TOKYO (Reuters) - Japan sank deeper into recession with its worst quarterly contraction since the oil crisis in the 1970s, its reliance on exports and soft domestic demand dragging down the world’s second-largest economy.
Hillary Clinton, in Tokyo on her first trip abroad as U.S. secretary of state, said Asia and the United States must fight the global crisis together.
The U.S.-Japanese relationship was founded on a “commitment to our shared security and prosperity, but we also know that we have to work together to address the global financial crisis,” she said.
The grim Japanese figures, coupled with disappointment over the lack of coordinated action from the G7 and worries about bank rescue plans, pushed down European shares by 1.4 percent in thin trade, with U.S. markets closed and lighter UK volumes due to holidays. [nLG79960]
U.S. oil prices dipped below $37 a barrel as the raft of gloomy economic data underscored falling oil demand worldwide. Oil prices have dropped by more than 70 percent from their peak at almost $150 per barrel last year.
The pessimism extended to Latin America. At midday, Mexico’s peso weakened 0.65 percent as appetite for riskier emerging market assets waned. Brazilian stocks and currency declined in thin trade as investors awaited details on a U.S. government economic plan.
In Canada, factory shipments sank a record 8 percent in December from a month earlier, far steeper than analysts had projected, boosting predictions that the central bank would once again trim interest rates.
In Rome, G7 financial leaders, fearing a 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession.
“The outlook for the global and euro area economy in 2009 appears dismal,” said European Central Bank Governing Council member George Provopoulos. “The current crisis is the biggest since the 1930s and exiting from it will not be easy or quick.”
At the Italian parliament, U.S. House Speaker Nancy Pelosi defended the United States against accusations of protectionism, following concerns about a “Buy American” provision in the U.S. economic stimulus plan.
“Somewhere in the mix of things, someone has decided that America has become, is becoming, more protectionist. I don’t think that is the case,” she said.
In the United States, President Barack Obama will sign on Tuesday the $787 billion stimulus package which is hoped will save or create 3.5 million jobs.
The Bank of England said it would probably have to take further action to boost Britain’s waning economy but recovery could start later in the year.
“A sharp contraction in activity, both here and abroad, is already baked into the cake for the first half of this year,” Deputy Governor Charles Bean said.
Falling demand forced German car maker BMW to announce it was shedding 850 jobs and cutting back production of the Mini at its factory near Oxford.
European Central Bank President Jean-Claude Trichet warned policymakers they must avoid sowing the seeds of future crises in their efforts to revive economies.
Decisions made today should “not lay the ground for similar disorder in the future,” he told European parliamentarians.
In India, the government said spending may have to rise sharply this year to shield the economy from the global credit crunch. The announcement in an interim budget worried investors, and credit rating agency Standard & Poor’s said it planned to review the country’s domestic debt rating.
Singapore Airlines said it planned to cut capacity by 11 percent in the year from April amid waning travel and cargo demand.
The German government is considering emergency measures to rescue the stricken bank Hypo Real Estate, whose shares have fallen by 97 percent over the last 18 months.
In Europe, the Czech Republic approved an economic stimulus package, Hungary announced plans to reform its tax code to help boost the economy, and Bulgaria said its economic growth nearly halved in last year’s fourth quarter.
The widening economic crisis in Russia has sparked a wave of violent crime in Moscow that started last month, said the city’s chief prosecutor.
Even though Japan has been relatively insulated from the collapse of the U.S. credit and housing markets that precipitated the global downturn, Economics Minister Kaoru Yosano said his country faced its worst economic crisis since World War Two.
With demand for its cars and electronics waning, an unprecedented slump in exports saw Japan’s economy shrink by 3.3 percent in the fourth quarter of 2008, or an annual rate of 12.7 percent, marking three straight quarters of contraction and its worst result since the first oil crisis in 1974.
Japanese investors had largely factored in a big fall in GDP, limiting losses after the data was released.
The Nikkei share average fell 0.4 percent. But the yen rose against other major currencies after the G7 financial chiefs made no specific mention of the strength of the Japanese currency.
Adding to the Japanese government’s woes, Finance Minister Shoichi Nakagawa faced calls for his resignation after denying he was drunk at a G7 news conference. He said he had taken too much cough medicine.
In the United States, administration officials said President Obama would form a task force to oversee the restructuring of the ailing U.S. auto industry.
General Motors Corp and Chrysler LLC are due to submit new turnaround plans by Tuesday showing they can be made viable again after receiving $13.4 billion in emergency aid last year.
Negotiators for GM and the United Auto Workers union were making progress in talks aimed at trimming the automaker’s costs and debt, a person familiar with the matter told Reuters. GM wants concessions from the union and debt holders as required under the terms of the government aid package.
Additional reporting by Sumeet Desai in Rome, Elaine Lees in Tokyo, Martha Graybow in New York, Kevin Krolicki in Detroit, and Reuters bureau around the world; Writing by Giles Elgood; Editing by Jon Boyle and Matthew Lewis