Japan's output shrinks faster than expected

What's Down: Japan's economy shrinks by more than expected, setting analysts to wonder whether the Bank of Japan will decide on further monetary easing to weaken the yen at a meeting concluding today.

Japan's economy remains on an unsteady footing nearly a year after the Fukushima earthquake, with output shrinking faster than expected as the yen strengthens against the dollar.

The economy's contraction, blamed in part on a stronger yen, will be on the minds of Bank of Japan officials concluding a meeting today that some economists have speculated will result in further intervention to weaken the yen.

Japanese GDP contracted by an annualised 2.3 per cent during the fourth quarter, as a slump in exports undermined recovery from the earthquake on March 11.

The contraction compared with a median forecast for a 1.3 per cent decline, according to economists polled by Bloomberg. Growth was a revised 7 per cent in the previous quarter, the cabinet office said yesterday in Tokyo.

The decrease in output came as the strong yen hampered exporters' profits. The yen has risen 0.1 per cent to ¥77.60 against the US dollar, though the currency fell 0.3 per cent to ¥102.79 against the euro after Greece's parliament reached agreement on its austerity deal.

Gains in the yen have created a headache for Japanese companies including Sony and Panasonic, which have seen losses after flooding in Thailand hit their manufacturing operations.

However, reconstruction work and an improving US economy would contribute to the Japanese economy in the months ahead, said Yoshimasa Maruyama, the chief economist at Itochu.

"The drop was mainly due to weak exports exacerbated by slowing global demand and the impact of the Thai floods," he said. The central bank might reserve more easing for any "excessive yen gains and a deterioration in overseas economies", Mr Maruyama said.

Motohisa Furukawa, Japan's economy minister, cited the Thai floods and a "weak overseas recovery" for the fourth-quarter contraction, adding that the economy would "continue recovering slowly".

However, he expects that Japan's annual trade deficit last year, the country's first since 1980, would narrow in the year ahead. "We expect a steady increase in exports on a gradual recovery in the global economy."

* Bloomberg News