Japan unexpectedly sank into recession in the third quarter, even before it felt the full force of the financial crisis, putting more pressure on world leaders to deliver on a promised global economic rescue plan.
With the euro zone also in recession, the U.S. economy shrinking in the third quarter and China slowing sharply, markets shrugged off pledges from leaders of the Group of 20 nations to stimulate growth and reform the financial system.
Oil fell more than $1 to below $56 a barrel and stock markets retreated in Asian trading.
The yen and U.S. dollar initially pressed higher as investors pulled cash away from emerging markets and riskier assets, before a rebound in Tokyo share prices from early losses dampened fear-driven demand for the Japanese currency.
Consensus forecasts had suggested Japan's economy would narrowly avoid its first recession in seven years, but Economics Minister Kaoru Yosano said he was not surprised and expressed concern about neighbouring China as well.
"As data shows, China's economy seems to be slowing. We are seeing clear signs that the global financial crisis is also affecting BRICs economies," Yosano told a news conference, referring to Brazil, Russia, India and China.
WORSE TO COME
Japan's third-quarter data did not capture the full impact of the crisis that erupted in September, destroying Wall Street banks and threatening to rupture the global financial system.
Japan had largely escaped the first rumblings of the crisis triggered last year by U.S. mortgage defaults.
It felt the first major tremors in October when the Tokyo stock market crashed, forcing banks to try to replenish capital. A surge in the yen also sideswiped exporters facing their toughest markets in decades.
"I think that it is possible for the negative growth to continue in the second half of the fiscal year," said Tatsushi Shikano, a senior economist at Tokyo's Mitsubishi UFJ Securities. "The economy abroad, especially the United States, is slowing down and it is likely that exports will remain weak."
G20 LAUNDRY LIST
The euro zone is already in its first recession since its creation in 1999 and most economists say the United States is probably in a downturn as well, although official data confirming that will not come until January.
Britain will suffer its sharpest economic contraction in almost two decades next year, and unemployment could rise to almost 3 million by 2010, according to the Confederation of British Industry.
International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn told the BBC that the European Central Bank had scope to cut interest rates and warned the IMF was likely to need at least $100 billion in extra funding over the next six months.
The IMF said on Saturday that it had agreed with Pakistan on a $7.6 billion emergency loan to stave off a balance of payments crisis and pave the way for a broader economic rescue plan.
And on Sunday, Iceland said it had reached a deal with several European Union states on how to repay thousands of foreign savers with money in frozen Icelandic accounts, potentially paving the way for an IMF-led package worth as much as $6 billion for the crisis-hit country.
Leaders of the world's 20 largest economies, meeting in Washington over the weekend, agreed on a host of steps to rescue the global economy from the worst financial crisis in 80 years.
But they left it to individual governments to tailor their response to their own circumstances and troubled industries.
With a $700 billion fund promised to stabilise the battered U.S. financial system, the outgoing Bush administration and its successor must tackle the urgent question of how, or whether, to rescue the nation's "big three" automakers.
The Senate is due on Monday to begin debating emergency legislation to provide $25 billion in aid to General Motors Corp, Ford Motor Co and Chrysler LLC.
Also on Monday, U.S. Treasury Secretary Henry Paulson is due to speak on the economy and markets.
SPECIFIC PLANS
The post-meeting statement from the group of major industrialised and developing countries contained a laundry list of reform pledges aimed at soothing volatile markets and calming consumers' worries.
"This weekend's G20 summit failed to deliver any new stimulus measures to rescue the world economy from the current recession, but at least it avoided the knee-jerk responses (such as rushed regulation) that would have made things worse," Julian Jessop at London-based Capital Economics said in a report.
"The real purpose of this summit was to agree a work programme for reform of the global financial system. In that respect we would suggest that it has been a success."
The G20 statement said that all financial markets, products and participants would be subject to supervision, vowed tougher accounting rules, a review of compensation practices and greater cooperation between national regulators.
Finance ministers were told to develop specific plans with the first set of actions to be completed by the end of March, and a follow-up meeting held by the end of April.