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 may get “ugly” in the coming months.

The revelation came in the form of a bigger-than-expected revision to the official figures for Japanese gross domestic product for July to September. When released last month, they showed the economy contracting at an annualised rate of 0.4 per cent – but they underestimated the extent of the slump, the Cabinet Office said yesterday. The new numbers show an annualised shrinkage of 1.8 per cent and almost certainly will force the unpopular Government, led by Taro Aso, to abandon its 2008 growth target of 1.3 per cent.

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

Rumours began to circulate in parliament yesterday that the Government was planning a supplementary 20 trillion yen (£147 billion) stimulus package in response to the crisis. It would be a dramatic addition to the Y27 trillion package already announced and supposedly focused on provoking medium-term growth.

The creeping atmosphere of panic in government circles was evident, with Kaoru Yosano, the Economic and Fiscal Policy Minister, pledging to “implement policies to prevent the bottom from falling out of the economy”. Analysts are sceptical, however, about the 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 planned, affecting the country’s capacity to avoid a full-blown recession.

Akira Maekawa, Japan economist at UBS, downgraded estimates for growth in the current financial year to 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 main forces supporting the economy – turned negative in the Government’s new estimates. Capital investment has begun to dip more acutely than was previously foreseen.

“Exports are starting to collapse,” Hiroshi Shiraishi, an economist at BNP Paribas, said. “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 likely to accelerate because of the rising yen. Its surge against the dollar and euro has hammered exporters and there are few signs that the Government will step in, as it has in the past.

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