Japan GDP shrinks more than expected


Japan's stocks rose after the figures were announced, even though the fourth-quarter slump was worse than expected

By Alex Frew McMillan and wire reports

TOKYO, Japan (CNN) -- Japan's gross domestic product dropped more than expected on Friday, fresh figures show.

The Japanese economy shrank 1.2 percent in the fourth quarter, the cabinet office reported. That was the third straight monthly drop.

Many economists had been revising their forecasts toward a decline of 1 percent.

Despite the size of the drop, markets took it as a positive sign. The benchmark Nikkei index is at 11,940.84, up 2.51 percent, in late afternoon trade. The broader Topix index is up 1.45 percent at 1,114.23.

The yen has also strengthened in recent days, breaking below 130 to the dollar on Thursday and appreciating by more than 2.5 yen. It traded recently in Tokyo at 127.65.

But experts advise caution.

"Although a weak figure was anticipated, the disappointing figures still may increase pressure on the government to provide more stimulus in its second installment of the deflation counter-measures to be announced as early as April," economist Ryo Hino of J.P. Morgan wrote in a report.

"Hence, comments from policymakers warrant further attention," he added.

Commerz Securities chief economist in Tokyo, Ron Bevacqua, told CNN that while exports were turning up, there was still no domestic demand in Japan.

He said while all the cyclical indicators were pointing upward, the only really good news was from the U.S. This was driving the indicators up.

More capital spending needed

In general, economists warn against paying too much attention to gross domestic product figures out of Japan. They say the statistics are more of a lagging, or late, indicator than a leading one and are too erratic to make them reliable.

In Asia, economists often look at other indicators to interpret whether an economy is in recession or not.

The yen continued to strengthen on Friday, getting as low as 127.31 to the U.S. dollar, then took a breather as Finance Minister Masajuro Shiokawa said the moves were "unnatural."

Japan got a jolt of good news on Friday from its domestic wholesale prices. They rose 0.1 percent for February, over January. They were down 1.3 percent over the previous year.

Finance Minister Masajuro Shiokawa said on Friday that companies would need to spend more money to help Japan's moribund economy recover.

"We need to see more active capital expenditure for the economy to recover," he said in parliament.

"The government alone cannot be effective," he added.

'Losing the battle'

Capital spending fell as much as it ever has, under the current way Japan's gross domestic product is calculated.

Bevacqua told CNN he expected the decline in capital spending to bottom out at the end of the year.

But he noted that Prime Minister Junichiro Koizumi was "losing the battle" against the old guard Liberal Democratic Party politicians who saw public spending as the only way to respond to economic difficulties.

He said the weak GDP numbers gave "further ammunition" to the old guard in pressing for more spending.