Japanese consumers are still spending, but for how long?

The world's second largest economy reported flat Gross Domestic Product (GDP) to March 2003 and has been teetering towards reverse since then.

"The economy is on the brink of recession," said Jesper Koll, chief economist at Merrill Lynch Japan Securities.

Other analysts predicted the government would now have to take action to prevent the country's year-long recovery from slipping further and to fight deflation.

Exports fall

GDP showed zero growth in the three month period to March after four straight quarters of solid, but slowing, rises.

Exports, which account for 11% of Japan's GDP, took the biggest hit, largely due to poor car exports to the US.

But analysts warned the current Sars (Severe Acute Respiratory Syndrome) epidemic could hit exports again in the current three month period to June.

"Exports will likely fall further, pressured by a decline to Asia due to Sars," said Soichi Okuda, senior economist at Aozora bank.

Ending deflation?

Consumer spending, which remained positive to March, is also expected to slide in coming months.

"There has been some tax increase in April which could affect consumption....and incomes are falling," said Marshall Gittler, senior currency strategist at Deutsche Bank.

A 3.5% drop from a year ago in the GDP deflator - the broadest measure of deflation - is another headache.

The government's economist minister Heizo Takenaka said the figures showed the government needed to push harder to get prices rising again.