Markets throughout Asia slumped after Japan announced that output had fallen for the second consecutive quarter - the classic definition of recession. The London stock market also got the jitters as pounds 18bn was wiped off share values and the FT-SE 100 index suffered one of its biggest two- day falls this year.
Inevitably, there is a worry that if the world's second-largest economy and what has been its fastest-growing region head into a long depression, they will drag down the rest of the world.
Figures published yesterday show that Japan's gross domestic product (GDP) shrank by 1.3 per cent in the three months to the end of March, equivalent to a decline at an annual rate of 5.3 per cent. This follows a decline in the final quarter of last year, and leaves Japan's GDP 0.7 per cent lower than it was a year ago. This is the first full-year decline since 1974, following the first oil shock.
The decline was sharper than expected by the markets, which had forecast a fall of only about half a percent, and reflects both a lack of confidence among consumers in Japan and a fall in exports to the rest of east Asia.
The decline in the Japanese economy has lead to fears that the depreciation of the yen, which has fallen by 11 per cent in the past two months, will reach a stage where it destabilises the whole of the world economy. It fell yesterday to 144.77 against the dollar, compared with a peak of 80 in April 1995. The markets now expect it to fall to a rate above 150.
The markets also fear that the fall of the yen will force a devaluation of the Chinese yuan and the Hong Kong dollar. Any intention to devalue has been strongly denied by the Chinese authorities, but were it to happen the other countries of the region might be pushed into a further round of devaluations.
The fall in demand and the lack of confidence in the yen have depressed share prices, pushing the Nikkei-Dow index briefly below 15,000 yesterday. It recovered to close at 15,022, but the fragility of share prices is of particular concern in Japan, because the banks hold large portfolios of company shares. Falling share prices therefore threaten to bankrupt the banks. While the Japanese authorities have promised to protect depositors, ordinary Japanese savers remain fearful for their savings.
Japan is now the only member of the Group of Seven - the seven largest economies in the world - that has failed to recover from the recession of the early 1990s. It has been particularly hard-hit by the economic problems of the developing countries of east Asia, which take more than one third of its exports. Proportionately this is much higher than exports from the US and Europe to the region, which in most cases are less than 10 per cent of the total.
But Japan has also suffered from shrinking demand from consumers at home. Retail sales earlier this year were running more than 8 per cent down - here in Britain they are more than 4 per cent up.
Consumers are frightened partly because they are worried that they might lose their savings due to banking collapses, but also because they might lose their jobs; despite supposed "jobs for life" in Japan, unemployment has been rising.Reuse content