Japan's economy posted its sharpest contraction since the oil crisis of 1974 in the final three months of last year, revised government data showed, and economists saw little signs of an early rebound.
With companies aggressively scaling back production and cutting jobs to cope with a plunge in global demand, economists say Japan is on course for its longest recession in modern times.
The data confirms that Japan's economic state is quite severe. We see a sharp decline in exports, which puts Japan in a bad situation because exports are falling everywhere, said Seiji Adachi, senior economist at Deutsche Securities.
The economy shrank 3.2 percent or an annualized 12.1 percent in October-December, slightly less than the initial estimate and a consensus forecast of economists, both for a 3.3 percent or annualized 12.7 percent contraction.
A rise in inventories led to the slight revision, but analysts said that was nothing to be happy about as it reflects slowing demand both at home and abroad -- and not companies' appetite to produce more.
The revised GDP figures were shy of the record 3.4 percent contraction in the first quarter of 1974.
While the global financial crisis has dragged much of the rich world into recession, the contraction in Japan, the world's No.2 economy, was about twice as deep as elsewhere due to its heavy dependence on exports for growth.
The euro zone economy shrank 1.5 percent in the same period while the United States contracted an annualized 6.2 percent.
Japan's economic slump is its deepest of the modern era and economists see it also becoming the longest, with many expecting the economy to keep shrinking well into this year.
A Reuters poll of 25 economists showed the economy is expected to shrink 2.5 percent in three months to March and 0.4 percent in the following quarter, which would mark an unprecedented five straight quarters of contraction.
While analysts had thought the economy would contract most in the fourth quarter, some now think the worst may be yet to come.
Now we are starting to think the contraction in January-March could be bigger than October-December, and we might change our forecasts, said Takahide Kiuchi, chief economist at Nomura Securities.
Many economists expect the economy to bottom out some time this year, given some signs of recovery in the Chinese economy and the impact of stimulus steps planned in the United States and Japan.
But others think the malaise could well continue beyond this year.
We are quite pessimistic and think the Japanese economy will bottom out in 2011. We could be looking at three straight years of contraction in GDP. Consumption is likely to weaken as the labor market is worsening and people are giving up looking for work, said Deutsche's Adachi.
Central banks and government have slashed interest rates and rolled out stimulus packages in response to the global downturn, which grew out of a U.S. housing market slump and spread through the rich world to emerging economies.
Japan pledged on Tuesday to do whatever it takes to drag its ailing economy out of recession as a rift emerged between the United States and Europe over whether governments have done enough to stimulate consumer spending.
Until recently, exports and corporate capital spending were the pillars supporting the economy, while household consumption remained tame even during the boom years from early 2002 to late 2007.
Net exports -- exports minus imports -- shaved 3.0 percentage points off GDP in the fourth quarter, in line with the initial estimate.
Highlighting the impact that the plunge in exports has had on business investment, corporate capital spending fell 5.4 percent, revised down slightly from the 5.3 percent drop initially estimated.
(Editing by Hugh Lawson)