Japan's big GDP drop a worry for PM tax plan

The fourth-quarter drop was twice as big as analysts had forecast and marked the fourth contraction in the last five quarters, ending a year when Japan was also hit by an earthquake, tsunami and the worst nuclear power accident since Chernobyl in 1986.

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Economic output for all of 2011 fell 0.9 percent, the first full-year slide since the global financial crisis in 2009. That translated into heavy losses for some of Japan's biggest exporters, including Sony Corp <6758.T>.

"This is a contraction driven by external demand. Exports have fallen a lot because of a triple shock from Europe, the strong yen and floods in Thailand," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co in Tokyo.

In addition, domestic demand contributed a mere 0.1 percentage point to GDP in October-December compared with 0.9 percent in the third quarter, a worrying sign that the economic boost from rebuilding the earthquake-devastated northeast coast is slow in coming.

Japan has struggled to sustain economic growth since a property-price bubble burst in the early 1990s, prompting years of deflation that persists to this day and huge government borrowing aimed at sparking fresh life into the economy.

Noda hopes to contain the rise in the debt pile --

now already twice the size of the economy -- by doubling the national 5 percent sales tax by late 2015, but has yet to win over a combative opposition and a skeptical public.

Raising the sales tax has been a political taboo for Japan's politicians for years despite experts suggesting any negative economic impact would be short-lived.

With Europe mired in a debt crisis and the United States losing its gold-plated credit rating, the IMF has warned Japan it risks a sudden loss of market trust if it fails to raise the sale tax.

Although the economy is expected to pick up this year, the debt crisis in the euro area and the persistent strength of the yen cloud the outlook for the economy and the sales tax.