Japan sank deeper into recession with industrial output tumbling and inflation slipping to almost zero, while US data was also expected to mirror the worsening financial crisis.
Japan's industrial production fell a record 9.6% in December, with companies forced to cut output as demand for their cars, electronics and machinery waned, while annual core inflation slowed to a mere 0.2%.
Rising unemployment, slowing household spending and no improvement in the industrial outlook added to investors' fears that Japan was flirting with deflation and would post a horror GDP figure in February if exports do not bail it out.
“It is already a consensus view that core consumer inflation will turn negative soon, but we must watch if a worsening of the economy pushes Japan into a deflationary spiral even though the Bank of Japan sees no signs of that happening right now,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.
Economists expect February's figures to show Japan's economy shrinking at a double-digit annual rate.
The worsening economic conditions in Japan, and elsewhere, could prompt more drastic measures by central banks already seeking more inventive ways to support economies and relieve credit markets that are starving key companies of cash.
Equally startling because it was so unexpected, Australian private sector credit shrank in December for the first time since 1992 as foreign banks cut lending to local companies.
Reserve Bank of Australia figures showed that total credit fell 0.3% in December, well below a forecast 0.5% rise, fuelling expectations the RBA would announce another hefty interest rate cut next week.
“Under pressure and facing a squeeze on margins, businesses are clearly not expanding and have little appetite for debt and growth,” said Su-Lin Ong, senior economist at RBC Capital.
Other economists said the surprise figure strengthened the case for a second stimulus package in Australia, accelerated income tax cuts and increased government spending.
Across the Tasman Sea, the once-favored New Zealand dollar fell to another six-year low after the central bank said interest rates would likely have to be cut further, a day after the benchmark rate was cut by 1.5 percentage points.
“Lest there be any doubt, the tool box is by no means empty,” central bank governor Alan Bollard told a business meeting.
The yen rose across the board, its reputation as a safe haven helping it overcome Japan's weak economic data.
But Japan's Nikkei share average closed 3.1% lower after the bad industrial output and rising unemployment news. Wider Asian stocks were down 0.6%, the first daily drop in a week.
The falls followed similar declines on Wall Street after record monthly US unemployment figures.
More bad news was expected in the United States on Friday.
Economists think the US Commerce Department will report that gross domestic product, the broadest measure of economic activity, shrank at an annualized 5.4% in the fourth quarter.
Figures out on Thursday showed new US single-family home sales fell 14.7% in December to an all-time low. The number of Americans receiving unemployment benefits jumped to a record 4.78 million in mid-January and first-time filings also rose.
New US President Barack Obama had his first legislative win this week when the House of Representatives passed his $819 billion stimulus plan, which still faces an uncertain road before a hoped-for mid-February completion.
Markets also liked his administration's proposal for a “bad bank,” or aggregator bank, to absorb toxic debts, but CNBC reported that negotiations over how such a bank would work hit a snag and that round-the-clock meetings were being held.
As more jobs and company wealth were lost, Obama railed against “shameful” Wall Street bonuses paid to executives at a time when taxpayer money was being used to shore up the crumbling financial system.
US and Japanese companies were providing daily evidence of how deeply the global crisis was biting, costing governments trillions of dollars and threatening millions of jobs.
Toyota Motor Corp was likely to post an operating loss for the year to March 31 in excess of its latest forecast of ¥150 billion ($1.67 billion), a company source said, because of big production cuts planned in coming months.
In an un-sourced report, the Nikkei business daily said Toyota's loss would hit ¥400 billion ($4.5 billion).
Toshiba Corp was in talks to merge part of its chip operations with NEC Corp's semiconductor unit as they battle slumping demand and prices, a source with knowledge of the negotiations said in Tokyo.
Toshiba had already warned it would post its biggest annual loss ever and its shares slid 17% on the possible chip unit merger, leading to a rating cut by Goldman Sachs.
“It's a losers' union,” said SMBC Friend Securities manager Fumiyuki Nakanishi. “The domestic chip industry appears at the brink of death.”
The picture in Europe was hardly any sunnier.
German unemployment rose almost twice as much as expected in January, euro zone economic sentiment hit a new low, while hundreds of thousands of French workers staged a nationwide strike demanding more was done to protect jobs and wages.
Reflecting the slowdown in world trade, the International Air Transport Association said air freight in December fell a “shocking” 22.6% from a year earlier. (Reuters)