped 4.9% during the latest quarter, the sharpest decline in more than two years, due to a strong yen, slowing overseas economies and a slump in domestic industrial production.

A strong yen is painful for Japan because it reduces the value of foreign earnings for exporters like car and electronics manufacturers, and makes Japanese goods more expensive in overseas markets.

The dollar hit a record post-Second World War low of 76.25 yen in the days following the March 11 earthquake and tsunami.

Economy Minister Kaoru Yosano was more upbeat about the quarterly growth figures, which he said reflected gradual improvements in consumer confidence and industrial production as the supply of parts recovers. He said growing public works investment in reconstruction projects is also expected to provide further support for the economy.

"We expect the economy to achieve a relatively high growth in the second half of this fiscal year," he told reporters.

Japanese stocks reacted favourably to the smaller-than-expected contraction of the economy in the quarter right after the disaster.

The Nikkei 225 benchmark index was 0.9% higher at 9,045.17 after the GDP announcement, which also sent other Asian stocks higher.