Japan is effectively in recession, according to data released yesterday, which showed its gross domestic product contracting 1.4 per cent in the six months to September compared with the previous half year.
The continued deterioration of the world's second-largest economy will fuel fears that Japan's corporate sector could be hit by more bankruptcies.
This would further undermine its beleaguered banking system and put more pressure on the yen, adding to worries about another round of competitive currency devaluations.
Most private sector economists are predicting Japan's GDP will fall this financial year. The government remains more upbeat, though the Economic Planning Agency admitted it would be difficult for the economy to achieve its 1 per cent growth target this financial year.
The disappointing data will put further pressure on the government to produce a meaningful package this month to boost the economy. This is expected to include more public money to secure the deposits of bank customers and cuts in corporate tax.
Japan's economy did not contract for two consecutive quarters - the technical definition of recession - but analysts said this would have been almost impossible given the scale of the fall in the three months to the end of June.
The economy rebounded modestly in the three months to September, with GDP up 0.8 per cent on the April-June period, but the figure was below expectations. In April-June the economy contracted a revised 2.8 per cent.
Particularly worrying was a 1.3 per cent quarter-on-quarter decline in exports, until now one of the few bright spots.
Last month, Japanese carmakers suffered a setback in the US. Sales there of Toyota, Japan's largest carmaker, dropped 10.1 per cent, Mitsubishi Motors' fell 12 per cent and Nissan's declined 2 per cent.
"Everything that can go wrong, has gone wrong, except the Americas. But if Latin America and the US slow, that would be very hard on Japan," said Brian Rose, senior economist at SBC Warburg in Tokyo.
Capital expenditure was up 1.6 per cent. However, Michael Hartnett, senior economist at Morgan Stanley, warned: "A fall in capital spending would be the final nail in the coffin for the authorities' hopes of recovery."
