Japan economy shrinks more than expected, adds to fears of global slowdown

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) - Japan's economy contracted an annualised 1.4 percent in the final quarter of last year as consumer spending slumped, adding to headaches for policymakers already wary of damage the financial market rout could inflict on a fragile recovery.

The data underscores the challenges premier Shinzo Abe faces in dragging the economy out of stagnation, as exports to emerging markets fail to gain enough momentum to make up for soft domestic demand.

Market speculation of additional monetary easing simmers, although the Bank of Japan's policy ammunition appears to be dwindling, analysts say, after it deployed negative interest rates last month.

The contraction in gross domestic product (GDP) was bigger than a median market forecast for a 1.2 percent decline and followed a revised 1.3 percent increase in the previous quarter, Cabinet Office data showed on Monday. It matched a fall marked in April-June last year.

Private consumption, which makes up 60 percent of GDP, fell 0.8 percent, more than a median market forecast for a 0.6 percent decline, a sign Abe's stimulus policies have so far failed to nudge households into boosting spending.

In a glimmer of hope for policymakers, however, capital expenditure rose 1.4 percent, confounding market expectations for a 0.2 percent decrease.

While domestic demand shaved 0.5 percentage point off GDP growth, external demand, or net exports, added 0.1 point due to a decline in the value of imports caused by falling oil prices.

Last month the Bank of Japan unexpectedly cut a benchmark interest rate below zero, stunning investors with another bold move to stimulate the economy as volatile markets threatened its efforts to overcome deflation.

(Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Eric Meijer)