Japan suffered its biggest ever plunge in exports between October and December as Asia’s largest economy recorded its third consecutive quarter of contraction – the worst decline in 35 years.

The economy shrank by an annualised rate of 12.7 per cent in the last quarter – more than one percentage point worse than average market expectations, and the sharpest pace of decline since the oil crisis of the early 1970s, when the country’s export-led economy was threatened with catastrophe. Exports in the third quarter were a record 13.9 per cent lower than in the previous quarter.

Economists said that the decline highlighted the fact that, even though its banking system had not been affected badly by the sub-prime crisis, Japan had been hit harder and faster by the global downturn than Western or other Asian economies.

“The global imbalance that built during the boom phase is now being corrected to Japan’s cost,” Hiroshi Shiraighi, an economist at BNP Paribas, said. “Japan has effectively become a high-end factory of consumer durable and capital goods, which has made it sensitive to strong credit conditions and high asset prices. That was to Japan’s great benefit in the good times, but means it suffers badly when the wealth conditions deteriorate.”

The period covered in today’s GDP report, which included the normally strong pre-Christmas run-up in Western countries, was disastrous for Japan: external demand – or a lack of it – made the worst contribution to Japanese GDP on record. The October-December quarterly GDP performance was 3.3 per cent lower than in the previous quarter, and 3 per cent of that contraction was accounted for by the collapse of external demand.

Domestic consumption – which represents more than half of Japan’s GDP – dropped by 0.4 per cent, reflecting recent anecdotal evidence that Japanese households are dramatically curbing their spending and that hundreds of stores are being forced out of business as the banks withdraw credit lines.

Corporate capital spending fell by 5.3 per cent in the quarter. Over the past fortnight profit warnings have been issued by some of the biggest and previously most successful names in Japanese industry – even Toyota is forecasting a full-year loss. According to brokers at Tokyo Mitsubishi UFJ, this time last year only 192 Japanese companies had issued profit warnings for the full year, but 687 have already done so this year.

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