Japan's economy struggled to stay afloat in the March quarter as exports faltered and economists warned yesterday that the spread of SARS in Asia coupled with sluggish US demand could sink future growth prospects.
GDP was seen shifting into reverse in the second quarter after remaining flat during the first quarter.
The world's second largest economy "is at a standstill," said Hisashi Yamada, senior economist at Japan Research Institute.
"There were improving signs in personal consumption and capital investment [in January through March], but foreign demand, which had been an engine for the Japanese economy, fell," he said.
"We are likely to see bad figures for the June quarter," he said.
Exports, which account for 11 percent of Japan's GDP, weighed down on growth in the three months to March, sliding 0.5 percent -- the first fall in five quarters and reversing a 4.5 percent rise in the previous three months.
"The main drag was exports ... reflecting a contraction in auto exports to the United States," said Masaaki Kanno, chief economist at JP Morgan.
US-bound shipments of automobiles grew year-on-year in January but took a double-digit fall in February and March.
Demand from the US as well as Europe is expected to remain soft in the three months to June, while the outbreak of SARS in Asia is also seen hurting Japanese shipments.
"Exports will likely fall further, pressured by a decline to Asia due to SARS," said Soichi Okuda, senior economist at Aozora Bank.
Spending by companies, which remained surprisingly strong in the first quarter, is also expected to taper off.
"There is a risk that capital expenditure will fall sharply," said Okuda.
"I am not expecting the [GDP] strength seen in the first quarter to last in the second," he said.
Adding to the gloom, consumer spending, which stayed in positive territory over the three months to March despite slumping wages, is expected to slide.
"There has been some ... tax increase [last month] which could affect consumption ... and incomes are falling," said Marshall Gittler, senior currency strategist at Deutsche Bank.
"We expect the economy to slip back into a shallow recession," he said.
Prime Minister Junichiro Koizumi must also push on with a pledge to boost the economy by cleaning up the banking system, buried under massive bad loans, and fighting deflation, which restricts growth, said analysts.
"The government will have to take some action and the market will be waiting to see what comes next," Kanno said.
However, Christopher Walker, economist at Credit Suisse First Boston (CSFB) noted the latest GDP data would not give much ammunition to those calling for a supplementary budget this year -- a notion Economic and Financial Affairs Minister Heizo Takenaka also dismissed.
"There is little room for the government to take additional fiscal stimulus measures for economic growth," Takenaka told legislators in parliament.
Walker also doubted the Bank of Japan would be prompted to take new action even though the March quarter GDP deflator, a measure of price movements, plunged 3.5 percent from the previous year, down for the 20th straight quarter and the sharpest drop on record.
Lawmakers have stepped up pressure on the central bank to adopt an inflation target to prevent prices from spiralling down further.