Japanese industrial production fell a record 9.6 per cent in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.
Unemployment hit a three-year high, household spending dipped, and manufacturers saw no quick turnaround in the outlook for industry - the main driver of the world's second-biggest economy - as inventories hit record highs despite factory closures and lay-offs.
Subsiding inflation and worsening economic conditions are also stoking deflation worries, as in other major economies, which may prompt more central bank steps to support the staggering economy and free up frozen credit markets that are starving key companies of cash.
Economists said fourth-quarter GDP figures, due out in February, would show Japan's economy shrinking at a double-digit annual rate, and Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities, said early 2009 also looked bleak.
"As output adjustments continue, weakness in the overall economy will persist in January-March, and the degree of worsening depends much on how exports turn out," he said.
"It is already a consensus view that core consumer inflation will turn negative soon, but we must watch if a worsening of the economy pushes Japan into a deflationary spiral even though the Bank of Japan sees no signs of that happening right now."
Susumu Kato, chief economist at Calyon, said he expected a 9.6 per cent annualised contraction in the fourth quarter, followed by a deeper slump in January-March.
Japan's industrial production fell a record 9.6 per cent in December after an 8.5 per cent drop in November, as companies have been forced to cut output as export demand for their cars, electronics and machinery evaporates.
"We haven't experienced such a sharp fall in the past," Economics Minister Kaoru Yosano said. "This drop is likely to continue."
Related fears for the health of the US economy, and the effect on Japanese exports, drove the Nikkei share average down 3.4 per cent, with a string of corporate profit warnings not helping.
Once again the yen's safe-haven reputation trumped the weak Japanese economic data, as it rose to around 89.5 per dollar.
Factories are now operating at their lowest level in 20 years but the data showed inventories rose for a fourth straight month - suggesting there is no sign that production cuts have finished.
"The inventory ratio rose to a record high, showing output adjustments are still not catching up with the incredible speed of falls in shipments," said Junko Nishioka, chief economist for RBS Securities.
Factories forecast a further slide in production of 9.1 per cent in January and another 4.7 per cent fall in February. Job conditions are worsening amid a slew of job cuts by companies that are slowing output at an unprecedented pace.
Reuters