Japan economy shrinks more than expected, highlights lack of policy options

Reuters: Japan’s economy shrank more than expected in the final quarter of last year as consumer spending and exports slumped, adding to headaches for policymakers already wary of damage the financial market rout could inflict on a fragile recovery.

Gross domestic product contracted by an annualised 1.4% in October-December, bigger than a market forecast for a 1.2% decline and matching a fall marked in the second quarter of last year, Cabinet Office data showed on Monday. It followed a revised 1.3% increase in the previous quarter.

The data underscores the challenges premier Shinzo Abe faces in dragging the world’s third-largest 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.

“Private consumption is especially weak. The economy is at a standstill,” said Junko Nishioka, chief economist at Sumitomo Mitsui Banking.

“It’s a matter of time before the BOJ and the government will take additional stimulus measures,” she said, predicting the central bank will ease policy again as early as next month.

With his stimulus policies that gave big manufacturers windfall profits, Abe had hoped to generate a positive cycle in which companies raise wages and help boost household spending.

Instead the data showed that private consumption, which makes up 60% of GDP, fell 0.8%, exceeding market forecasts of a 0.6% decline.

Economy Minister Nobuteru Ishihara told reporters after the data was issued that the economy would head for a moderate recovery as its fundamentals remained strong.

Offering some hope for policymakers, capital expenditure rose 1.4%, confounding market expectations for a 0.2% decrease.

But analysts doubt whether the economy will gain momentum in coming months, with the recent market turbulence and slowing Chinese growth clouding the outlook for corporate profits.

Exports fell 0.9% in October-December after rising 2.6% in the previous quarter, underscoring the pinch companies are already feeling from soft emerging market demand.

Domestic demand shaved 0.5 percentage point off GDP growth, while external demand – or net exports – added just 0.1 point.