TOKYO, Dec 7: Japan has slumped into its third recession in a decade and the economy is set to deteriorate further as unemployment rises amid weak consumer demand and the global slowdown, the government said on Friday.

Gross domestic product (GDP) in the three months to September fell 0.5 per cent from the previous quarter, when the world’s second largest economy shrank a revised 1.2 per cent.

Two consecutive quarters of contraction are widely defined as recession.

“The US economy is experiencing negative growth at the moment and it is quite possible that we will see a severe figure for October-December,” State Minister for Economic and Fiscal Policy Heizo Takenaka told a news conference.

On an annualized basis, Japan’s economy shrank 2.2 per cent during the three months to September and 4.8 per cent in the June quarter.

Takenaka referred to a “fear economy”, with Japanese reluctant to spend due to concerns about their prospects as unemployment rises to unprecedented heights.

“Households seem more concerned about the future than we expected,” the minister said.

Consumer spending, which accounts for two-thirds of Japan’s GDP, sank 1.7 per cent over the quarter, the sharpest slide since the end of 1999, due to rising unemployment and wage cuts.

Japan’s jobless rate climbed to a record high of 5.4 per cent in October and most economists expect the level to hit six per cent by next year. Lay-offs and wage reductions were being implemented faster than the government had expected, said Takenaka.

In the past month, hi-tech leaders such as Hitachi Ltd. have accelerated restructuring plans which include cutting the jobs of over 100,000 workers. The financial sector is also reducing staff with most major banks suffering losses as they speed up bad loan write-offs and the value of their share portfolios sink.

The September 11 terrorist attacks in the United States and the discovery of mad cow disease at home further chilled consumer sentiment, economists said.

Capital spending by the private sector rose 1.1 per cent over the quarter, led by investment in information technology but a global slump in demand for hi-tech products will depress future spending, said UBS Warburg chief economist Hiromichi Shirakawa.

Public investment also grew 3.2 per cent over the three month period but this will subside as the government reins in spending to contain the national debt, which has ballooned to 130 per cent of GDP, economists said.

Takenaka said the government was committed to implementing its reform drive — despite fears it would further chill the economy — which includes a clean up of the banking sector, a cap on new government bond issues and a more efficient allocation of budget spending.

Prime Minister Junichiro Koizumi has called for a relatively slim 4 trillion-yen ($33 billion) second extra budget to take total supplementary spending this fiscal year to 7 trillion yen.

But some lawmakers argue the amount is insufficient to prevent the onset of a depression.

Takenaka told reporters that Japan should retain a revised forecast for the year to March of a 0.9 per cent economic contraction, but warned of the risk of tipping into a deflationary spiral.—AFP