By Tetsushi Kajimoto and Leika Kihara
TOKYO (Reuters) - Japan's economy shrank slightly in the final quarter of last year, hurt by the expiry of government incentives for car purchases, but analysts expect a recovery this year on stronger exports to China and other parts of fast-growing Asia.
Gross domestic product (GDP) shrank 0.3 percent in October-December from the previous quarter, slightly less than a 0.5 percent fall expected by markets, marking the first contraction in five quarters.
That translated into an annualized contraction of 1.1 percent, far worse than U.S. growth of 3.2 percent in the same quarter, though analysts blame the weakness mostly on a temporary hit to consumption from the expiry in September of government incentives for purchases of low-emission cars.
"Capital expenditure is stronger than we expected. Looking at the BOJ tankan or other surveys, the corporate sector has strong demand for capital expenditure, centered on manufacturing and exports," said Seiji Adachi, senior economist at Deutsche Securities.
"In the first quarter GDP likely returned to growth. External demand will drive growth for this year. Capital expenditure will be the second contributor to growth."
RISKS FROM OVERSEAS, CURRENCIES
Private consumption, which makes up about 60 percent of GDP, fell 0.7 percent from the previous quarter, after a 0.9 percent increase in July-September.
Capital expenditure rose 0.9 percent from the previous quarter, slower than the 1.5 percent pace of gains in July-September.
External demand, or net exports, shaved 0.1 percentage point off GDP, with the yen's spike to a 15-year high against the dollar during the period putting a damper on exports.
"Risks from overseas economies and currency moves need to be closely watched," Economics Minister Kaoru Yosano said after the release of the data.
"While weakness will remain for the time being, Japan's economy is expected to pick up on improvements in overseas economies and effects from government policy steps."
Yosano added that there were risks in how markets will view the government's ability to enact legislation in a divided parliament.
With domestic demand expected to remain weak, a heavy reliance on exports to fuel a recovery also poses a risk if external demand stumbles, analysts added.
Japan's economy is emerging from a lull and is seen recovering moderately this year as exports and factory output pick up on demand from China, the United States and emerging nations.
The encouraging signs prompted the government to upgrade its economic assessment last month and dampened expectations of an imminent monetary easing by the Bank of Japan.
BOJ policymakers meeting this Monday and Tuesday may see no immediate need to ease policy further through an increase of asset purchases and may instead focus on assessing the strength of the recovery.
(Editing by Edmund Klamann & Kim Coghill)
