Japan the latest economy to fall into recession as exports drop off

Japan became the latest country yesterday to succumb to the disintegrating global markets and fall into recession, its first since the technology bubble burst seven years ago.

This follows less than a week after the entire eurozone officially slipped into its first recession and after a weekend of intense talks at the G20 conference as the world's biggest economies tried to stave off further disintegration.

Japan, the second biggest global economy, issued third-quarter growth data that confirmed the country had fallen into recession, ending its longest run of growth since the Second World War.

The government of Prime Minister Taro Aso announced that the economy had shrunk for the second consecutive quarter – the technical definition of a recession. Gross domestic product contracted 0.1 per cent in the third quarter, after a 0.9 per cent fall in the second. The announcement sent the Nikkei down almost 3 per cent.

Kaoru Yosano, Japan's economy minister, said that worse could follow. "We need to bear in mind that our economic conditions could worsen further as the US and European financial crisis deepens, worries of economic downturn heighten and stock and foreign exchange markets make big swings."

Peter Dixon, an economic analyst at Commerzbank, predicted two more quarters of contraction. "The whole situation in Japan looks pretty grim."

The International Monetary Fund believes the Japanese economy will fall 0.2 per cent next year.

The government was last month forced to slash interest rates for the first time since the last recession ended in 2001. There was little room for manoeuvre, given the historically low rates, but the government reduced levels from 0.5 per cent to 0.3 per cent. It also announced an economic stimulus package, that included a plan to boost the domestic economy by handing every adult at least Y12,000 (£82) as part of an emergency Y5,000bn handout.

While Japan doesn't have a severe exposure to the toxic debt that has brought financial institutions to their knees and forced countries into recession, it is highly dependent on exports, which rose 0.7 per cent in the third quarter – less than expected.

As demand from Japan's trading partners in China, its biggest customer, and in the US has declined, the economy has come under more pressure.

This has smashed domestic businesses, highlighted by Toyota at the start of the month, which predicted that profits would fall 70 per cent this year. Toyota is heavily dependent on exports. Japan's market peaked in 1989 when the Nikkei hit 38,916 points but the economy went into freefall shortly after that point as the country's debt and real estate bubble burst.

The government was criticised for reacting slowly to the problem, waiting well over a year to cut rates and not attempting to kick start the economy until the end of the 1990s.

The period of recession and deflation became known as the Lost Decade. The last official recession in Japan was when the technology bubble burst in the United States in 2001.

"Japan has never really got over the problems cause by the bubble bursting in the 1990s," Mr Dixon said. "Recent growth has not been as impressive as other Asian economies."