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Japan economy shrinks during Q4 in body blow for 'Abenomics'

Update: February, 15/2016 - 11:00

TOKYO — Japan's economy contracted in the last quarter of 2015, official data showed Monday, dealing another blow to Prime Minister Shinzo Abe's faltering bid to kickstart the world's number three economy.

Weak consumer spending weighed on the vast economy which shrank 0.4 per cent in the October-December quarter – or an annualised 1.4 per cent drop.

That was Japan's second quarterly contraction in 2015 although GDP ticked up a tepid 0.4 per cent for the whole year, underscoring Tokyo's challenges in slaying deflation and cementing a sustained recovery.

Japan's bid to revive its once-soaring economy, dubbed Abenomics, has also been shaken by a bloodbath on equity markets since the start of the year and a resurgent yen that threatens to dent Japan Inc.'s bottom line.

Tokyo's benchmark Nikkei 225 index surged more than five per cent Monday morning as the yen weakened and overseas markets rallied.

But the wild volatility prompted Abe on Friday to meet with Japan's central bank chief Haruhiko Kuroda for an emergency meeting.

As his growth programme wobbles and the Bank of Japan struggles to hit an ambitious two-per cent inflation target, the prime minister must decide whether to follow through with another sales tax hike next year.

The rise is seen as key to containing a spiralling national debt, but it could further dent spending.

"Japan's economy shrank last quarter for the second time over the past year," said Marcel Thieliant from research house Capital Economics.

"While activity is set to pick up in coming months ahead of next year's sales tax hike, the bigger picture is that spare capacity is not shrinking fast enough to reach the Bank of Japan's two per cent inflation target on a sustainable basis."

Abe's growth plan – big government spending, central bank monetary easing and reforms to the highly regulated economy – appeared to bear fruit at first.

The yen weakened sharply, which boosted Japanese exporters' profits and sparked a huge stock market rally.

Tax hike question

But sustained growth has been elusive and Abe's efforts to overhaul the economy have been widely criticised as half-hearted.

"The government plans to raise the consumption tax in 2017, so we will probably see an increase in spending later this year ahead of the hike," said Taro Saito, senior economist at NLI Research Institute.

"But I don't think we should expect the fundamentals of the Japanese economy to recover easily."

Before Monday's rally, the Nikkei was down about 30 per cent from its summer highs, while the yen soared nearly four per cent on the dollar last week.

A stronger yen dents the profitability of Japanese firms doing business overseas.

That could dash Abe's hopes that the companies which benefited most from his policies will lift employee wages during annual spring labour talks.

" (The stronger yen) will lower corporate profits and could reduce firms' willingness to lift wages, thus further delaying the pick-up in earnings required to hit the Bank of Japan's inflation target," Thieliant said.

The huge forex moves have sparked speculation that the central bank will intervene in markets for the first time since 2011 to stem the yen's rise – just weeks after the BoJ adopted a widely-panned negative interest rate policy.

The shock move was aimed at penalising banks for storing excess reserves at the BoJ rather than making loans which could boost growth.

But many observers disparaged the move as desperate, while the safe-haven yen soared on the back of fears about a slowdown in the global economy. — AFP

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