Japan's yen has weakened by 15% against the U.S. dollar since November following Tokyo's monetary policy expansion

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Government data shows Japan unexpectedly still stuck in recession last quarter

Data gives fresh defense against charges of recklessly expanding monetary policy

Japanese yen has fallen more than 15% since November against U.S. dollar

Tokyo Financial Times  — 

Japan secured fresh ammunition against charges that it is recklessly expanding its monetary policy and weakening the yen after evidence emerged that the country’s economy was in weaker shape than most experts had believed.

Government data on Thursday that showed Japan unexpectedly remained stuck in recession last quarter could help Japanese officials at what is shaping up to be a contentious meeting of G20 finance ministers and central bankers in Moscow beginning on Friday.

Measures implemented by Japan’s new government to revive the country’s slack economy will be central to a G20 debate over global foreign exchange policy in which some have cast Japan as the instigator in a brewing “currency war”.

The steps – increased public spending and, especially, pressure on the Bank of Japan to adopt a looser monetary stance – have had the effect of significantly weakening the yen, to the delight of Toyota and other Japanese exporters and the irritation of some of Japan’s trading partners.

The yen has fallen more than 15 per cent against the dollar since November, when the election that brought the government to power was called. In response, officials in Europe and Latin America have warned of a potentially dangerous cycle of competitive devaluations should other countries seek to weaken their own currencies to keep their economies competitive.

Japan’s moves have boosted the stock market and should help return the economy to growth this year, economists say. But Thursday’s data indicated that gross domestic product fell 0.1 per cent between October and December, or 0.4 per cent on an annualised basis, the third contraction in as many quarters.

That compared with a median forecast of 0.4 per cent annualised growth in a survey of 32 economists conducted by Bloomberg News.

“Sentiment has changed along with the government, and now the question is how that will be reflected in actual behaviour,” Akira Amari, the economy minister, told reporters in a tacit acknowledgment that stimulus measures could take time to boost the real economy.

Japanese leaders argue the yen’s fall from what had been historically high levels is a side effect, not a goal, of its new policies. Yet they have made little secret of their hope that a weaker currency will help Japanese companies by increasing their export income and – through higher import costs – reversing persistent consumer-price deflation at home.

Mr Amari said it was important that pricier imports “move the deflator in the right direction”.

Thursday’s data, which are preliminary and may ultimately be revised, showed Japan’s worsened terms of trade and a decline in business investment were responsible for extending the recession, the country’s fifth in 15 years.

In addition, revised estimates for previous quarters suggested the slump was already worse than previously reported. GDP shrank at a 3.8 per cent annualised rate in June-September, the government said, compared with an initial estimate of 3.5 per cent.

Economists noted that much has changed since the administration of Shinzo Abe, prime minister, took power in December, and most expect growth to resume this year as a result of fiscal expansion – Mr Abe has launched a Y10.3tn ($110bn) stimulus package, one of Japan’s largest – stronger demand in the US and China and the depreciation of the yen.

Many companies that depend heavily on foreign sales, from carmakers to Japan Tobacco, have raised their profit forecasts for the Japanese accounting year through March.

“With recent high frequency data and sentiment indicators pointing to a pick-up in activity, the worst is over for the Japanese economy,” said Izumi Devalier, an economist at HSBC.

The Bank of Japan, which kept monetary policy unchanged on Thursday after setting a 2 per cent inflation target at its last meeting, said the economy “appears to have stopped weakening”.

Some economists believe the economy will slow or even contract again next year, however, particularly if the government goes ahead with a sales tax increase that it agreed to when it was in opposition under the previous government.

A keenly debated question is whether the effort to reverse deflation will benefit the average Japanese by pushing up wages along with prices. If it does not, a public that has been largely supportive of Mr Abe could turn against his economic agenda, dubbed “Abenomics”.

Mr Abe on Tuesday urged representatives of the country’s major employers’ lobbies to raise wages as profits rebound.

Investors took the downbeat GDP data in their stride. The Nikkei 225 share average closed up 0.5 per cent up on the day, with gains led by technology stocks and industrials. The yen held steady at about 93.30 to the dollar, while the benchmark 10-year government bond yield stayed within the range it has occupied for the first two weeks of this month, at 0.76 per cent.

Additional reporting by Ben McLannahan in Tokyo