The Japanese economy shrank in the second quarter at its fastest pace since the last recession in 2001, government data showed on Wednesday.
Household spending, which makes up 55 per cent of the economy, was the biggest drag on activity.
"Consumption is barely hanging on even as prices of daily necessities rise," said Yasuo Yamamoto, senior economist at Mizuho Research Institute. "But if consumption weakens further, it would delay Japan's escape from recession."
Japan is thought to have slipped into recession even as households failed to enjoy much of the fruits of just over six years of export-driven economic expansion that began in 2002.
Faced with tough competition abroad, big companies used profits for capital spending or bolstering balance sheets instead of boosting wages for their staff.
The severity of the economy's "lost decade" in the 1990s, along with the falling prices it wrought, also weakened the ability of workers to demand higher pay.
Between the start of the latest expansion in 2002 and March this year, wages shrank 0.8 per cent and consumption rose only 1.5 per cent. The economy grew an average annualised rate of 2.2 percent over that period, mostly due to robust exports.
That is in stark contrast to a 32 per cent wage rise during Japan's "bubble" economy of the late 1980s, when consumption grew at a rate of 4.4 per cent to help the economy expand at an annualised 5.4 per cent.
With Japan's economy very much reliant on exports, overseas economic developments are likely to determine the timing for when the nation will pull out of recession.
But consumers, who saw wages shrink even during an economic upturn, any recession to be a shallow one as companies are now more resistant to external shocks, having recovered from the so-called triple excesses of the bubble era - excess production capacity, heavy debt loads and bloated payrolls.
But without strong support from households, the economy is more vulnerable to a deepening global downturn.
Kyohei Morita, chief economist at Barclays Capital in Tokyo, said export growth may not pick up until the April-June quarter next year due to the global slowdown, and any improvement in consumption may not come till later in 2009.
A roughly 20 per cent drop in crude oil and commodity prices from their peaks hit in July could ease some of the pain on consumers.
But with wages not rising much and summer bonuses likely to have fallen for many households, consumers are already taking action by cutting less imminent spending to make ends meet.
Department store sales fell for the fourth straight month in June as consumers cut spending on clothing by 14 percent from a year earlier. Sales of jewellery, art and accessories slid 6 per cent.
Reuters