Japan's economy shrank more than initially thought in the fourth quarter, the government said Thursday.

Real gross domestic product contracted at an annualized rate of 1.3 percent in the October-December period, worse than the negative 1.1 percent growth reported in preliminary data last month.

The Cabinet Office's revised report includes weaker figures for business investment and consumer spending, which accounts for more than half of Japan's GDP.

The annualized figure translates to a 0.3 percent fall from the previous three-month period.

Private consumption fell 0.8 percent, worse than a 0.7 percent decline in the previous estimate. Business investment grew 0.5 percent instead of a 0.9 percent climb recorded initially.

A slightly steeper slowdown in exports also contributed to the quarterly slump.

For the full 2010 calendar year, Japan's economy expanded 3.9 percent, unchanged from the preliminary report. Last year marked a historic shift as China surpassed Japan as the world's second-biggest economy after the U.S.

While China is growing at a blistering pace and driving the global economy, Japan never fully bounced back from the stagnation that followed the bursting of its property bubble. Japan now faces a rapidly aging and shrinking population, ballooning public debt and persistent political turmoil.

The more immediate road ahead looks brighter for Japan, however. Economists say that GDP — a measure of the value of all goods and services produced domestically — is likely to expand this quarter in tandem with rising global demand.

Recent signs support their predictions. Core private sector machinery orders — a key indicator of business investment — beat forecasts in January, and industrial production rose for the third straight month.

While rising oil prices may pose a risk to the economy, their impact should not be exaggerated because Japan's energy consumption per unit of GDP is among the lowest in the world, said Kyohei Morita, chief economist at Barclays Capital Japan, in a note to clients.

"The economy is already pulling out of its soft patch, and we believe it will avoid a second consecutive quarter of negative real GDP growth," he said.