Japan's economy shrank in the final three months of 2011 as exports suffered, data showed Monday, but analysts say disaster reconstruction projects at home are likely to stave off a new recession.
On an annualised basis, the economy contracted a worse-than-expected 2.3 percent in the October-December quarter, a sharp drop on the previous quarter's growth, owing to the strong yen, falling overseas demand and flooding in Thailand that hammered production.
The world's number-three economy shrank 0.6 percent quarter-on-quarter, the Cabinet Office said, and 0.9 percent through 2011. It grew 4.4 percent in 2010.
However, ministers and analysts tipped a rebound this year as government reconstruction programmes after the March 11 disasters begin to bear fruit.
Severe flooding in Thailand in the autumn disrupted global supply chains and the production capability of Japanese manufacturers, particularly electronics suppliers and automakers, just as they were recovering from the quake-tsunami disaster at home.
The floods compounded Japan Inc.'s struggles against a continually strong yen, which is sitting close to record highs against the dollar and is also putting pressure on the euro.
The data came as the country's key export markets in the United States and Europe struggle with huge debt troubles and unemployment, struggling to get back on track after the global downturn.
The contraction was more severe than the annualised 1.6 percent drop forecast by economists surveyed by Dow Jones Newswires.
It also sharply contrasted to a revised quarter-on-quarter growth of annualised 7.0 percent for the July-September period, which was in part boosted by post-March 11 reconstruction.
Annualised growth rates reflect the status of the economic trend in a given period, extrapolated as if it had continued for a year. The result allows comparison of data for different time periods.
Economic and Fiscal Policy Minister Motohisa Furukawa said that despite Monday's figures, the economy continued its "upward movement" with exports and production improving month-on-month in December.
The contraction "came after external demand was significantly reduced due to the one-off factor of the Thai flooding, which came amid the weak recovery of economies overseas", he said in a statement.
"Having taken into account (the recovery of exports and production in December) and the overall economic situation, it is assessed that upward movement is continuing," he said.
Forthcoming public programmes to rebuild tsunami-wrecked areas will help buoy the economy, which should return to growth in the July-September quarter of 2012, said Yasunari Ueno, chief market economist at Mizuho Securities.
"Public investment is expected to increase in the April-June quarter thanks to effects of the extra budget, while exports are also expected to recover in the July-September period as overseas economies are likely to regain momentum gradually," he said.
Slow implementation of a supplementary budget contributed to the latest contraction, said Yuichiro Nagai, an economist at Barclays Capital, who told Dow Jones Newswires: "Our view that Japan's economy will start expanding from the first quarter of this year remains unchanged."
The government in December downgraded growth forecasts for the year to March 2012 to a contraction of 0.1 percent but expected a 2.2 percent expansion in the year from April.
The data had little effect on Japanese markets, with the Nikkei 225 index closing 0.58 percent higher.