Japan's economy shrank at end of 2010

The Japanese economy contracted at the end of last year.

The Cabinet Office reported today that Japan's real gross domestic product decreased 0.3 percent in the fourth quarter of 2010. It had grown 0.8 percent in the third quarter.

The decline in GDP was mostly the result of a fall in domestic demand. Household consumption in particular decreased 0.8 percent in the fourth quarter, a sharp turnaround from the 0.9 percent increase in the third quarter, after the government ended or reduced purchase incentive programmes in the fourth quarter. Domestic demand contributed minus 0.2 percent to GDP growth in the fourth quarter.

Net exports contributed minus 0.1 percent to GDP growth in the fourth quarter, the second consecutive quarter that it had detracted from GDP growth.

The contraction in the economy may prove to be a short-term phenomenon. The sharp fall in household consumption, being related to the timing of government programmes, is unlikely to be repeated in the first quarter. And exports, which had fallen back after hitting a post-recession peak in July last year, may be resuming growth after bouncing back to record a new post-recession peak in December.

Also, both the coincident and leading indices of business conditions compiled by the Economic and Social Research Institute bottomed in October and rose in the subsequent two months.

So despite the contraction in the fourth quarter, the Japanese economy may already be resuming its recovery.