Japan spent the first quarter of 2009 in its worst spiral of decline ever recorded, with GDP in the world’s second largest economy shrinking at an annualised pace of 15.2 per cent as the country’s export-focused business model was tested to the extreme.

Plunging exports, a strong yen and an unprecedented drop in production were the chief culprits, though an acute drop in consumer spending also dealt significant damage to growth.

However analysts and Tokyo dealing floors appeared unfazed by the numbers: following the Government’s recent revision to the GDP figures for the fourth quarter of 2008, economists had been expecting the contraction to be over 16 per cent in the January to March quarter.

In the hour of trading that followed the GDP release, the Nikkei surged over 1.2 per cent, as initial market commentary reflected the sense that the worst of the crisis may now be over. That momentum eased-off quickly though, as concern over Japan’s longer-term prospects resurfaced and began to weigh on sentiment.

All eyes are now turned on how closely the government’s giant stimulus package will hit its target of reviving consumption and stimulating growth. Richard Jerram, Japan economist at Macquarie, highlighted the fact that public investment saw first year-on-year gain in eight years as a sign that the package may be starting to work.

Optimists, point to the ferocity of Japan’s plunging production numbers and corporate restructurings as evidence that the country could return to growth by the end of the year and may even have reached that point in the current quarter. Consumer confidence made a surprise rebound in April and the 32 per cent rise in the Nikkei 225 since March has begun to draw domestic investors back to the Japanese market.

Having learned the hard lessons of the so-called “lost decade” in the 1990s, Japanese companies have attacked their inventories with a savagery and speed that few thought possible, and managements at some of Japan’s largest corporate behemoths – the likes of Panasonic and Toyota – have been uncharacteristically ruthless about shuttering factories and slashing staff headcounts.

Question marks still remain over the future of Japanese exports, however. The most optimistic view for the current year foresees only a stabilisation in that area, rather than the sort of high-pace export trade on which the Japanese economy so heavily relies. Analysts believe that even well-managed companies may historically have allowed themselves to be too dependent on the US and European markets, and are now not well positioned to benefit from the growth of China and other emerging economies.

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