The world's second largest economy experienced a quarterly 4 per cent shrink in its gross domestic product (GDP) reflecting the continued impact of the recession on the export-dependent nation.
Hit hard by a global plunge in demand for cars and technology, Japan's economy shrank 15.2 per cent in the first quarter compared to last year, according to Cabinet Office figures.
The contraction eclipses that of other industrialised nations: the nation's GDP slide was more than double the 1.6 per cent recorded in the US and significantly higher than Europe's record 2.5 per cent.
A weakening in domestic demand has been the biggest contributor to Japan's decline, with consumer spending dropping 1.1 per cent and business investment plunging a record 10.4 per cent during the same period.
As companies continue to cut spending due to diminished demand, the number of underused factories and workers was continuing to grow, according to Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo.
"There is a huge problem of over capacity," he said. "That means capital spending is not likely to pick up." While the contraction is the biggest for Japan since records began in 1955, hopes have been raised that the economy will soon start to rebound following a slight surge in industrial production in March.
Last month, consumer confidence also rose to a ten-month high and factory output increased for the first time since September. As exports start to stabilise and the government's stimulus plan takes effect, there are cautious hopes that the economy might record its first growth in a year this quarter.
However, analysts have warned that any recovery is likely to be fragile in an on-going climate of thousands of job cuts, diminished domestic demand and factory closures in the worst post-war recession to hit the economy.
Hiroshi Watanabe, senior economist at Daiwa Institute of Research, said: "The deterioration in domestic demand has just started. But external demand probably hit bottom in the first quarter.
"Both exports and output are expected to rise in April to June. So I'd expect positive growth in the current quarter. From July to September, stimulus packages will boost growth, so I expect the economy to continue recovering mildly for the rest of the year."
