Japan fell deeper into recession with its worst quarterly contraction in 35 years, data showed yesterday, with its reliance on exports and soft domestic demand dragging down the world's second-largest economy.

Japan's grim data came after financial leaders from the Group of Seven (G7) foreshadowed unorthodox solutions to the global financial crisis as scope for more traditional tools diminished amid near-zero interest rates.

Even though Japan has been relatively insulated from the collapse of the US credit and housing markets, which precipitated the global crisis, Japanese Economics Minister Kaoru Yosano said his country faced its worst economic crisis since World War II.

With demand for its cars and electronics waning, an unprecedented slump in exports saw its economy shrink by 3.3 per cent, marking three straight quarters of contraction and its worst result since the first oil crisis in 1974.

"The data showed a severe picture of the Japanese economy and highlighted the weakness in exports," said Takeshi Minami, chief economist at Norinchukin Research Institute.

European Central Bank President Jean-Claude Trichet foreshadowed "non-standard measures" to tackle the crisis, but said the ECB had not drawn any conclusions after discussions with other central banks.

US and Japanese rates are now virtually zero, with the Bank of England and the ECB heading that way, leaving policy makers searching for alternatives to traditional tools like rate cuts and stimulus packages to boost spending.

Japan applied the measure with mixed results earlier this decade during its previous battle with deflation, a damaging spiral of falling prices in which consumers defer spending. ECB policy makers have said measures already put in place were starting to take effect.

The ECB held interest rates at two per cent this month, but figures last week showing the eurozone economy had shrunk 1.5 per cent in last year's fourth quarter meant a cut to a record low of 1.5 per cent was likely next month.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.