Japan hobbles out of recession with growth below estimates

The Japanese yen has weakened about 28 per cent against the dollar since Abe took power in December 2012. Photo / AP

Japan's economy expanded less than economists estimated in the fourth quarter, underlining the difficulty in stoking growth while export gains are undermined by weak investment and consumption at home.

Gross domestic product grew at an annualised 2.2 per cent, less than a median forecast for a 3.7 per cent increase. Nominal GDP, which is unadjusted for price changes, climbed an annualised 4.5 per cent from the previous quarter.

The softness of the rebound shows Prime Minister Shinzo Abe's challenge to revive the world's third-largest economy from two decades of stagnation. Wage rises and increased consumer spending are likely to be pivotal this year to spur activity beyond exports, where the lower yen has contributed to surging profits at companies like Toyota Motor Corp.

"Japan has clawed its way out of recession but we are looking for a modest acceleration in growth," Izumi Devalier, an economist at HSBC Holdings in Hong Kong said on Bloomberg TV. "This is not the picture of an economy that has a lot of spark behind it."

The yen has weakened about 28 per cent against the dollar since Abe took power in December 2012 with a pledge to revive the economy with his Abenomics reflation policies. While the lower Japanese currency helped boost exporters' earnings, it also increased import costs and bruised consumer sentiment.

The economy shrank 6.7 per cent in the three months after Abe increased the sales tax in April, and dropped 2.3 per cent in the third quarter, according to Monday's revised data.

Taken for 2014 as a whole, GDP came to a standstill after two years of expansion, reflecting the blow from the tax hike as the government tries to contain the world's heaviest debt burden.

Business spending rose 0.1 per cent in the three months ended December 31 from the previous quarter, when it dropped 0.1 per cent, according to the data released by the Cabinet Office in Tokyo on Monday. Private consumption increased 0.3 per cent following 0.3 per cent gain.

Domestic demand is set to remain weak, economists at Capital Economics wrote in a note. Besides a temporary boost from winter bonuses, wages are barely growing and households may use any strong gains in pay this year to replenish their savings, they said.

Bank of Japan

"The disappointing output figures indicate that the Bank of Japan's view on growth is too optimistic," Capital Economics said. "We still believe that the Bank will announce more easing at the late-April meeting."

The BOJ last month raised its growth forecast for the fiscal year starting in April to 2.1 per cent, with Governor Haruhiko Kuroda saying slumping oil prices will boost growth.

Kuroda also said the drop in oil could delay inflation reaching the BOJ's 2 per cent target next fiscal year, and some economists see a risk of prices falling briefly this summer.

While the Bank of Japan is projected by economists to boost stimulus later this year, some officials inside the central bank think further monetary easing to shore up inflation would be a counterproductive step for now, according to people familiar with the talks. They are concerned it could trigger declines in the yen that damage consumer confidence.

Economy Minister Akira Amari said employment and income conditions may continue to improve and conditions are falling into place for the economy to turn upward. It's important that increased corporate profits lead to higher pay for workers, he said.

Nissan raised its full-year profit forecast this month, citing the yen and US deliveries. Toyota has said it may have a record profit of more than 2.1 trillion yen for the 12 months ending in March.

- Bloomberg