Economists are forecasting that Japan's export-oriented economy could go through one of its sharpest contractions ever this quarter and next.

"Production is falling off a cliff"

Naoki Iizuka,
Mizuho Securities

"Production is falling off a cliff," Naoki Iizuka, senior economist at Mizuho Securities told Reuters news agency.

"The Japanese economy is unlikely to bottom out until October-December next year as output is expected to remain very weak until then."

At the same time unemployment is continuing to rise, hitting 3.9 per cent in November from 3.7 per cent in October.

Meanwhile retail sale fell 0.9 per cent in November from a year earlier, underscoring the weakness in private consumption.

Worse to come

Earlier this week Taro Aso, the Japanese prime minister, unveiled Japan's biggest ever budget, hoping to stimulate spending and fend off some of the worst effects of the slowdown.

The budget, approved by the cabinet on Wednesday, runs to some $980bn and includes increased spending on social security and pensions.

Japan fell into recession in the third quarter of this year and analysts say they expect worse still to come in the months ahead.

The latest government forecast projects Japan's economy will shrink this fiscal year and manage only flat growth the following year.