Japan economy shrinks more than expected, adds to fears of global slowdown

[TOKYO] Japan's economy contracted an annualised 1.4 per cent in the final quarter of last year as consumer spending slumped, adding to headaches for policymakers already wary of damage the financial market rout could inflict on a fragile recovery.

The data underscores the challenges premier Shinzo Abe faces in dragging the economy out of stagnation, as exports to emerging markets fail to gain enough momentum to make up for soft domestic demand.

Market speculation of additional monetary easing simmers, although the Bank of Japan's policy ammunition appears to be dwindling, analysts say, after it deployed negative interest rates last month.

The contraction in gross domestic product (GDP) was bigger than a median market forecast for a 1.2 per cent decline and followed a revised 1.3 per cent increase in the previous quarter, Cabinet Office data showed on Monday. It matched a fall marked in April-June last year.

Private consumption, which makes up 60 per cent of GDP, fell 0.8 per cent, more than a median market forecast for a 0.6 per cent decline, a sign Abe's stimulus policies have so far failed to nudge households into boosting spending.

In a glimmer of hope for policymakers, however, capital expenditure rose 1.4 per cent, confounding market expectations for a 0.2 per cent decrease.

While domestic demand shaved 0.5 per centage point off GDP growth, external demand, or net exports, added 0.1 point due to a decline in the value of imports caused by falling oil prices.

Last month the Bank of Japan unexpectedly cut a benchmark interest rate below zero, stunning investors with another bold move to stimulate the economy as volatile markets threatened its efforts to overcome deflation.

REUTERS