Japanese economy contracts for third straight quarter

Japan's economy contracted for the third straight quarter in the three months to end of December, underlining the challenges the new government faces in reviving growth.

The economy shrank 0.1% compared with the previous three months. Most analysts had forecast growth of 0.1%.

That is equivalent to an annualised dip of 0.4% in gross domestic product.

Japan's growth has been hurt by a drop in exports to key markets as well as subdued domestic consumption.

"The biggest reason for the decline in gross domestic product (GDP) is external demand was weak and domestic demand did not recover as quickly as we thought," said Shuji Tonouchi of Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Meanwhile, Japan's central bank, the Bank of Japan (BOJ) left its interest rates unchanged at between zero to 0.1%.

However, it rejected a proposal to keep the rates at that level until its target of achieving a 2% rate of inflation is met.

The central bank had set that target last month, in an attempt to spur domestic demand.

Japan has been fighting deflation, or falling prices, for best part of the past decade.

That has hurt domestic demand as consumers tend to put off purchases in the hope of getting a cheaper and better deal later on.

Many analysts have said that stoking inflation is key to spurring Japan's domestic consumption.

Bottoming out?

Japan's new government led by Shinzo Abe has said that reviving the country's economy is its top priority.

Last month, it approved a fresh 10.3 trillion yen ($116bn; £72bn) stimulus package in an attempt to spur a revival in the economy.

The package, which includes infrastructure spending, as well as incentives for businesses to boost investment, is estimated to boost Japan's economy by 2% and create 600,000 jobs.

Japan's central bank also expanded its asset purchase programme in January, which is to expected to pump billions of yen into the economy.

Analysts said these moves were likely to help spur growth in the Japanese economy in the current quarter.

"The economy has contracted for three straight quarters, but the third quarter was the worst and fourth quarter data show the pace of decline is slowing," said Mr Tonouchi of Mitsubishi UFJ Morgan Stanley Securities

"Data show that overseas economies are recovering, so we expect Japan to return to growth in the first quarter.

"The economy is still on the recovery track," he added.

Yen effect

The measures by the central bank, coupled with the hopes that it may ease its policies further in the coming months, has had a big impact on the yen.

The Japanese currency has dipped more than 15% against the US dollar since November last year.

A weak currency bodes well for Japanese exporters as it makes their goods more affordable to foreign buyers, but also helps boost their profits when they repatriate their foreign earnings back home.

Analysts said the timing of the drop in yen's value has been great for the exporters.

"We are nearing the end of the financial year, a time when leading exporters will be looking at closing their books and transferring their overseas earnings back to Japan," Martin Schulz of Fujitsu Research Institute told the BBC.

Mr Schulz said that given the sharp drop in yen's value, leading exporters were likely to see profits exceed their previous forecasts.

He explained that a profit boost would mean that firms were likely to have much more cash available for investment.

"As global demand begins to rise and Japan's goods become more affordable, companies are likely to use that cash pile to expand their facilities.

"That will help boost Japan's economy further in the coming months." Mr Schulz added.