Japan’s economy shrank by the biggest margin in almost seven years during the second quarter of this year as stumbling exports and tougher terms of trade battered Asia’s biggest industrial powerhouse.

A revision to official GDP data suggested that the economy is contracting more quickly than previously imagined, as companies around the world slash capital spending and suspend purchases of machinery and industrial robots.

Although the Government had previously released growth figures for the April to June quarter which showed a 2.4 per cent annualised contraction over that period, the new numbers had that figure at an annualised 3.0 per cent.

Economists now predict that when the figures come out for the third quarter early next month, the verdict could be just as bad, sending the economy into a recession. The technical definition of a recession is two consecutive quarters of negative GDP.

But the dire official reading of the world’s second largest economy coincided with the unexpected return of one of the market’s greatest heroes.

Junichiro Koizumi, the former prime minister and maverick reformer, made a surprise contribution to the ongoing leadership race within the ruling Liberal Democratic Party.

As the last Japanese prime minister to command both widespread popular appeal and the support of the markets, Mr Koizumi’s endorsement of a candidate was always going to be vital – particularly now that Japan’s faltering economy will dominate all the electioneering.

Although most pundits believe that the leadership race has already been sewn-up by Mr Koizumi’s former foreign minister, Taro Aso, the shock-haired “lion” of Japanese politics endorsed Yuriko Koike – the first woman to ever be nominated for the job of running Japan.

The Nikkei 225 index soared over 100 points on Mr Koizumi’s return to the fray – even if his role is only as a behind-the-scenes backer of Ms Koike, his presence has always suggested progress, rather than stagnation.

The dwindling fortunes of Japan’s exports are of grave concern to the authorities: having picked-up in earnest in February 2002, they were the driving force behind Japan’s longest period of post-War growth.

Despite the recent slide in commodity prices, and their descent from the record highs touched earlier this year, their explosive rise exposed the business model of Japan Inc as extremely vulnerable to raw material volatility.

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