TOKYO (AP) -- Japan's economy shrank at a record 15.2 percent annual pace in the first quarter, dragged down by plunging exports, thinner factory output and wary shoppers.
But within the details emerged new hope. Economists said the worst is over for the world's second-largest economy. Many predicted it would grow in the April-June period amid aggressive stimulus steps by the government and signs that companies are boosting production.
"I think the economy has passed the bottom, and the recovery has begun in the current quarter," said Richard Jerram, chief economist at Macquarie Capital Securities in Tokyo.
Government data released Wednesday confirmed what many had been dreading yet expecting. The drop in gross domestic product was the steepest since Japan began compiling such statistics in 1955. Compared to the previous three months, GDP fell 4 percent, in the fourth straight quarter that the economy withered.
The results were markedly worse than for other major economies. The euro zone logged a 2.5 percent quarterly decline, and the U.S. retreated 1.6 percent.
Like its Asian neighbors, Japan has been pummeled by the unprecedented collapse in global demand triggered last year by the U.S. financial crisis. Manufacturers such as Toyota Motor Corp. and Sony Corp. have had to suspend production and shut down plants. They have laid off thousands of workers, contributing to a rising jobless rate that could drag on any nascent recovery.
"Weakness in the corporate sector is gradually spreading to households," Prime Minister Taro Aso told lawmakers in a parliamentary budget hearing Wednesday. "This is a very serious situation, so we need to respond appropriately."
Aso is banking on massive public spending to spark a turnaround. His newest $150 billion stimulus package includes various programs to bolster consumer spending: incentives to buy energy-efficient appliances and cars, as well as help for the unemployed and small businesses.
The government's efforts are helping ensure that after likely hitting a low point last quarter, Japan's economy is cautiously stirring back to life.
Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs, predicts the GDP will turn positive this quarter and then accelerate to 3 percent growth in the July-September period, lifted by Japan's stimulus measures and by higher demand from China.
In other signs of progress, export declines are easing and industrial production rebounded 1.6 percent in March -- with further gains projected for April and May.
On Wednesday, Mazda Motor Corp. said it was resuming full production at its Japanese plants next month as demand in Europe recovers on government stimulus measures.
Optimistic investors shrugged off the bad news and instead focused on the good. The benchmark Nikkei 225 stock average extended gains Wednesday, climbing 0.6 percent to 9,344.64.
Some economists, however, question whether the expected recovery can last beyond the end of the year. Yamakawa warned that the "risk remains high for a slowdown" in the first half of 2010 as the impact of policy measures tapers off.
Officials will need to hammer out another extra budget later this year to sustain momentum, said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. But with Aso's ruling Liberal Democratic Party facing a critical election season, lawmakers aren't thinking that far ahead, he added.
A breakdown of the latest GDP figures showed that exports plummeted a record 26 percent in the first quarter from the fourth quarter. Capital expenditure -- business investment in factories and equipment -- fell 10.4 percent from the previous quarter, while consumer spending slipped 1.1 percent.
Unlike previous downturns, consumption has weakened much more than income, said Jerram of Macquarie Capital Securities.
"It seems that the public has basically panicked about job security to an extent that hasn't happened in previous cycles," he said.
For the last fiscal year through March 31, Japan's GDP contracted by a record 3.5 percent, the Cabinet Office said. It expects the economy to shrink 3.3 percent this fiscal year.