The world's number-three economy, Japan, contracted 2.3 percent in the final quarter of 2011, the Cabinet Office announced in Tokyo on Monday. It shrank 0.6 percent quarter-on-quarter and 0.9 percent through last year.

"The contractions came after external demand was significantly reduced due to the one-off factor of the Thai flooding, which came amid the weak recovery of economies overseas," said Economic and Fiscal Policy Minister Motohisa Furukawa in a statement.

Severe fall flooding in Thailand disrupted global supply chains and impacted Japanese manufacturers. Worst hit were electronics suppliers and automakers, just as they were about to recover from the quake-tsunami disaster in March.

The marked drop in growth was also attributed to a strong yen, which is still sitting close to record highs against the dollar and is also putting pressure on the euro.

Budgetary woes

Sluggish growth is standing in the way of speedy budget consolidation in Japan. Public debt is already twice as high as the annual growth domestic product. The International Monetary Fund (IMF) warned in a statement that Japan could lose market confidence if it didn't raise VAT and generally increase revenue.

But analysts are seeing a silver lining, and are expecting a rebound amid continuing and new post-disaster reconstruction programs organized by the state.

"Forthcoming public programs to rebuild tsunami-wrecked areas will help kick-start the economy, which should return to growth in the July-September quarter of 2012," said Yasunari Ueno, chief market economist at Mizuho Securities.

Japan's latest economic data came as the country's key export markets - the United States and Europe - continue to struggle with huge debt problems and unemployment.

hg/cmk (AFP, Reuters)