Japanese economy contracts for third straight quarter

Japan's economy contracted for the third straight quarter in the three months to end of December, underlining the challenges the new government faces in reviving growth.

The economy shrank 0.1% compared with the previous three months. Most analysts had forecast growth of 0.1%. That is equivalent to an annualised dip of 0.4% in gross domestic product. Japan's growth has been hurt by a drop in exports to key markets as well as subdued domestic consumption.

"The biggest reason for the decline in gross domestic product (GDP) is external demand was weak and domestic demand did not recover as quickly as we thought," said Shuji Tonouchi of Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Meanwhile, Japan's central bank, the Bank of Japan (BOJ) left its interest rates unchanged at between zero to 0.1%.

However, it rejected a proposal to keep the rates at that level until its target of achieving a 2% rate of inflation is met. The central bank had set that target last month, in an attempt to spur domestic demand.

Japan has been fighting deflation, or falling prices, for best part of the past decade.

That has hurt domestic demand as consumers tend to put off purchases in the hope of getting a cheaper and better deal later on.

Many analysts have said that stoking inflation is key to spurring Japan's domestic consumption.