Japan's economy slid into a recession for the first time since 2001, the government said yesterday, as companies sharply cut back on spending in the third quarter amid the unfolding global financial crisis.

Government officials and economists² warned that the world's second-largest economy could contract further in the coming months.

Japan's economy shrank at an annual pace of 0.4 percent in the July-September period after declining an annualized 3.7 percent in the second quarter. That means Japan, along with the 15-nation euro-zone, is now technically³ in a recession, defined as two straight quarters of contraction⁴.

"What we're starting to see is the extent of deterioration⁵ in external demand starts to weigh more heavily on the Japanese economy," said Glen Maguire, chief Asia economist¹ at Societe Generale. "And I think looking forward, there's every indication that dynamic is going to continue."

The GDP figure was worse than expected. Economists surveyed by Kyodo News agency had predicted the gross domestic product would gain an annualized 0.1 percent.

Japan's Economy Minister Kaoru Yosano said following the data's release that "the economy is in a recessionary phase".

But the worst may be yet to come, especially with dramatic declines in demand from consumers overseas for Japan's autos and electronics gadgets⁶.

Hurt also by a strengthening yen⁷, a growing number of exporters, big and small, are slashing⁸ their profit, sales and spending projections⁹ for the full fiscal¹⁰ year through March.

Toyota Motor Corp, for example, has cut its full-year profit forecast to 550 billion yen ($5.5 billion) - about a third of last year's earnings¹¹.

Compared to the previous quarter, Japan's GDP shrank 0.1 percent, the cabinet office said. Business investment - a main driver of Japan's six-year economic recovery since 2002 - dropped 1.7 percent from the previous quarter.

"As the global economy is expected to slow down for the time being, downward movements (in Japan) are expected to continue," Yosano said.

The deteriorating¹² conditions also led Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo, to downgrade his outlook on the Japanese economy.

"We are now looking for a severe recession, similar to that during Japan's own financial market crisis in 1997 and 1998, and to the current US recession, in terms of depth," he said in a report.

Oil prices fell below $56 a barrel yesterday in Asia as investors¹³ fear a global economic slowdown will hurt crude demand.

The US economy is in recession and will contract at a faster pace in the fourth quarter, extending the decline into early 2009 as high unemployment crimps consumer spending, a survey showed.

The National Association of Business Economists' poll of 50 professional forecasters released yesterday found that real gross domestic product was expected to fall 2.6 percent in the fourth quarter and slump¹⁴ 1.3 percent in the first three months of 2009.