Japan's economy shrinks in last quarter as recession lingers; 2012 growth 1.9 per cent

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TOKYO - Japan's economy remained mired in recession late last year, shrinking 0.4 per cent in annualized terms for the third straight quarter of contraction on feeble demand both at home and overseas.

The government reported Thursday that growth for all of 2012 was 1.9 per cent, after a 0.6 per cent contraction in 2011 and a 4.7 per cent increase in 2010 and a 5.5 per cent contraction in 2009.

The figures were worse than expected, as many analysts had forecast the economy may have emerged from recession late last year as the Japanese yen weakened against other major currencies, giving a boost to Japanese export manufacturers.

Prime Minister Shinzo Abe, who took office in late December, is championing aggressive spending and monetary stimulus to help get growth back on track. He has lobbied the central bank to set an inflation target of 2 per cent, aimed at breaking out of Japan's long bout of deflation, or falling prices, that he says are inhibiting corporate investment and growth.

However, the Bank of Japan was not expected to announce any major new initiatives from a policy meeting Thursday. The current central bank governor, Masaaki Shirakawa, is due to leave office on March 19, and Abe is expected to appoint as his successor an expert who favours his more activist approach to monetary policy.

Last year began on an upbeat note with annual growth in the first quarter at 6 per cent as strong government spending on reconstruction from the March 2011 tsunami disaster helped spur demand. But the economy slipped back into contraction in the second quarter and deteriorated further as frictions with China over a territorial dispute hammered exports to one of Japan's largest overseas markets.

Despite the dismal data for last year, many in Japan expect at least a temporary bump to growth from higher government spending on public works and other programs. An index measuring consumer confidence, released earlier this week, jumped to its highest level since 2007, the biggest ever increase in a single month.

"Overall the rebound in consumer confidence is consistent with other surveys showing that business conditions picked up strongly at the start of the year," Julian Jessop, an economist at Capital Economics in London, said in commentary Wednesday. "Whether this optimism proves to be justified is another matter, but at least sentiment is clearly improving."

Earlier this week, Abe appealed to businesses to raise wages to help boost domestic demand and carry on momentum from government spending. Data for the fourth quarter showed that private consumption, which accounts for more than two-thirds of Japan's economic activity, rose 0.4 per cent in the fourth quarter while housing investment climbed 3.5 per cent. Investment by businesses, however, fell 2.6 per cent and exports dropped 3.7 per cent.

Organizations: Bank of Japan, Capital Economics

Geographic location: Japan, TOKYO, China London

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