Japan's economy slumps as global gloom spreads

By Yuzo Saeki

TOKYO (Reuters) - Japan sank deeper into recession with its worst quarterly contraction since the oil crisis in the 1970s, its reliance on exports and soft domestic demand dragging down the world's second-largest economy.

Hillary Clinton, in Tokyo on her first trip abroad as U.S. secretary of state, said Asia and the United States must fight the global crisis together.

The U.S.-Japanese relationship was founded on a "commitment to our shared security and prosperity, but we also know that we have to work together to address the global financial crisis," she said.

The grim Japanese figures, coupled with disappointment over the lack of coordinated action from the G7 and worries about bank rescue plans, pushed down European shares by 1.4 percent in thin trade, with U.S. markets closed and lighter UK volumes due to holidays. [nLG79960]

U.S. oil prices dipped below $37 a barrel as the raft of gloomy economic data underscored falling oil demand worldwide. Oil prices have dropped by more than 70 percent from their peak at almost $150 per barrel last year.

The pessimism extended to Latin America. At midday, Mexico's peso weakened 0.65 percent as appetite for riskier emerging market assets waned. Brazilian stocks and currency declined in thin trade as investors awaited details on a U.S. government economic plan.

In Canada, factory shipments sank a record 8 percent in December from a month earlier, far steeper than analysts had projected, boosting predictions that the central bank would once again trim interest rates.

In Rome, G7 financial leaders, fearing a 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession.

"The outlook for the global and euro area economy in 2009 appears dismal," said European Central Bank Governing Council member George Provopoulos. "The current crisis is the biggest since the 1930s and exiting from it will not be easy or quick."

At the Italian parliament, U.S. House Speaker Nancy Pelosi defended the United States against accusations of protectionism, following concerns about a "Buy American" provision in the U.S. economic stimulus plan.

"Somewhere in the mix of things, someone has decided that America has become, is becoming, more protectionist. I don't think that is the case," she said.

In the United States, President Barack Obama will sign on Tuesday the $787 billion stimulus package which is hoped will save or create 3.5 million jobs.

FURTHER ACTION

The Bank of England said it would probably have to take further action to boost Britain's waning economy but recovery could start later in the year.

"A sharp contraction in activity, both here and abroad, is already baked into the cake for the first half of this year," Deputy Governor Charles Bean said.