Japan's economy contracts for third straight quarter

japan gdp

It's more bad news for Japan.

The world's third-largest economy failed last quarter to pull out of a mild recession, further raising prospects of aggressive fiscal and monetary stimulus.

Data from Japan's Cabinet Office showed the economy contracted at an annual rate of 0.4% from October to December -- a steeper slowdown than economists had expected and the third consecutive quarter of negative growth.

Exports, a primary driver of Japan's economy, remain in a slump, and the country's trade deficit is ballooning.

Later Thursday, the country's central bank will announce its latest policy decision. The bank, which is not expected to announce any major changes to monetary policy, is under intense political pressure.

Newly appointed Prime Minister Shinzo Abe has been the bank's most vocal antagonist, deploying supercharged rhetoric in an attempt to steer the country's central bank into aggressive easing.

The bank has responded to the pressure, pledging to make "open-ended" purchases of government bonds and raising its inflation target to 2% from 1%.

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Abe's government has also put in place an $117 billion fiscal stimulus package that will increase spending on public works, disaster recovery and provide aid to smaller businesses.

The actions have precipitated a sharp fall in the value of the yen, which has weakened by nearly 20% against the U.S. dollar since the beginning of October.

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Japanese exporters rank prominently among the beneficiaries of Abe's policies and the yen's decline.

A weaker currency cheapens the price of a country's exports, making them more attractive to international buyers.

Last week, the Nikkei rose to its highest level in more than four years, riding a wave of optimism that has coincided with Abe's rising political fortunes. While the rally may yet have a little further to run, stocks have probably seen most of the gains they can expect from the currency move.

Still, the country's debt-to-GDP ratio is the highest in the world, limiting further stimulus options for the government.

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