TOKYO -- It's official. Japan is technically in a recession after back-to-back quarters of negative economic activity.


gross domestic product

fell 1.4% from the previous quarter, or by 5.5% on an annualized basis, according to the

Economic Planning Agency

. The market had expected a 0.9% decline, but consumer spending nosedived and the government's massive spending on public works programs, which previously boosted housing investments, dried up.

Of course investors took note of the decline in GDP, but most players had something else on their minds: beating up Internet shares. The


index, which includes blue-chips and large tech plays listed on the

Tokyo Stock Exchange's

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first section, shed 4.6% while the


small-cap index tumbled 8.6%, as retail investors followed the lead of U.S. hedge funds and Japanese dealers.

It's not so surprising that the tech sector, down 15.6% in two weeks, is getting pummeled as the fiscal year comes to a close on March 31. Selling high-priced tech shares is the best way to book profits, say investors.

But what local traders are saying about Internet firms, especially former market darlings



Hikari Tsushin

, is that too much faith was put into these New Japan companies to turn the sagging economy around. The Internet revolution alone can't swing GDP positive.

It's strange to see that the only positive figure to emerge from GDP was the 4.6% rise in corporate investment, an increase not seen in two years. That means large firms started to increase spending on their operations, especially on information technology. Japan Inc. is thought to be two to three years behind the U.S. in the technological transformation.

When will investors take note (again) that corporations are finally spending on IT? Some say April 1, or the start of fiscal 2000, when GDP will paint a much rosier economic picture, according to economists.