Tokyo, February 15

Japan’s economy shrank more than expected in the final quarter of last year as consumer spending and exports slumped, adding to headaches for policymakers already wary of damage the financial market rout could inflict on a fragile recovery.

Gross domestic product contracted by an annualised 1.4 per cent in October to December, bigger than a market forecast for a 1.2 per cent decline and matching a fall marked in the second quarter of last year, Cabinet Office data showed today. It

followed a revised 1.3 per cent increase in the previous quarter.

The data underscores the challenges Premier Shinzo Abe faces in dragging the world’s third-largest economy out of stagnation, as exports to emerging markets fail to gain enough momentum to make up for soft domestic demand.

Abe sought to reassure markets that Tokyo is ready to stem excessive market volatility that could undermine the wealth effect delivered by his stimulus policies.

“As we have agreed at G-7 and G-20, sudden currency moves are undesirable. I want the finance minister to closely monitor the situation and respond with appropriate measures as needed,” he told parliament today.

Market speculation of additional monetary easing simmers, although the Bank of Japan (BoJ)’s policy ammunition appears to be dwindling, analysts say.

With his stimulus policies that gave big manufacturers windfall profits, Abe had hoped to generate a positive cycle in which firms raise wages and help boost household spending. Instead data showed private consumption, which makes up 60 per cent of GDP, fell 0.8 per cent, exceeding market forecasts of a 0.6 per cent decline.

Since Abe took power three years ago, private consumption has shrank by roughly 1.5 trillion yen to 306.5 trillion yen. The economy grew an average 0.68 per cent since Abe’s administration took office in 2013, below a 1.8 per cent increase during the opposition Democratic Party’s reign.

Offering some hope for policymakers, capital expenditure rose 1.4 per cent, confounding market expectations for a 0.2 per cent decrease.

But analysts doubt whether the economy will gain momentum in coming months, with recent market turbulence and slowing Chinese growth clouding the outlook for corporate profits.