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The contraction followed a revised fourth-quarter drop of 14.4 percent, the Cabinet Office said today in Tokyo. Gross domestic product fell 3.5 percent in the year ended March 31, the most since records began in 1955, confirming that the recession is Japan’s worst in the postwar era.

Exports plunged an unprecedented 26 percent last quarter, forcing companies from Toyota Motor Corp. to Hitachi Ltd. to cut production, workers and wages. Stocks have gained 32 percent since reaching 26-year low in March on speculation worldwide interest-rate reductions and spending by governments will halt the slide in the world’s second-largest economy.

“There was a collapse across the board,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. Still, he added that there’s “light at the end of the tunnel” and the economy will resume growing this quarter as companies replenish inventories and stimulus plans at home and abroad take effect.

The yen traded at 95.71 per dollar at 11 a.m. in Tokyo from 96.16 before the report was published. The Nikkei 225 Stock Average rose 0.4 percent.

The first-quarter contraction was the most severe since records started 54 years ago. Economists predicted the economy would shrink 16.1 percent.

Worse Than U.S.

GDP fell 4 percent on a non-annualized basis, more than double the U.S.’s 1.6 percent slide. It’s also worse than Europe’s record 2.5 percent contraction. Without adjusting for price changes, Japan shrank 2.9 percent last quarter.

Weaker domestic demand was the biggest contributor to the decline, shaving 2.6 percentage points off GDP, the most since 1974. Net exports — the difference between exports and imports — was responsible for 1.4 percentage points of the drop.

Consumer spending slid 1.1 percent and business investment plunged a record 10.4 percent. Economists say companies will keep cutting spending because the decline in demand has left factories and workers underused.