Japan fell into a deeper recession in the third quarter

Japan fell into a deeper recession in the third quarter than first thought, the government said today, as exports weakened, domestic demand fell and companies bracing for a prolonged downturn pared inventories.

The Cabinet Office said that Japan's economy shrank at an annual pace of 1.8 per cent in the July-September period, compared with its original estimate of a 0.4 per cent contraction.

The figure was much worse than market expectations for a 0.9 per cent decline in gross domestic product, underscoring the severity of the slump that the world's second largest economy is mired in.

The data also confirms that Japan slipped into recession in the third quarter after GDP contracted an annualised 3.7 percent in the April-June period. A recession is commonly defined as two consecutive quarters of negative growth, though many economists using other parameters say that the current downturn actually began in late 2007.

"The revision was large, but the implication is limited, as there is no need to change our assessment of the economy, which has been in recession since (the) end of last year," said Masamichi Adachi, senior economist at JP Morgan Securities in Tokyo, in a report today.

With business conditions deteriorating, companies likely reduced their inventories to cut running costs, the Cabinet Office said, according to Kyodo news agency.

Overall weakness in the third quarter stemmed largely from a sharp pullback in corporate investment amid the unfolding global financial crisis. For export-reliant Japan, the deep slump in global demand for its cars and gadgets has taken a particularly heavy toll

A growing number of exporters big and small — also hurt by a stronger yen — are slashing their expectations for profit, sales and spending.

Toyota Motor Corp has cut its full-year net profit forecast to 550 billion yen (RM19.8 billion) — about a third of last year's earnings.

With both foreign and domestic demand dragging down growth for the second straight quarter, a Cabinet official said Tuesday's data "underlined the weakness of Japan's economy," Kyodo said.

But the worst may be yet to come, since the third-quarter data do not fully reflect the global reverberations from the collapse of US investment bank Lehman Brothers in mid-September.

The Bank of Japan recently slashed its projection for economic growth to just 0.1 per cent for the year through March compared with the 1.2 per cent growth projected in July.

Economists expect the central bank's closely watched "tankan" survey, due out on Monday, to show a dramatic plunge in corporate confidence.

Credit Suisse predicts that the business sentiment index for large manufacturers will fall from minus 3 in September to minus 36, which would be the lowest level in more than three decades. The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable.

The survey is used by the Bank of Japan to guide monetary policy, and grim results could lead to another interest rate cut. The central bank last lowered its key policy rate to 0.3 per cent from 0.5 per cent in late October.