Japan’s economy shrank more than expected in the final quarter of last year. Consumer spending and exports slumped, adding to headaches for policymakers already wary of damage the financial market rout could inflict on a fragile recovery.

Gross domestic product contracted by an annualised 1.4 per cent in October-December. Exports to emerging markets are failing to gain enough momentum to make up for soft domestic demand.

Japan is the world’s third largest economy. Private consumption is especially weak. The economy is at a standstill. Private consumption, which makes up 60 per cent of GDP, fell 0.8 per cent.

With stimulus policies that give big manufacturers windfall profits, the country hopes to generate a positive cycle in which companies raise wages and help boost household spending. But the economy’s fundamentals remain strong. Capital expenditure rose 1.4 per cent. But it is doubtful whether the economy will gain momentum in coming months, with the recent market turbulence and slowing Chinese growth clouding the outlook for corporate profits.

Exports fell 0.9 per cent in October-December after rising 2.6 per cent in the previous quarter, underscoring the pinch companies are already feeling from soft emerging market demand. Domestic demand shaved 0.5 percentage point off GDP growth, while external demand – or net exports – added just 0.1 point.