Japan's economy shrank 3 per cent last quarter, the steepest contraction since 2001, as companies and households cut spending and exports fell.
Gross domestic product for the three months ended June 30 shrank more than the annualized 2.4 percent initially estimated, the Cabinet Office said in Tokyo today.
Economists expect the slowdown to continue into next year as the US slowdown spreads to Asia, where Japan ships half its exports.
The next prime minister will have little money to spend on an economy that may be in a recession, because public debt is about 1.8 times the size of GDP.
Economic and Fiscal Policy Minister Kaoru Yosano, one of five candidates to replace Yasuo Fukuda, who resigned this month, said last week that there's "nothing to be done but wait" for export markets to recover.
"Japan's economy will keep slowing at least until the end of this year,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo.
"Compared with previous recessions, this one will be very shallow. We're at the deepest point of the downturn now."
The yen traded at 107.16 per dollar at 12.11pm in Tokyo from 107.14 before the report was published. Economists surveyed by Bloomberg News expected the economy to contract 3.1 per cent.
Taro Aso, the favorite in polls to become prime minister, said in a debate yesterday that balancing the budget isn't a priority.
Yosano and the other three candidates -- Yuriko Koike, Shigeru Ishiba, and Nobuteru Ishihara - want to maintain a goal of eliminating the fiscal deficit by 2011 to contain the debt.