Japan's GDP shrinks 2.3% in fourth quarter Japan's economy shrank for the third time in four quarters between October and December, after floods in Thailand damaged production and a strong yen and subdued overseas demand hurt exports. Government figures on Monday showed that real gross domestic product fell an annualised 2.3 per cent in the fourth quarter, much worse than consensus forecasts of a 1.3 per cent decline. On a quarter-on-quarter basis, output fell 0.6 per cent, dragged down by exports - which fell 3.1 per cent - following a 1.7 per cent rise in the third quarter. IN Japan The nation's currency has eased only a little since hitting a postwar high of Y75.35 against the US dollar in October. The trade balance for 2011 showed a deficit of Y2.5tn ($32bn) - the first annual deficit in 31 years - as exports to the eurozone and Asia, including China, fell sharply. The future picture is brighter, however, thanks in large part to reconstruction demand in the quake-hit region of Tohoku. Machinery orders in the three months to December increased by 10 per cent from September, suggesting that industrial production in January and February could recover to a level reached before the disasters last March, according to the Ministry of Economy, Trade and Industry. Real GDP growth for the full calendar year is expected at 1.7 per cent, according to Bloomberg. While that is well short of the 2.2 per cent global average, it is more than double the average growth rate Japan has achieved since 1995. "Provided that the US and global economy can continue to grow, a recovery in Japan's exports on top of reconstruction demand could allow the economy to make up for the slack seen late last year," said Takuji Aida, an economist at UBS, before the release of Monday's data. Meanwhile, the Bank of Japan, which concludes a two-day policy meeting on Tuesday, will be under pressure to do more to shake off the country's persistent state of deflation. Opposition party members last month called for the BoJ to emulate the US Federal Reserve's decision to set a firm inflation target of 2 per cent. The BoJ, however, prefers to aim for what it calls "price stability," whereby the year-on-year rate of change in the core consumer price index - which includes all items, excluding fresh food - is between zero and 2 per cent, centring around 1 per cent. Nationwide core CPI fell 0.1 per cent, year on year, in December, the third straight month of decline. Prices haven't risen at least 1 per cent for any year since 1997.