Growth in Japan below expectations

The economy shrank 6.7 per cent in the three months after Prime Minister Shinzo Abe increased the sales tax in April. Photo / AP

Japan's economy expanded less than economists estimated in the fourth quarter, underlining the difficulty in stoking growth while export gains are undermined by weak investment and consumption at home.

Gross domestic product grew at an annualised 2.2 per cent, less than a median forecast for a 3.7 per cent increase. The softness of the rebound shows Prime Minister Shinzo Abe's challenge to revive the world's third-largest economy from two decades of stagnation. Wage rises and increased consumer spending are likely to be pivotal this year to spur activity beyond exports, where the lower yen has contributed to surging profits at companies such as Toyota.

"Japan has clawed its way out of recession but we are looking for a modest acceleration in growth," said Izumi Devalier, an economist at HSBC Holdings in Hong Kong.

"This is not the picture of an economy that has a lot of spark behind it."

The yen has weakened about 28 per cent against the US dollar since Abe took power in December 2012 with a pledge to revive the economy with his Abenomics reflation policies.

While the lower Japanese currency helped to boost exporters' earnings, it also increased import costs and bruised consumer sentiment.

The economy shrank 6.7 per cent in the three months after Abe increased the sales tax in April, and dropped 2.3 per cent in the third quarter, according to yesterday's revised data.

Taken for 2014 as a whole, GDP came to a standstill after two years of expansion, reflecting the blow from the tax hike as the Government tries to contain the world's heaviest debt burden.

Business spending rose 0.1 per cent in the three months ended December 31 from the previous quarter, when it dropped 0.1 per cent, according to the data released by the Cabinet Office in Tokyo. Private consumption increased 0.3 per cent.

Domestic demand is set to remain weak, economists at Capital Economics wrote in a note. Besides a temporary boost from bonuses, wages are barely growing.

- Bloomberg