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Japan's economy has shrunk more than expected in the final quarter of 2015, dealing another blow to Prime Minister Shinzo Abe's faltering bid to revive the world's number-three economy.

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Falling consumer spending and exports made the economy contract by 1.4 percent in October-December compared with the last quarter of 2014, official data showed on Monday.

The slump was bigger than the forecast 1.2 percent shrinkage.

The data underscores the challenges Abe faces in dragging the economy out of stagnation, as exports to emerging markets fail to gain enough momentum to make up for low domestic demand.

With his stimulus policies that gave big manufacturers windfall profits, Abe had hoped to generate a positive cycle in which companies raise wages and help to boost household spending.

Instead, the data showed that private consumption, which makes up 60 percent of the economy, fell 0.8 percent, exceeding market forecasts of a 0.6 percent decline.

'Moderate recovery' expected

Economy Minister Nobuteru Ishihara told reporters after the data was issued that the economy would head for a moderate recovery as its fundamentals remained strong.

Exports fell 0.9 percent in October-December after rising 2.6 percent in the previous quarter, underscoring the pinch companies are already feeling from soft emerging market demand.

Last month the Bank of Japan (BOJ) unexpectedly cut a benchmark interest rate below zero, stunning investors with another bold move to stimulate the economy as volatile markets threatened its efforts to overcome deflation.

However, the shock move has failed to boost Tokyo stock prices or weaken the yen as Japanese markets remained at the mercy of a global equity sell-off, bolstering a view among investors that the BOJ is running out of policy options.

Source: Agencies