Australia's biggest customer has slipped into recession.
Japan joins Germany and Italy as officially in recession, with the United States expected to follow despite co-ordinated action to boost developed economies.
The news will hit Australia especially hard as Japan as Japan provides $1 in every $5 of Australia's export earnings, about half as much again as does China.
During previous Japanese downturns its export industries have kept operating at full pace. During this one, demand for Japan's exports will slump as well, suggesting that Australia will be hit harder.
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Japan's economy shrank for two consecutive quarters - the technical definition of recession - sliding 0.9% in the June quarter and then 0.1% in the three months to September, the firstsustained contraction in 7 years.
Japan’s economy minister Kaoru Yosano said the slump would continue.
“The economy is in a recessionary phase. The downtrend will continue for the time being as global growth slows," Mr Yosano said.
He warned that "conditions could worsen further as the US and European financial crisis deepens, worries of economic downturn heighten and stock and foreign exchange markets make big swings".
Japan has announced an economic stimulus package in tandem with developed countries including Australia, but is unable to cut its official interest rate much further. It has already been cut to 0.3%.
TD Securities economist Joshua Williamson said the recession would hit Australian economic growth and push it nearer to recession.
"It suggests our growth will be slowing not just from the domestic side but also from the external accounts," he said.
Westpac yesterday conceded that Australian economic growth might turn out to be negative when the data is released next month, after worse than expected retail figures showed that in trend terms Australians bought less in shops in the September quarter than they did in the June quarter.
"The weak result lowers traises the risk of a flat or slight negative read on headline GDP," said chief economist Bill Evans.
"However, we expect a rebound in December as the stimulus package and lower fuel prices give households a major cash injection."
An Australian Industry Group - American Express survey released Monday found that 90% of Australian businesses felt no longer able to pass on increased costs. Only 12% felt able to take on above average or significant financial risks.
Nearly one in five businesses said borrowing from banks had become more difficult and 40% said they had no plans for capital investment during the next half year.
“While these strategies are sensible, and indeed may be essential for each individual business, they point very clearly to one of the ways the slowdown is likely to spread across the economy," said Ai Group chief executive Heather Ridout.
"With businesses tightening and delaying their own expenditures – both in response to and in anticipation of reduced receipts – an ongoing reduction in confidence and the expectation of a slowdown can quickly become self-fulfilling," she said.