Japan's economy shrank more-than-expected in the fourth quarter, hurt by slowing global growth, Thai floods and a strong yen, casting doubt on hopes for a pick up in activity in the first months of 2012.

The 0.6 percent drop was twice as big as analysts had forecast, bad news for Prime Minister Yoshihiko Noda's government which is trying to persuade a skeptical public that Japan is strong enough to double the sales tax without prolonging years of economic torpor.

Japan's fourth contraction in five quarters led to a 0.9 percent drop in output for the whole of 2011, the first full-year slide since the global financial crisis in 2009, which prompted companies, such as Sony Corp <6758.T>, to forecast big cuts in profits or losses.

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.

The slump could add to mounting political pressures on the Bank of Japan to ease monetary policy. The central bank, which begins a two-day meeting on Monday, may decide to set a more specific inflation goal to strengthen its commitment to battling deflation, but is expected to hold off with policy easing.

I don't expect the BOJ to ease policy anytime soon unless the yen spikes further, said Takahide Kiuchi, chief economist at Nomura Securities.

But policymakers are prone to mount pressure on the BOJ to ease policy further and boost inflation in order to proceed with the sales tax hikes.

Noda aims to double the 5 percent sales tax by late 2015 to help reduce the country's mammoth public debt, but has yet to win over the opposition and a skeptical public.

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Graphic http://link.reuters.com/tys56s

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The economy contracted in the fourth quarter of 2010 and the first and second quarter of 2011 before expanding in the July-September quarter by a revised 1.7 percent.

The third-quarter expansion marked a growth spurt from the shock of last year's earthquake and tsunami that devastated northeast coastal areas in March and triggered the world's worst nuclear disaster since Chernobyl in 1986.

On an annualized basis, the economy shrank 2.3 percent in the fourth quarter, 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.

The contraction was largely caused by a slump in exports, and the economy is likely to remain in a soft patch through the first half of this year as exports struggle, capital spending slows and implementation of public works is delayed, said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.

Supply-chain disruptions caused by the Thai floods added to the pressure on Japanese companies that were already fighting against the yen's strength and weakening foreign demand. Net exports shaved 0.6 percentage point off GDP in October-December.

Honda Motor Co <7267.T> slashed its annual profit guidance in January to the lowest level in three years, blaming the Thai floods and the yen.

TV makers Panasonic <6752.T>, Sony <6758.T> and Sharp <6753.T> forecast a combined loss of $17 billion this fiscal year, partly as a result of floods and the yen.

The yen was trading around 77.70 to the dollar on Monday, comfortably below its record highs after Greek parliament's approval of an austerity package on Sunday propped up the euro.

Domestic demand contributed 0.1 percentage point to GDP in the fourth quarter, less than a 0.9 percentage point contribution in the third quarter, reflecting decline in private inventories due in part to the supply chain disruption.

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 ($103.04 billion) in unilateral intervention on October 31, and another 1 trillion yen in early November on undeclared forays into the currency market.

(Additional reporting by Chris Gallagher and Stanley White; Editing by Tomasz Janowski and Neil Fullick)

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