Japan’s recessionary plunge is far deeper and more rapid than analysts had predicted, triggering warnings that the world’s second largest economy is politically rudderless in a crisis and primed to get “ugly” in the coming months.

The shock revelation of Japan’s plight came in the form of a deeper-than-expected revision to the official reckoning of real gross domestic product (GDP) for the July to September quarter.

When the first set of Japanese GDP figures were released last month, they showed Japan’s economy contracting at an annualised rate of 0.4 per cent.

But those numbers underestimated the extent of the slump, the Cabinet Office said today. The new numbers show an annualised shrinkage of 1.8 per cent and will almost certainly force the hugely unpopular government of Prime Minister Taro Aso to abandon official growth targets of 1.3 per cent for 2008.

Rumours began circulating around Parliament today that the Government is planning a huge supplementary Y20 trillion stimulus package in response to the worsening crisis — a dramatic addition to the existing Y27 trillion stimulus package already announced and supposedly focused on provoking medium-term growth.

The creeping atmosphere of panic in Japanese government circles was also evident, with Kaoru Yosano, Economic and Fiscal Policy Minister, pledging to “implement policies to prevent the bottom from falling out of the economy.”

Analysts are highly sceptical, however, of the Japanese Government’s ability to engineer any form of recovery.

Naomi Fink, a strategist at the Bank of Tokyo Mitsubishi UFJ, said that the policy deadlock that has crippled Parliament could delay most of the important stimulus measures already announced, stymieing the country’s capacity to avoid full-blown recession.

Both nominal and real GDP figures were sharply lower than the preliminary estimates, confirming that Japan is well along the recessionary path.

Although some economists believe that Japan faces a shorter, shallower economic contraction than other G8 nations, most now predict at least three more quarters of performance well below potential growth rates.

Akira Maekawa, Japan economist at UBS, today downgraded estimates for growth in the current financial year to just 0.2 per cent, and said that the economy would probably shrink by 0.9 per cent in fiscal 2009.

Internal demand in Japan — previously one of the key forces supporting the economy — turned from positive to negative in the Government’s new estimates. Capital investment has begun to dip more acutely than previously foreseen.

“Exports are starting to collapse,” said Hiroshi Shiraishi, an economist at BNP Paribas, who predicts a major downshift in hiring and investment by Japanese companies “and the expectations of corporate managers have really started to come down.

"The belief that growth would be supported by emerging markets has now gone as it has become clear that the high growth in those economies was supported by the US housing bubble.”

The pace of retrenchment among Japanese companies is also likely to accelerate because of the rising yen.

The currency’s unprecedented surge against the US dollar and euro has hammered exporters and there are few signs that the Government will step in, as it has in the past, to artificially weaken the yen even if it climbs above the Y90 mark against the American currency.

Kyohei Morita, an economist at Barclays Capital, said that yen appreciation and further deterioration in the leading Western consumer markets mean that the worst of the export collapse will come in the first three months of next year.

The grim official re-assessment of GDP comes as economies throughout Asia are facing the full blast of a spending downturn in the US and Europe.

Investors in China are braced for what promises to be punishing set of economic data releases later this week: exports from the region’s manufacturing engine room are tipped to be particularly horrible.

The bleak economic news dented what began as a positive day for Japanese stocks: investors believe that stimulus measures in the US and European Union stand a chance of reviving spending sooner than originally feared.

Hong Kong was unable to extend its massive gains on Monday into a second session, with the Hang Seng sliding more than 1.3 per cent before closing.

Although the Japanese stock market responded neutrally to the darkening outlook for the economy, the Tokyo Stock Exchange revealed that, after a stunning shortage of new listings and a destructive run of bankruptcies in the real estate sector, it expects the number of companies listed on the First Section to fall in 2008 for the first time since the late 1960s.

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