Japan’s economy unexpectedly contracted in the October-December 2012 quarter, indicating the persistent weakness in the economy and the rising pressure on the Shinzo Abe government to adopt strong measures to boost economic growth.
Gross Domestic Product (GDP) fell 0.1 percent in the October-December from that in the earlier quarter, against the analysts' forecast of a 0.1 percent expansion. The economy, struggling to come out of a mild recession, contracted 0.4 percent in the fourth quarter on a year-on-year basis.
However, the fall in the GDP did not influence the Bank of Japan’s (BoJ) policy board meeting ended Thursday, as the central bank kept the key interest rates unchanged at around 0 to 0.1 percent. The BoJ left the asset purchase fund unchanged at 76tn yen ($813bn).
The world’s third largest economy is battling deflation, falling exports and investment slump, forcing the newly elected Abe government to resort to radical monetary measures to stimulate growth. The government has increased public spending and adapted an export-friendly monetary policy to revive the economy.
The government’s aggressive fiscal stimulus and monetary policy saw the domestic currency weakening against the dollar, boosting the stocks and exports in January. However, the radical measures that drew cautious comments from South Korea and G7 countries over the government’s and the BoJ’s interference in the Forex trade is yet to reflect in the GDP figures.
“These are pre-Abe numbers… He was only prime minister for about the last week of the quarter. We will see a fairly big pick up this year, led by exports recovering on the weaker yen,” Takuji Okubo, chief economist at Japan Macro Advisors, told Bloomberg.
Japan’s new monetary measures have triggered an international debate and the issue is expected to see fierce debates in a meeting of G20 finance ministers and central bankers in Moscow beginning Friday. Japanese policy makers are under pressure to convince the meeting that the new measures are intended to promote growth and not at deliberately weakening the yen to derive the competitive benefit from currency depreciation. The yen has weakened over 15 percent against the dollar in the last two months, prompting the G7 and Japan’s trade partners to warn the country about the possibility of a currency war among the countries.
The lower house of Parliament passed Abe’s $117 billion stimulus package Thursday while the Bank of Japan announced that it would pursue the monetary easing measures to reach its inflation target of 2 percent.
"Japan's economy is expected to level off more or less for the time being, and thereafter, it will return to a moderate recovery path as domestic demand remains resilient partly due to the effects of various economic measures and overseas economies gradually emerge from the deceleration phase," the bank said in a statement.
Japan’s Topix index traded 0.2 percent down to close at 954.88 for the second day on the GDP data and the BoJ decision while the Nikkei 225 Stock Average climbed 0.5 percent to 11,307.28, as the overseas investors resorted to profit-taking.
To contact the editor, e-mail: