Japan's economy grew less than initially estimated in the fourth quarter and a broad gauge of price trends hit a record negative reading, adding to pressure on the Bank of Japan to ease monetary policy further next week.
While solid exports to Asia will continue to support growth, the economy may slow on cuts in public works and as the impact of government subsidies on energy-efficient goods starts to wane, analysts say.
The contribution of domestic demand was also revised down from preliminary data that showed it was the biggest driver of growth. The change was partly due to a fall in inventories, which could be a positive as it could point to higher factory output in the future.
Some economists say domestic demand and overall growth would be stronger if it were not for the impact of deflation, and that bolsters calls for the central bank to do more.
"The revised GDP data doesn't change the prospects of the economy slowing down towards the summer, chiefly because the boost from government stimulus on private consumption is likely to peter out," said Seiji Shiraishi, chief economist at HSBC Securities Japan.
"Although the government is reportedly set to upgrade its economic assessment, the Bank of Japan is entirely focused on price moves and probably on government pressure, so it is expected to take further easing steps."
The economy grew 0.9 per cent in the October-December quarter, slower than the preliminary estimate of 1.1 per cent and a median market forecast of 1.0 per cent, as capital spending rose less than initially reported and with private inventories subtracted from growth, data by the Cabinet Office showed today.
Japan's expansion in the fourth quarter was faster than the 0.1 per cent growth in the European Union but slower than a 1.4 per cent expansion in the United States in the same period.
Capital expenditure rose 0.9 per cent in the quarter, less than the preliminary 1.0 per cent rise as manufacturers saddled with excess capacity and service sector firms worried about domestic demand are slow to increase spending.
Private inventories shaved 0.1 percentage point off GDP, compared with a preliminary reading of a 0.1 percentage point contribution, as inventories of cars and steel products were less than initially estimated.
Domestic demand contributed 0.4 percentage point to growth, down from an initial estimate of 0.6 point. The contribution from external demand was unchanged at 0.5 percentage point.
On an annualised basis, Japan's economy expanded 3.8 per cent, against the initial reading of 4.6 per cent and a median market forecast of 4.1 per cent.
The deflator, a statistical device used to adjust data in nominal GDP to reflect overall price levels, stood at minus 2.8 per cent, the biggest negative reading on record, in a sign deflation shows no signs of abating. It compared with a preliminary reading of minus 3.0 per cent.
The Bank of Japan is leaning towards easing monetary policy again at its next policy meeting on March 16-17th, sources familiar with the central bank's thinking said, but there is disagreement among the seven policymakers on its board on how to justify such a move.
Finance minister Naoto Kan has said he hopes Japan will escape deflation by the end of this year but economists see that as impossible with the economy still suffering a big overhang of excess capacity.
The government is likely to upgrade its assessment of Japan's economy in its monthly report for March in the wake of solid exports to China, although it will maintain its warning that the country remains in deflation, the Nikkei newspaper reported today.
Reuters