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The economy eked out a marginal increase of 0.5 percent in the October-December period from the previous quarter, marking the fourth consecutive quarter of growth, the Cabinet Office said Friday.

Economists said, however, that uncertainty over the economy has already caused people to reduce consumption and will deal a blow to the country’s nascent recovery later this year.

The real gross domestic product — the total value of goods and services within a country’s borders — rose 0.5 percent in the October-December quarter from the previous quarter, expanding at an annualized rate of 2 percent.

The figures are largely supported by exports amid strong overseas demand. Exports continued to rise, marking 4.5 percent growth in the quarter, up sharply from a 0.1 percent expansion in the July-September quarter. Imports rose 1.9 percent, compared with a 2.8 percent increase the previous quarter.

The data also show the seriousness of the country’s deflation problem. The GDP deflator — a measure of the economy’s overall inflation rate — in the same quarter slipped 2.2 percent from a year earlier, recording the 19th consecutive quarter of decline.

The nominal GDP, including the deflator factor, fell 0.1 percent in the October-December period from the previous quarter, which would translate into a minus 0.5 percent annualized rate.

Chief Cabinet Secretary Yasuo Fukuda said that although the GDP had been helped by external demand in the October-December quarter, he was still cautious about the future.

“The nominal GDP was a minus figure and we cannot be optimistic,” the top government spokesman said at a news conference. “We will accelerate reforms in the areas of finance, taxes and expenditures.”

To achieve the government’s 0.9 percent expansion target in fiscal 2002, the real GDP growth rate needs to be at least minus 3.3 percent in the next quarter, the Cabinet Office said.

Economists said Friday’s figures indicate the economy will probably remain feeble this year, adding that the government has so far failed to take effective steps to stop the deflationary trend. This will slow manufacturing, increase unemployment and further dampen public consumption.

“The Japanese economy has probably slipped into a retreating phase already,” said Hiromichi Shirakawa, chief economist at UBS Warburg Ltd. Japan.

He expects Japan’s GDP to shrink this year due to a slowdown in personal spending, which had been one of the few bright spots in the economy, as a sharp reduction in bonuses in 2002 caused people to tighten their purse strings.

Friday’s data show that private consumption increased 0.1 percent in the quarter, but dropped sharply from 0.8 percent July-September growth.

Employees’ nominal wages dropped 0.1 percent in the October-December period, which was the eighth consecutive quarter of decline, it added. The government announced last month that the nation’s unemployment rate hit a record 5.5 percent in December.

Hideki Matsumura, senior economist at Japan Research Institute, Ltd., said it is essential that the government take steps to shore up the business sector as companies inevitably look to cut labor costs when the business outlook is bleak.

He also said uncertainty over the global economy is overshadowing the future of the Japanese economy.

“Any setback in the U.S. economy in the future would hurt the Asian economy, which has supported Japan’s exports to the region,” Matsumura said.

Caution expressed

Business leaders expressed caution Friday over the latest gross domestic product data, saying it implies the economy is on a downtrend.

“The plus margin is getting smaller and shows the economy is slowing down,” said Hiroshi Okuda, chairman of the Japan Business Federation (Nippon Keidanren).

“There is the increased risk of the economy faltering,” said Nobuo Yamaguchi, chairman of the Japan Chamber of Commerce and Industry.

Data released by the Cabinet Office showed the GDP in the October-December period rose 0.5 percent for an annualized expansion of 2 percent for the fourth straight quarter of growth.

While the GDP grew in real terms, it still showed the economy was slowing after a revised 0.7 percent growth in the July-September period and a 1.3 percent gain in the April-June quarter.

Yamaguchi criticized the government’s economic policies.

“The economy as a whole is shrinking because of policies that have placed priority on reconstruction of finances and which consequently have accelerated deflation,” he said.

Yamaguchi urged the government to take steps, including fiscal spending, to fight deflation.

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