Japan Economy Contracts in Setback

TOKYO (AP) -- Japan's economy contracted at a worse than expected 1.4 percent annual pace last quarter as Prime Minister Shinzo Abe's lavish stimulus policies failed to counter anemic consumer demand and sluggish exports.

The preliminary data released Friday, which may be revised, shows the world's third-largest economy stumbling again after a 1.3 percent expansion in the July-September quarter. The economy shrank 0.4 percent in the October-December quarter from the previous quarter.

Despite the lackluster report, Tokyo's main share index, the Nikkei 225, vaulted 7.1 percent to 16,017.94 helped by a weakening in the Japanese yen, hopes of more stimulus and Friday's rally on Wall Street.

The latest contraction, the second in 2015, adds to worries that Abe's strategy for reviving the economy through inflation fueled by massive monetary easing is failing. The slowdown in China, one of Japan's biggest export markets, has been a further hindrance.

Japanese officials have expressed concern over recent market gyrations. The expectation in Tokyo is that a meeting of finance ministers of leading industrial nations next week in Shanghai might help restore some balance to markets that have been out of kilter since China began tweaking its foreign exchange policies in August.

Japan's central bank has already resorted to imposing negative interest rates on some bank deposits it holds to help spur more lending, though cash-rich companies appear generally uninterested in borrowing.

Growth also has been stunted by slow increases in wages, which leave households less inclined to spend. Companies are still drawing down excess capacity built up during decades of fast growth, and have held back on domestic investments, viewing their shrinking and aging home market as less attractive than other faster growing economies in Southeast Asia and elsewhere.

Consumer demand fell more than expected in the last quarter, dipping to a four-year low, offsetting moderate growth in business investment, said Marcel Thieliant of Capital Economics. He expects consumer demand to perk up in coming months, in anticipation of a sales tax hike, to 10 percent from 8 percent, in April 2017.

"However, this should be short-lived, as activity will almost certainly slump once the tax has been raised," Thieliant said. "The upshot is that the Bank of Japan still has plenty of work to do to boost price pressures."

Masamichi Adachi of JP Morgan questioned the preliminary data, which contradict other recent signs of resilient demand. "The fourth quarter decline in consumption is very, very odd against the improvements in other indicators," Adachi said, citing warm winter weather and relatively few consecutive public holidays as possible factors.

He said a 1.4 percent jump in corporate spending was surprising and may reflect businesses upgrading outdated equipment.

Despite the zigzags in growth last year, the economy eked out a 0.4 percent expansion in 2015, better than the flat-lining of 2014. But that pace of growth falls far short of the expansion needed to achieve Abe's goal of a 600 trillion yen ($5.3 trillion) economy by 2020.

If the yen weakens as some economists forecast, corporate profits will likely moderate, adding to pressures on growth.

Abe has been maneuvering ahead of an election for the upper house of Japan's parliament this summer. One possible tactic to reassure voters and boost support for his ruling Liberal Democrats would be to postpone, for a second time, the tax hike meant to help mend tattered public finances.

(KA)