Demand for services fell at its fastest pace in 12 years in March as job cuts discouraged consumers from spending.
The tertiary index, a gauge of money households and businesses spend on phone calls, power and transportation, dropped 4 percent from February, the Ministry of Economy, Trade and Industry said Thursday, the biggest decline since April 1997. The median estimate of 21 economists surveyed was for a 1.5 percent decline.
The economy shrank at a record 15.2 percent pace last quarter as businesses and consumers slashed spending, a report Wednesday showed. Economic and fiscal policy minister Kaoru Yosano said rising unemployment is a risk even though there are signs exports and production are recovering.
"Households have become increasingly defensive," said Kyohei Morita, chief economist at Barclays Capital in Tokyo. "It will be difficult for consumption to break out of the current slump" given the deterioration in the job market and wages, he said.
Declines in retail and wholesale sales drove the drop in the tertiary index, the report showed. Demand for information services including software and outsourcing fell 18.8 percent, an indication that companies are also cutting back on spending.
"The report showed that business spending is deteriorating and consumer spending is very weak," said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. "That poses a risk for the economic outlook."
"It's a clear negative for consumer spending," said Jesper Koll, chief executive officer of hedge fund adviser TRJ Tantallon Research Japan. "The pressure on purchasing power is very, very real."
The jobless rate surged to 4.8 percent from 4.4 percent in March, the largest advance since 1967. "Japan is far from a sound recovery," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. "Worsening employment will keep weighing on consumer spending."