Japan's economy contracted at an annualized rate of 0.6% in January-March 2018, a weaker-than-expected reading which brought an end to a run of eight straight quarters of economic growth and likely further pushed back the horizon for any monetary policy normalization.
On a quarter-over-quarter basis, gross domestic product contracted an annualized rate of 0.2%, following a revised 0.1% quarter-over-quarter expansion in October to December 2017, preliminary estimates from the Cabinet Office showed.
Adverse weather at the beginning of the year damped construction and other sectors, said Takuji Aida, an analyst at Société Générale.
"The economy will rebound significantly in the coming quarters. Japan's economic growth fundamentals remain intact and the economy will likely see growth move back above the potential growth rate," added Aida, expecting growth to reach 1.2% in 2018 and 1.4% in 2019 on the back of wage growth and a pick-up in public demand.
Historically, Japan's GDP occasionally delivers either an "outsize spike or a dismal-looking trough," said Robert Cornell, chief economist and head of research, Asia-Pacific at ING, in a note. "As a result, we need not worry overly when the occasional bad quarter comes. This was not a particularly shocking result."
"Markets were braced for first-quarter weakness. The data merely came in a little weaker than had been imagined," he said. But he added that the result made the prospect of any reduction of the Bank of Japan's qualitative and quantitative easing program an even more distant prospect.
"It is now virtually impossible to see them adjusting their QQE program to a less accommodative setting this year, irrespective of what the ECB manages to do in the background," Cornell said.
Yields on 10-year Japanese government bonds were little changed at 0.054%, but the yen gained, with the dollar losing 0.16% against the Japanese currency to 110.17 by 5:24 a.m. ET. Japan's benchmark Nikkei 225 index closed down 0.44%.
Private consumption was unchanged in the first quarter from October to December 2017, the Cabinet Office data showed. Capital expenditure fell 0.1%. External demand, or exports minus imports, added 0.1 percentage point to first-quarter GDP, as imports slowed more than exports.