TOKYO — Japan's economy remained mired in recession late last year, shrinking 0.4 percent in annualized terms for the third straight quarter of contraction on feeble demand both at home and overseas.
The figures Thursday were worse than expected. Many analysts had forecast the economy would emerge from recession in the final quarter of 2012 as the Japanese yen weakened against other major currencies, giving a boost to Japanese export manufacturers.
Prime Minister Shinzo Abe took office in late December with a platform of aggressive spending and monetary stimulus to help get growth back on track. He has lobbied the central bank to set an inflation target of 2 percent, aimed at breaking Japan out of its long bout of deflation, or falling prices, that he says are inhibiting corporate investment and growth.
Chief government spokesman Yoshihide Suga acknowledged the lingering weakness in the economy, while voicing optimism over a global recovery.
"We also expect our nation's economy to make a gradual recovery," he said.
The Bank of Japan left monetary policy unchanged following a two-day meeting that ended Thursday, noting in a statement that "Japan's economy appears to have stopped weakening."
Government spending, housing investment and private consumption appear to be picking up, it said. For the time being, inflation is likely to remain flat since prices are unlikely to increase following last year's jumps in costs for energy and consumer durable goods, the BOJ said.
The current central bank governor, Masaaki Shirakawa, is due to step down on March 19, and Abe is expected to appoint as his successor an expert who favors his more activist approach to monetary policy.
Last year began on an upbeat note with annual growth in the first quarter at 6 percent as strong government spending on reconstruction from the March 2011 tsunami disaster helped spur demand. But the economy slipped back into contraction in the second quarter and deteriorated further as frictions with China over a territorial dispute hammered exports to one of Japan's largest overseas markets.
For all of 2012, the economy grew 2012 after a 0.6 contraction in 2011.
Despite the dismal data for last year, many in Japan expect at least a temporary bump to growth from higher government spending on public works and other programs. An index measuring consumer confidence, released earlier this week, jumped to its highest level since 2007, the biggest ever increase in a single month.
"Overall the rebound in consumer confidence is consistent with other surveys showing that business conditions picked up strongly at the start of the year," Julian Jessop, an economist at Capital Economics in London, said in commentary. "Whether this optimism proves to be justified is another matter, but at least sentiment is clearly improving."
Earlier this week, Abe appealed to businesses to raise wages to help boost domestic demand and carry on momentum from government spending. Data for the fourth quarter showed that private consumption, which accounts for more than two-thirds of Japan's economic activity, rose 0.4 percent in the fourth quarter while housing investment climbed 3.5 percent. Investment by businesses, however, fell 2.6 percent and exports dropped 3.7 percent.
Japan's growth has stagnated since its "bubble economy" burst in the early 1990s, despite massive investments in public works that have pushed its national debt to the highest level among major industrial nations, at more than twice the size of the economy.
The Japanese yen, whose value was long pushed higher against other currencies due to its status as a "safe haven" for investors, has weakened by about 20 percent since October. Though the government has not directly intervened to bring the yen's value lower, its policies have convinced many in the markets that more money will be created, undermining the yen's value.
This has raised concern over the potential for competitive devaluations of other currencies that could undermine growth.
In a statement issued Tuesday, finance ministers and central bank governors of the Group of Seven richest nations – which also includes Japan – insisted they remained committed to exchange rates driven by the market – not government or central bank policies – and would consult closely when it comes to sharp movements in foreign currency markets.
The G-7 statement's lack of any direct criticism of Japan's economic strategy effectively encouraged traders to continue selling the yen. On Thursday, the Japanese currency was trading at about 93.50 yen per U.S. dollar. Earlier in the week it hit a nearly three-year low of 94.40.