TOKYO (AFP) ― Japan’s recession-hit economy shrank in the last quarter of 2012, official data showed on Thursday, as weak export demand overseas weighed but analysts pointed to brighter times ahead.

Tokyo said growth contracted 0.1 percent in the October-December quarter from the previous three months, the third quarter of contraction, as a new government vows to reflate the world’s third-largest economy.

However, household consumption was improving and the country logged growth of 1.9 percent through all of 2012 compared with the previous year, when Japan was hammered by the quake-tsunami disaster, dealing a major blow to firms’ domestic production and consumer demand.

Financial turmoil in Europe, an export-denting strong yen and a diplomatic row with major trade partner China have hurt Japan’s economy, casting doubt on hopes it had cemented a recovery after the twin disasters.

The country has seen a mixed bag of economic data lately, with factory output rising 2.5 percent in December on-quarter while the trade picture remains hazy with Japan reporting a record trade deficit for 2012.

However, the yen has weakened in recent months, helping make the nation’s exporters more competitive and boosting their latest earnings results.

“While the figures were worse than expected, they aren’t too bad ― we could see it rebound in the future,” said Hideki Matsumura, senior economist at Japan Research Institute, referring to the quarterly results.

“I would maintain the assessment that the economy is in a phase of bottoming out.”

Hiroichi Nishi, general manager of equity at SMBC Nikko Securities, added that the quarterly data “covers the period when the yen was still strong and Japanese exporters were struggling as the prospect of the global economic recovery remained uncertain.”

Key to Japan’s outlook was a recovery in demand from debt-hit Europe, a key market for everything from Japanese cars to electronics, while slumping shipments stemming from a diplomatic dispute with China appear to be improving, some of the nation’s biggest firms have said recently.

Tokyo’s trade deficit with Beijing doubled to a record 3.52 trillion yen ($38 billion) last year, as the feud over a set of islands in the East China Sea spurred a consumer boycott of Japanese goods in China.

The dispute flared in September after Tokyo nationalized the Senkakus, which Beijing refers to as the Diaoyu islands.

Last month, the Bank of Japan, following government pressure, adopted a two percent inflation target to beat the deflation that has haunted the economy for years and also set out plans for indefinite monetary easing.

The central bank wraps up a two-day policy meeting later Thursday with markets waiting to see if the BOJ launches fresh easing measures.

Japan’s cabinet has approved a $1.02 trillion annual budget that is aimed squarely at pulling the economy out of the doldrums with big spending on public works.

Markets have cheered Prime Minister Shinzo Abe’s strong stand on stoking the economy. The Nikkei 225 stock index has soared in the past couple of months, while speculation of monetary easing has sent the yen falling.

The unit’s steep decline, however, has stoked criticism, particularly from Europe, that Tokyo was engineering a devaluation of the yen to boost its exports and risking setting off a global currency war.