Japan stock market traded low as the yen surged after the Bank of Japan decided against any extra monetary easing.
The Bank of Japan (BoJ) kept interest rates unchanged despite coming under pressure to take further action.
The central bank had introduced negative rates in January but this failed to provide a much needed boost for the economy.
The Nikkei 225 index finished 3.6% lower at 16,666.05. New economic data also showed a slip back into deflation while industrial production expanded.
Japan has for years been trying to boost its economy and end a period of stifling deflation.
One way to try to achieve this is by monetary policy, which is one of PM Shinzo Abe’s three key “Abenomics” policies to turn around the economy.
However, even negative rates – meaning commercial banks will be charged if they deposit money with the central bank – have not trickled down to get banks to lend more and companies and people to invest or spend more.
Inflation is still far off the 2% target.
The BoJ’s decision to hold rates also sent the yen currency soaring, which is likely to have a negative effect on the crucial export sector.
The yen rose nearly 2% against the dollar, with one dollar worth 109.33 yen.
The Japanese economy contracted by 0.4% in Q4 of 2015 compared with the previous quarter, official figures show.
Expectations for the numbers were for a quarterly contraction of 0.3%.
Weaker domestic demand, together with slower investment in housing, contributed to the disappointing numbers.
On an annualized basis, Japan’s economy contracted 1.4% during the period. That compares with expectations for an annualized contraction of 1.2%.
The annualized figure is the rate at which the economy would have contracted over a full 12 months had the December quarter been a reflection of the entire year.
PM Shinzo Abe’s plan to revive the economy – dubbed Abenomics – was introduced after his December 2013 election win.
Its aim was to combat deflation, which Japan has struggled with for nearly two decades, as well as boost demand and investment. It also wanted to weaken the yen, so helping big exporters like Toyota become more competitive.
However, growth has remained a concern. Analysts say Japan needs to ensure exports grow in order to support future economic growth – for every 1% that Japan’s economy grows, between 0.5 and 0.7% comes from exports.
Japan also relies heavily on domestic consumption but its population is ageing and shrinking so fewer people are contributing to the economy.
In Q3 of 2015, according to revised numbers, Japan avoided a technical recession. It has already been in recession four times since the global financial crisis.
Some analysts said February 15 numbers should be viewed in context.
“A single negative growth number should not be over-interpreted because the economy remains in rather good shape and continues to get strong policy support,” said economist Martin Schulz.
Investors seemed to shrug off February 15 growth numbers, with the benchmark Nikkei 225 jumping more than 4% shortly after the figures were released.
However, the benchmark shed more than 11% last week, which was a short trading week due to a public holiday on February 11.
Japan’s big exporters were particularly hard hit as a stronger yen against the dollar hurt investor sentiment.