Japan's economy shrank for a third straight quarter in October-December, data showed Thursday, leaving it mired in recession owing to weak export demand, but analysts pointed to brighter times ahead.
Tokyo logged a 0.1 percent contraction in October-December from the previous three months, indicating the work ahead for Shinzo Abe's new government as it looks to kickstart growth while fending off claims it is manipulating the yen to boost exports.
Financial turmoil in key market Europe, a strong yen and a diplomatic row with China have hurt Japan, frustrating hopes that it would cement a recovery from the 2011 quake-tsunami disaster that battered domestic demand and output.
The country logged growth of 1.9 percent for 2012 compared with the previous year.
Japan has seen a mixed bag of economic data lately as factory output has risen but the export picture has been cloudy, with a record trade deficit for 2012.
However, the yen has weakened in recent months, which helps exporters' competitiveness and has provided a much-needed boost to their latest earnings results.
"While the figures were worse than expected, they aren't too bad -- we could see it rebound in the future," said Hideki Matsumura, senior economist at Japan Research Institute, referring to the quarterly results.
Key to Japan's outlook was demand in the United States and an easing in the debt crises in Europe, while some of the nation's biggest firms have said a slump in shipments stemming from the diplomatic row with China appears to be softening.
Tokyo's trade deficit with Beijing doubled to a record 3.52 trillion yen ($38 billion) last year, as the feud over a set of islands in the East China Sea spurred a consumer boycott of Japanese goods in China.
The dispute flared in September after Tokyo nationalised the Senkakus, which Beijing refers to as the Diaoyu islands.
Last month, the Bank of Japan (BoJ), following government pressure, adopted a two percent inflation target to beat the deflation that has haunted the economy for years, while it also set out plans for indefinite monetary easing.
However, the new aggressive policy followed by premier Abe -- which has seen the yen tumble about 17 percent since November -- has raised eyebrows overseas.
The unit's steep decline has stoked criticism, particularly from Europe, that Tokyo is engineering a devaluation to boost its exports that risks setting off a global currency war.
But Japan dismisses the charges and markets have cheered Abe's strong stand, betting his administration may succeed in stoking the strong growth that eluded previous administrations.
The central bank wraps up a two-day policy meeting later Thursday with markets waiting to see if it will launch any fresh policy action.
Expectations for an improving picture overseas have prompted the BoJ to raise its economic growth forecast for the fiscal year to March 2014, to 2.3 percent from a previous 1.6 percent estimate.
The government has issued a similarly rosy growth estimate as it approved a $1.02 trillion annual budget that is aimed at pulling the economy out of the doldrums with big spending on public works.
"Housing and public works investments supported the economy," Naoki Murakami, chief economist at Tokyo brokerage Monex, said in a note.
"The economy will rise from (its) bottom with a recovery in the global economy and a turnaround in monetary policy. Growth in January-March is likely to be above one percent at an annualised rate."
-- Dow Jones Newswires contributed to this report --