The contraction compared with the median forecast for a 1.3 percent decline in a Bloomberg News survey of 26 economists. Growth was a revised 7 percent in the previous quarter, the Cabinet Office said today in Tokyo.

Today’s report underscores pressure on Bank of Japan officials meeting today and tomorrow to consider more monetary easing as gains in the yen worsen losses for companies from Sony Corp. (6758) to Panasonic Corp. (6752) At the same time, the world’s third- biggest economy may get a boost this quarter from more reconstruction work, fading disruptions from floods in Thailand, and signs of improvements in the U.S.

“The drop was mainly due to weak exports exacerbated by slowing global demand and the impact of the Thai floods,” Yoshimasa Maruyama, chief economist at Itochu Corp. (8001), said in Tokyo today. The central bank may reserve more easing for any “excessive yen gains and a deterioration in overseas economies,” Maruyama said.

The yield on the benchmark 10-year Japanese government bond was little changed at 0.975 percent as of 10:49 a.m. local time, according to data compiled by Bloomberg. The Nikkei 225 Stock Average increased 0.2 percent after Greek lawmakers approved austerity measures to secure a bailout package.

First-Quarter Forecasts

Analyst Junko Nishioka at RBS Securities Japan Ltd. forecasts that GDP will expand at a 1.6 percent pace this quarter and Masamichi Adachi, senior economist at JP Morgan Securities in Tokyo, forecasts 1.8 percent growth.

Economy Minister Motohisa Furukawa cited the Thai floods and a “weak overseas recovery” for the fourth-quarter contraction, adding that the economy will “continue recovering slowly” and is on “an upward swing.” “We expect a steady increase in exports on a gradual recovery in the global economy,” Furukawa said.

The nation’s currency climbed to a postwar record of 75.35 per dollar on Oct. 31, making exports less competitive. It traded at 77.68 as of 10:49 a.m. in Tokyo today.

Net exports, or overseas shipments less imports, subtracted 2.6 percentage points from annualized GDP, today’s report showed. Capital investment rose at a 7.9 percent pace, the first increase in five quarters, and consumer spending rose 1.2 percent, the third straight advance.

‘Severe’ Condition

Bank of Japan Governor Masaaki Shirakawa said last week that the economy is in a “severe” condition because of deflation and gains in the yen. The GDP deflator, a gauge of price trends, fell 1.6 percent in the fourth quarter from a year earlier. In nominal terms, GDP contracted an annualized 3.1 percent from the previous quarter.

Furukawa said yesterday on television that the central bank may need to improve communication of its stance on prices, after the Wall Street Journal cited an unnamed person as saying that the topic would be considered by officials. So far, the BOJ has avoided setting an explicit inflation target.

Panasonic, the world’s largest maker of plasma televisions, said on Feb. 3 that it almost doubled its annual loss forecast to a record 780 billion yen because of the Thailand floods and slowing demand for TVs.

Sony Forecasts Loss

Sony, Japan’s largest consumer-electronics exporter, said on Feb. 2 that it widened its full-year net loss forecast to 220 billion yen from the 90 billion-yen loss predicted in November.

First-quarter growth may get a boost as earthquake reconstruction work kicks in, said Masayuki Kichikawa at Merrill Lynch Japan Securities Co.

Parliament last week passed Prime Minister Yoshihiko Noda’s 2.5 trillion yen ($32 billion) recovery package from the earthquake and tsunami, the fourth supplementary budget since the disaster. The government will allocate 300 billion yen for the eco-friendly car subsidies as part of its fourth extra budget.

“If exports stop falling as the impact of the flooding in Thailand winds down, overall GDP is likely to return to growth,” Kichikawa said before the report.

The International Monetary Fund estimates that Japan’s economy will grow 1.7 percent in 2012, compared with a likely 1.8 percent expansion for the U.S. and an estimated 0.5 percent contraction for the euro area.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

http://www.bloomberg.com/news/2012-02-13/japan-economy-shrinks-more-than-estimated-2-3-as-strong-yen-hits-exports.html

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