Japan's big GDP drop a worry for PM tax plan

Mon Feb 13, 2012 2:10am EST
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By Tetsushi Kajimoto and Kaori Kaneko

TOKYO (Reuters) - Japan's economy shrank much more-than-expected in the fourth quarter, as Thai floods, a strong yen and weak demand hurt exports, casting doubt on hopes for a quick pick up in activity that could bolster government plans to raise the sales tax.

Prime Minister Yoshihiko Noda needs to persuade a skeptical public that the economy is strong enough to double the sales tax without prolonging the stagnation that has plagued the country for two decades.

But GDP data on Monday showing economic output fell 0.6 percent in the fourth quarter will not help his cause and could translate into increased political pressure on the Bank of Japan to use some of its limited policy firepower to lift the struggling economy.

"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," said Takahide Kiuchi, chief economist at Nomura Securities.

The fourth-quarter drop was twice as big as analysts had forecast and marked the fourth contraction in the last five quarters, ending a year when Japan was also hit by an earthquake, tsunami and the worst nuclear power accident since Chernobyl in 1986.

Economic output for all of 2011 fell 0.9 percent, the first full-year slide since the global financial crisis in 2009. That translated into heavy losses for some of Japan's biggest exporters, including Sony Corp (6758.T: Quote).

"This is a contraction driven by external demand. Exports have fallen a lot because of a triple shock from Europe, the strong yen and floods in Thailand," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co in Tokyo.

In addition, domestic demand contributed a mere 0.1 percentage point to GDP in October-December compared with 0.9 percent in the third quarter, a worrying sign that the economic boost from rebuilding the earthquake-devastated northeast coast is slow in coming.   Continued...