Japan’s economy shrank 2.3 percent in the fourth quarter last year as manufacturers were battered by the strong yen, weak export demand amid the European debt crisis and flooding in Thailand.
A drop in public investment during the quarter, largely because of political bickering delaying parliamentary approval for a ￥12 trillion (US$156 billion) extra budget for tsunami reconstruction, also contributed to the year-on-year decline reported yesterday.
The world’s No. 3 economy should get a boost once that rebuilding money kicks in, but the outlook for the country’s vital exporters remains unclear, said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch.
“This should be viewed as temporary setback,” Kichikawa said. “To what extent will the European crisis continue to affect overseas demand — that is the big question.”
Japan last month reported its first trade deficit since 1980, reflecting broader changes in its economy as manufacturers shift production overseas to escape the strong yen and be closer to their markets. However, the Thai flooding underlined that basing production overseas also has risks.
The drop in GDP was worse than expected. Economists polled by Kyodo news agency projected a 1.4 percent decline.
Compared to the previous quarter, October-to-December GDP fell 0.6 percent, the Cabinet Office said. That comes after 1.7 percent increase in the July-to-September quarter, reflecting some recovery after the tsunami disaster.
Domestic private consumption, which accounts for more than half the economy, edged up 0.3 percent from the previous quarter, the data showed.
Corporate capital investment rose 1.9 percent, while private housing investment fell 0.8 percent and public investment declined 2.5 percent.
Along the tsunami-battered coast, most of the debris has been cleared away, but rebuilding has yet to begin in many towns and communities as local leaders finalize reconstruction plans. Reconstruction is expected to stimulate economic growth, although export demand still appears weak.
“The growth rate will turn positive and stay positive this year because reconstruction demand will continue to push up GDP,” Kichikawa said. “But the pace of growth will depend on whether the decline in exports will stabilize.”
Japanese Economy and Fiscal Policy Minister Motohisa Furukawa said in a statement that exports and production increased in December in a “rebound to the impact of flooding in Thailand.”
“If we take into account these factors and look at the overall economic situation, we can say that upward movement is continuing,” he said.
Furukawa also said that the US economy is moderately recovering and global business sentiment is improving.
“We expect steady increase of exports amid moderate improvement of the global economy,” he said. “However, we need to be fully aware of the downside risk.”
For all of last year, Japan’s economy contracted 0.9 percent from 2010, when GDP grew a robust 4.4 percent. In 2009, the economy shrank 5.5 percent in the wake of the global financial crisis.
Meanwhile, traders largely shrugged off Japan’s announcement that its economy contracted by an annualized 2.3 percent in the October-to-December period.
Shares closed up 0.58 percent yesterday as traders digested the Greek parliament’s approval of fresh austerity measures needed for it to receive a crucial bailout.