Economists surveyed by Kyodo news agency had predicted an annualised 0.1 per cent rise.

Business investment - a main driver of Japan's six-year economic recovery since 2002 - slid 1.7 per cent from the previous quarter.

"The economy is in a recession phase. There are risks it may worsen further"

Kaoru Yosano, economic and fiscal policy minister

With exports suffering from the global slowdown, corporate profits are being eroded prompting companies to slash investment in new equipment and factories, which had been a key driver of economic growth.

In Tokyo the benchmark Nikkei share index rose 1.1 per cent by the lunch break on Monday, reversing early losses, despite the economic contraction confirming that the global financial crisis had sabotaged growth in yet another major economy.

Germany and Italy are already on the list of major economies that are officially in recession, despite emergency steps by world powers to try to shield the global economy from months of turmoil on financial markets.

But a promise of "vigorous efforts" to stabilise the global financial system by world leaders at a G20 summit in Washington on Saturday, seemed to lift Asian markets on Monday as most moved into positive territory after shaky morning sessions.

'Dragged down'

Kyohei Morita, the chief Japan economist at Barclays Capital, told the AFP news agency that "Japan was dragged down by the weakness in the global economy".

Major Japanese car makers have slashed profit forecasts and sales projections [EPA]
He said he expected the recession to last for four quarters in total.

Although Japan has not suffered financial turmoil on the same scale as the US or Europe, its export-dependent economy remains highly vulnerable to global downturns.

"Japan is as export-driven as ever. So as long as exports are slowing due the weakness of the global economy, we cannot escape," said Morita.

Takahiko Murai, the general manager of equities at Nozomi Securities, told the Reuters news agency that he worried more about the outlook ahead as Japan depended heavily on overseas demand for its exports.

"We have no factors to expect the GDP figures will be revised up later as a deterioration in US consumer spending is happening really fast, and a resulting firmer yen could further damage Japan's economic outlook," he said.