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Japan Economy Contracts 0.7%, Less Than Initial Estimate

Japan’s economy contracted less than the government’s initial estimate last quarter, improving prospects for the recovery from last year’s earthquake.

Gross domestic product shrank an annualized 0.7 percent in the three months ended Dec. 31, the Cabinet Office said in Tokyo today, compared with a preliminary estimate of a 2.3 percent contraction. The median forecast of 21 economists surveyed by Bloomberg News was for a 0.6 percent contraction.

The world’s third-biggest economy will grow 1.5 percent this quarter after industrial output and retail sales gained more than economists forecast in January, Barclays Capital estimates. A weakening of the yen since the Bank of Japan (8301) expanded monetary stimulus by announcing additional bond purchases on Feb. 14 may aid exporters, with reconstruction work after the earthquake and tsunami last March also kicking in.

“In the months ahead, it should gradually become clear that the soft patch is over,” Ryutaro Kono, chief economist at BNP Paribas SA in Tokyo, said before the report. “Revived exports and government-driven reconstruction demand should help bolster corporate earnings, leading to improved employment and income conditions for households.”

Some companies are increasing spending to meet rising demand, with Hitachi Construction Machinery Co. (6305), a heavy- equipment maker, planning to invest about 40 billion yen to boost production capacity.

Stimulus Measures

Parliament last month passed Prime Minister Yoshihiko Noda’s fourth extra budget, a package of 2.5 trillion yen ($30.7 billion), and the Bank of Japan expanded monetary stimulus to 65 trillion yen from 55 trillion yen to support growth and drive own the value of the yen.

“Japan’s economy is weathering a slump in external demand” and domestic demand is “solid,” Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd., said before today’s report. “With reconstruction demand kicking in, Japan’s economy will likely return to growth this quarter.”

Japan’s currency has weakened since the BOJ announced extra stimulus and set an inflation goal, trading at 81.16 per dollar as of 7:39 a.m. in Tokyo today compared with a post-World War II high of 75.35 in October.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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