Japan economy shrinks more than expected in Q4

Sun Feb 12, 2012 11:13pm EST
 
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By Tetsushi Kajimoto and Kaori Kaneko

TOKYO (Reuters) - Japan's economy shrank more-than-expected in the fourth quarter, hurt by slowing global growth, Thai floods and a strong yen, casting doubt on hopes for a pick up in activity in the first months of 2012.

The 0.6 percent drop was twice as big as analysts had forecast, bad news for Prime Minister Yoshihiko Noda's government which is trying to persuade a skeptical public that Japan is strong enough to double the sales tax without prolonging years of economic torpor.

Japan's fourth contraction in five quarters led to a 0.9 percent drop in output for the whole of 2011, the first full-year slide since the global financial crisis in 2009, which prompted companies, such as Sony Corp (6758.T: Quote), to forecast big cuts in profits or losses.

Domestic demand also weakened in a worrying sign that the economic boost from rebuilding the country's earthquake-devastated northeast coast is slow to materialize.

The slump could add to mounting political pressures on the Bank of Japan to ease monetary policy. The central bank, which begins a two-day meeting on Monday, may decide to set a more specific inflation goal to strengthen its commitment to battling deflation, but is expected to hold off with policy easing.

"I don't expect the BOJ to ease policy anytime soon unless the yen spikes further," said Takahide Kiuchi, chief economist at Nomura Securities.

"But policymakers are prone to mount pressure on the BOJ to ease policy further and boost inflation in order to proceed with the sales tax hikes."

Noda aims to double the 5 percent sales tax by late 2015 to help reduce the country's mammoth public debt, but has yet to win over the opposition and a skeptical public.   Continued...