(Wall Street Journal) According the Economic Planning Association's "ESP Forecast", Japan's real gross domestic product may have contracted 12.76% annualized in Q1 2009, or even worse than Q4 2008's 12.1% contraction. This represents a downward revision from just a month ago, when a 10.41% contraction was expected, before February trade data showed exports nearly halved, and imports recorded a record 43% plunge. The 38 economists surveyed gave a 57.2% probability to a turnaround within one year, with growth of 0.35% in Q4 2009. The responses to the latest poll were compiled between March 30 and April 6.

The above is "new" news.

The other (old) news out in media space is that the Japanese government downgraded their forecast to a 3.3% decline for 2009, after GDP shrank 3.1% in 2008. This based on, a) a 1.2% fall in global GDP, b) FY09 export decline of 27.6% and capex decline of 14.1%. Until the downward revision, the government had been forecasting a 0.8% decline, while the BOJ had revised their GDP forecast to a 2% decline. Both revised forecasts are still much milder than the OECD, IMF and World Bank forecasts, which see a decline in FY09 Japan GDP of between 5%~6%, and world trade shrinking up to 11%--with Finance Minister Kaoru Yosano warning of further possible downgrades. This is because the new Japanese government forecast of course assumes that stimulus policies so far announced will provide a 2 percentage point growth boost, which may or may not happen.

The glum outlook contrasts with upbeat views of Japan's economy which suggest Japan may actually be earlier than other countries to pull out of the greatest recession since WWII. This scenario points out that Japan's economy was already in recession from Q2 '07, and could bounce back sooner because the downturn was almost entirely due to a drop-off in exports. Economic bulls like Richard Jerram of Macquarie Secs. see the "stage being set for a strong rebound in industrial production and exports from SH2009", but the government survey has exports continuing to decline 27.6% in 2009.

If Japan's export recovery does surprise on the upside, it is most likely to come from trade with China. Some 20 institutions recently surveyed see April-June QTR China GDP growth recovering to 7% from 6.1% in the previous quarter as investment maintains growing momentum in the economy. From January to March 2009, retail sales were growing 15% and fixed asset investment was growing 29%. As mentioned in a previous post, major investment banks beginning with Goldman Sachs have recently rushed to raise their forecasts for China growth.

If the survey number of a 12.7% annualized decline in Japan's GDP for Q1 is more accurate, the stock market could react negatively even though the GDP number will be a backward-looking number. This is because investors had been discounting a number more like a 10% annualized decline which would imply incremental improvement from the lows in October~December 2008. The successful March re-test of the October 2008 low however may have already discounted this, but we are a little concerned about the Nikkei 225's inability to retake and hold 9,000, which in our mind would be representative of a clear incremental improvement in the economy and earnings fundamentals.