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Tokyo - Japan's economy contracted by more than first thought in the fourth quarter of 2010 due to weaker-than-expected business investment and private consumption, data showed Thursday.
The economy contracted by a revised 1.3%compared to a year earlier, more than an initial estimate of 1.1%, as expiring subsidies hit car sales, a new tobacco tax sapped cigarette demand and a strong yen hurt exports.
Japanese GDP data is subject to constant revision and the latest was in line with the median forecast in a survey of economists by Dow Jones Newswires and the Nikkei business daily.
The data also confirmed Japan's economy grew 3.9% in 2010 but ceded its 42-year ranking as the world's second-biggest economy to China, which first eclipsed its neighbour in the second quarter.
While Japan was expected to fall behind a surging China in the year, the data underlined the weak state of a Japanese economy burdened by deflation, soft domestic demand and the industrialised world's biggest debt.
Private consumption slipped by a revised 0.8% from the previous quarter, worse than an initial estimate of 0.7%.
Car sales were hit by the expiry of subsidies to encourage the purchase of green vehicles, and cigarette sales were dented by Japan's biggest ever tobacco tax hike.
Exports slipped in the quarter as the yen surged to 15-year highs against the dollar, making Japanese goods more expensive overseas and eroding repatriated profits.
However, analysts expect the economy to rebound in January-March as the rising tide of global recovery lifts Japan, amid a recent pick-up in output and exports.
"We expect the economy to turn around in January-March and stage further recovery in April-June. Monthly data such as export volume and industrial production already point to recovery," said Hiroshi Watanabe at Daiwa Institute of Research.
But there are worries about higher oil and other commodity prices as unrest across the Middle East and North Africa threatens to increase import costs, which manufacturers would be unable to pass onto consumers amid weak domestic demand.
"Surging crude oil prices could hit the economies of emerging countries, which could dampen Japan's export-driven economy," said Watanabe.
"Higher energy prices, a slowdown in emerging markets and the broader world economy, and a stronger yen could deal a triple blow to the Japanese economy."
Pressure is on beleaguered Prime Minister Naoto Kan, who has seen his approval ratings tumble amid a legislative impasse over funding for a $1.1 trillion budget for the next fiscal year beginning April 1.
Ratings agency Standard & Poor's on Tuesday warned that political uncertainty in Japan threatens to weigh on the country's recovery and that growth this year would not come close to pre-crisis levels.
In January the agency cut Japan's credit rating one notch to "AA-" from "AA", saying the government lacked a "coherent strategy" to ease a debt running near 200% of GDP, the highest of any developed nation.
The political future of Kan is now seen to be even more precarious after his high-profile foreign minister Seiji Maehara quit over a donations row.
Kan - Japan's fifth leader in as many years - has said he would not dissolve parliament and call snap elections as repeatedly demanded by the conservative opposition.
The government's immediate hurdle is to pass legislation enabling it to keep itself funded, a critical issue given that borrowing accounts for 48% of what it plans to spend in its primary budget.
But the Liberal Democratic Party (LDP), which controls the upper house, will be able to block them, threatening a government shutdown by the summer.
