(REUTERS) -- Japan's economy shrank a bigger-than-expected 0.6 percent in October-December, hurt by slowing global growth, Thai floods and a strong yen, casting doubt about expectations that growth will resume this quarter as Europe's debt crisis clouds the outlook.
Domestic demand also weakened in a worrying sign that the economic boost from rebuilding the country's earthquake-devastated northeast coast is slow to materialize.
In the whole of 2011 economic output fell 0.9 percent, marking the first calendar year contraction since the global financial crisis in 2009.
The weak reading could add to mounting political pressures on the Bank of Japan to ease policy further to shore up the world's third largest economy with policymakers grappling with a persistent deflation and a strong yen.
The gross domestic product data came hours before the central bank kicks off its two-day policy meeting at which it may decide it needs to act by weighing further easing or setting a more specific inflation goal.
The contraction came just as the economy was recuperating from a slump caused by last year's earthquake and tsunami that devastated the northeast coastal areas in March and triggered the world's worst nuclear disaster in Chernobyl in 1986.
It compared with economists' median forecast for a drop of 0.3 percent and followed a revised 1.7 percent expansion registered in July-September, which was the first expansion in four quarters.
On an annualized basis, the economy shrank 2.3 percent, against a 1.4 percent contraction expected, data from the Cabinet Office showed. That also compares with an annualized expansion of 2.8 percent in the United States in the same quarter.
Domestic demand contributed 0.1 percent point to GDP in the fourth quarter, less than a 0.9 percent point contribution in the third quarter.
Net exports shaved 0.6 percent point off GDP in October-December, due to slackening global demand and the supply-chain disruption caused by Thai floods, illustrating the plight of an export-reliant economy.
Personal consumption, which accounts for roughly 60 percent of GDP, rose 0.3 percent, compared with a 0.9 percent rise expected, and up for the third consecutive quarter.
In one positive sign, private capital spending grew 1.9 percent, against a 0.2 percent rise expected.
The government and the central bank as well as private economists expect Japan's economy to resume moderate growth this year thanks to post-disaster reconstruction efforts and emerging economies' growth.
Still, Europe's sovereign debt crisis and a persistently strong yen cloud the outlook.
Japan spent a record 8 trillion yen ($103.47 billion) in unilateral intervention on October 31, and another 1 trillion yen in early November on undeclared forays into the currency market.
Pressure is mounting on the BOJ to respond with action to the Fed's historic step of setting an inflation target and its extended commitment to near-zero rates.
Policy decision by the BOJ on Tuesday will be a close call, with some bankers still reluctant to use their limited policy options and see no clear justification to act now with the yen off its record highs.
(Additional reporting by Chris Gallagher; Writing by Stanley White; Editing by Tomasz Janowski)