Japanese stocks took a beating today to close below the 16,000-point level as investors flinched at the announcement of a negative quarter of real economic growth and its biggest contraction in nearly four years.

Shares began falling early in the day as Tokyo investors took fright at America's unexpected decline in employment figures that on Friday sent the Dow Jones industrial average down by 250 points to 13,113.40.

But a revision to the Japanese GDP figures for the April-June quarter, which fell 0.3 per cent in the quarter - to give an annualised pace of decline of 1.2 per cent rate, against an expectation of 0.5 per cent growth - deepened the gloom and sent the Nikkei 25 index into a brief period of freefall, closing 350 points down by the end of trading.

In London, after a brief early morning rally, the FTSE 100 index of leading shares settled up 1.6 point 6,192.5 after the Office of National Statistics said producer input prices dropped by 0.5 per cent in August, more than expected.

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Background

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However, output price inflation was unchanged at 2.5 per cent year on year. Other Asian markets, taking their lead from Wall Street, saw sell-offs of shares.

In Hong Kong, while the Hang Seng fell by 52.75 points to 23,929.86, the main index was aided by reports that the Government had increased its stake in Hong Kong Exchanges to 5.88 per cent as part of an effort to smooth a merger with the Shanghai Securities Exchange.

The Japanese turmoil, currency brokers said, was also driving an exit from the so-called yen carry trade, pushing the Japanese currency to a year high of Y112.60 against the dollar, but also providing big importers — particularly Japanese oil and chemicals companies — to stock up with the greenback on the cheap.

Some analysts dismissed the annualised 1.2 per cent drop in real economic growth over the April-June quarter as a “blip” that would disappear in the current quarter as corporate capital spending rose again.

The previous estimate of 0.1 per cent positive growth for the same quarter was, economists said, more in line with “cruising speed” expectations for the Japanese economy.

Many economists, including Masuhisa Kobayashi, of Barclays Capital Japan, predicted that the Bank of Japan (BoJ) would exploit today’s GDP revision to justify leaving interest rates unchanged at the monetary policy meeting next week.

The BoJ is keen to normalise Japan by raising rates, but is under heavy political pressure not to do so while the US and European economies establish what damage has been done by the sub-prime mortgage troubles.

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