Japan's economy shrank at an annual pace of 0.4 percent in the July-September period after a declining an annualized 3.7 percent in the second quarter. That means Japan, along with the 15-nation euro-zone, is now technically in a recession, defined as two straight quarters of contraction.
"What we're starting to see is the extent of deterioration in external demand start to weigh more heavily on the Japanese economy," said Glen Maguire, chief Asia economist at Societe Generale. "And I think looking forward, there's every indication that dynamic is going to continue."
The result was worse than expected. Economists surveyed by Kyodo News agency had predicted 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 gadgets. Hurt also by a strengthening yen, a growing number of exporters big and small are slashing their profit, sales and spending projections for the full fiscal year through March.
Toyota Motor Corp., for example, has cut net profit full-year profit forecast to 550 billion yen ($5.5 billion) - about a third of last year's earnings. And Sony Corp., whose July-September profit plunged 72 percent, expects to make 59 percent less this fiscal year than last year.
Compared to the previous quarter, 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.
Investors seemed to take the news in stride. The Nikkei 225 index, already down sharply this year, edged up 0.7 percent to 8,522.58.
Since taking office in late September, Japanese Prime Minister Taro Aso has unveiled two economic stimulus packages in an effort to cushion the blow. His latest 27 trillion-yen ($275.7 billion) proposal includes expanded credits for small businesses and a total 2 trillion yen ($20.4 billion) in cash disbursements to households.
At its last meeting, the Bank of Japan cut its key interest rate for the first time in more than seven years, lowering it to 0.3 percent, joining central banks around the world in trimming borrowing costs.
In its semiannual outlook report, the central bank slashed its projection for economic growth to just 0.1 percent for the year through March, compared with a 1.2 percent gain it projected in July. It said both exports and domestic private demand have weakened.
The deteriorating conditions also recently 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 to 1998, and to the current US recession, in terms of depth of real GDP contraction," he said in a report.
Monday's data showed that net exports sapped 0.2 percentage point from growth, as the high cost of importing fuel eclipsed a slight increase in outbound shipments. Imports rose 1.9 percent, while exports grew 0.7 percent.
Private consumption, which accounts for more than half of inflation-adjusted GDP, increased 0.3 percent from the previous quarter. However, the rebound in consumer demand is unlikely to last, economists say.