Japan fell deeper into recession with its worst quarterly contraction in 35 years, data showed on Monday, with its reliance on exports and soft domestic demand dragging down the world's second-largest economy.
Japan's grim data came after financial leaders from the Group of Seven (G7) foreshadowed unorthodox solutions to the global financial crisis as scope for more traditional tools diminished amid near-zero interest rates.
Even though Japan has been relatively insulated from the collapse of the US credit and housing markets, which precipitated the global crisis, Japanese Economics Minister Kaoru Yosano said his country faced its worst economic crisis since World War Two.
With demand for its cars and electronics waning, an unprecedented slump in exports saw its economy shrink by 3.3%, marking three straight quarters of contraction and its worst result since the first oil crisis in 1974.
Japan has suffered a sharper contraction than other major economies because of its heavy dependence on exports combined with persistently soft domestic consumption.
“The data showed a severe picture of the Japanese economy and highlighted the weakness in exports,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Yosano said his government must pursue all options to keep the economy afloat, but warned about large-scale spending, saying Japan could not become “addicted to painkillers.”
Worried by sliding US Treasuries and reports the heavily indebted Japanese government might be planning more stimulus spending, March 10-year government bond futures slid a third of a point.
In Rome, G7 financial leaders, fearing a 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession, but major world economies still faced the biggest downturn in decades.
But, with US and Japanese interest rates already close to zero, G7 leaders had to look beyond conventional economic tools once they can't cut rates any further, with a possible return to Japan's experiment with quantitative easing earlier this decade.
European Central Bank President Jean-Claude Trichet foreshadowed “non-standard measures” to tackle the crisis, but said the ECB had not drawn any conclusions after discussions with other central banks.
“I have said that I did not exclude additional non-standard action, but no decision has been taken yet on top of the non-standard action we have already decided to do and we will see,” Trichet said in Rome at the weekend.
US and Japanese rates are now virtually zero, with the Bank of England and the ECB heading that way, leaving policy makers searching for alternatives to traditional tools like rate cuts and stimulus packages to boost spending.
So-called quantitative easing, in which banks buy assets to raise money supply and boost demand, is now being considered by most of the world's major central banks.
Japan applied the measure with mixed results earlier this decade during its previous battle with deflation, a damaging spiral of falling prices in which consumers defer spending.
The US Federal Reserve has begun what it calls “credit easing” and the Bank of England could follow within a month.
However, other ECB policy makers have said measures already put in place were starting to take effect.
The ECB held interest rates at 2% this month, but figures last week showing the euro zone economy had shrunk 1.5% in the 2008 fourth quarter meant a cut to a record low of 1.5% was likely next month.
“Policy interest rates have been reduced to very low levels and unconventional monetary policy actions are being taken as appropriate,” the G7 leaders said after the Rome summit.
Japanese investors had largely factored in a big fall in GDP, limiting losses after the data was released. The Nikkei share average fell 0.2%, with rises in perceived resilient shares like drugmaker Daiichi Sankyo offsetting falls in exporters like Canon Inc.
The annualized rate in the fourth quarter of 2008 came in at 12.7%, three times the size of the fall in US GDP. There was little sign of an imminent bounce back, with exporters laying off workers and cutting production.
“Many people expected an annualized fall of at least 10%, so the actual figure was not that big a surprise,” said Shinko Securities technical analyst Yutaka Miura.
“But this did reconfirm that the economy is truly in bad shape, so investors are also reluctant to buy.”
In the United States, President Barack Obama will sign on Tuesday a $787 billion economic stimulus package of tax cuts and infrastructure spending that Treasury Secretary Timothy Geithner detailed for G7 leaders.
Administration officials said Obama has decided to form a government task force to oversee the restructuring of the struggling US auto industry.
General Motors Corp and Chrysler LLC are due to submit new turnaround plans by Tuesday showing they can be made viable again after receiving $13.4 billion in emergency aid from the former Bush administration last year.
Talks between GM and the United Auto Workers resumed on Sunday after they were broken off. (Reuters)