The economy contracted in the final three months of 2015 as Japan struggles to break free of a cycle of expansion and contraction despite more than three years of Abenomics.
Gross domestic product shrank an annualized 1.4 percent in the last three months of the year, following a revised 1.3 percent gain in the third quarter, the Cabinet Office said Monday in Tokyo.
Weakness in private consumption was the biggest contributor to the contraction, undermining Prime Minister Shinzo Abe’s policies to spur inflation and growth in the world’s third-largest economy.
“Consumption was weak, even after taking out seasonal factors, as households tightened their purse strings,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo.
“The downside risks to Japan’s economy are likely to increase as the yen’s gains may damp capital spending and exports, and private consumption also is looking weak. There’s no clear driver to support Japan’s economy.”
The yen has appreciated strongly against the dollar this month even after increased monetary stimulus and attempts by government officials to quell its volatile rise.
The economy’s performance has see-sawed over the past three years since Abe returned as prime minister, even as Bank of Japan Gov. Haruhiko Kuroda has ratcheted up monetary easing in concert with government efforts to spur higher wages, consumer spending and investment.
Monday’s report underscores the uneven progress Kuroda and Abe have made and adds to data showing 2015 ended with a bust, as everything from household spending to industrial production and exports tumbled in December.
And that was before this year’s global market rout. Since then, the BOJ has added to its stimulus by introducing negative rates out of concern that market volatility and China’s slowdown have increased the risks of a delay in changing Japan’s “deflationary mindset.”
“There’s a high chance that the BOJ may take additional easing at the next meeting in March,” said Masamichi Adachi, an economist at JPMorgan Chase & Co. and a former central bank official. “With the yen’s gains and stocks’ declines, the downside risks to the BOJ’s outlook on growth and inflation are increasing.”
The slowdown in China — Japan’s largest trading partner — and the sudden appreciation of the currency are concerns for companies and may erode their record profits. Panasonic Corp. cut its profit forecast for the year ending in March as sales of air conditioners and other products fell in China. Hitachi Ltd. slashed its full-year profit forecast on slower sales of construction machinery in China and reduced demand from oil-producing nations hurt by falling energy prices.
The annualized 1.4 percent GDP drop in the final quarter of last year adds to headaches for policymakers already wary of damage the financial market rout could inflict on a fragile recovery.
Monday’s data underscore the challenges Abe faces in dragging the economy out of stagnation, as exports to emerging markets have not gained enough momentum yet to make up for soft domestic demand.
Private consumption, which makes up 60 percent of GDP, fell 0.8 percent, more than a median market forecast for a 0.6 percent decline, a sign that Abe’s stimulus policies have so far failed to nudge households into boosting spending.
In a glimmer of hope for policymakers, however, capital expenditure rose 1.4 percent, confounding market expectations for a 0.2 percent decrease.
While domestic demand shaved 0.5 percentage point off GDP growth, external demand, or net exports, added 0.1 point due to a decline in the value of imports caused by falling oil prices.
The government on Monday had an upbeat assessment of where the economy is headed. It is expected to recover gradually, Chief Cabinet Secretary Yoshihide Suga told a news conference.
The top government spokesman said Japan’s economic fundamentals remain positive on the back of brisk corporate earnings and rising employment.