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-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 on Monday. 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.
Market speculation of additional monetary easing simmers, although the Bank of Japan's policy ammunition appears to be dwindling, analysts say, after it deployed negative interest rates last month.
"Private consumption is especially weak. The economy is at a standstill," said Junko Nishioka, chief economist at Sumitomo Mitsui Banking.
"It's a matter of time before the BOJ and the government will take additional stimulus measures," she said, predicting the central bank will ease policy again as early as next month.
With his stimulus policies that gave big manufacturers windfall profits, Abe had hoped to generate a positive cycle in which companies raise wages and help boost household spending.
Instead the data showed that 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.
Economy Minister Nobuteru Ishihara told reporters after the data was issued that the economy would head for a moderate recovery as its fundamentals remained strong.
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 the recent market turbulence and slowing Chinese growth clouding the outlook for corporate profits.
Exports fell 0.9 per cent in October-December after rising 2.6 per cent in the previous quarter, underscoring the pinch companies are already feeling from soft emerging market demand.
The economy is at a standstill.
Domestic demand shaved 0.5 per centage point off GDP growth, while external demand - or net exports - added just 0.1 point.
Last month the BOJ unexpectedly cut a benchmark interest rate below zero, stunning investors with another bold move to stimulate the economy as volatile markets threatened its efforts to overcome deflation.
But the shock move has failed to boost Tokyo stock prices or weaken the yen as Japanese markets remained at the mercy of a global equity sell-off, bolstering a view among investors that the BOJ is running out of policy options.