The New Nation - Internet Edition

Reuters, Tokyo

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.

Leaders of the world's 20 largest economies, meeting in Washington over the weekend to address the worst financial crisis in 80 years, agreed on a host of fiscal and monetary steps to rescue the global economy.

But they left it to individual governments to tailor their response to their own circumstances and troubled industries.

"Taken as a whole, it does not appear that the outcome of the summit will be sufficient to stem the financial crisis.

This was a high bar from the start," said Marc Chandler, global head of currency strategy with Brown Brothers Harriman in New York.

MADE THINGS WORSE

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. Even the long-running Doha round of free-trade talks was given a new lease on life.

Finance ministers were told to develop specific plans for implementing the recommendations.

The first set of actions is to be completed by the end of March, and a follow-up meeting will be held by the end of April.

U.S. President-elect Barack Obama sent emissaries to the event, and issued a statement in support of a coordinated response to the global financial crisis.

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.

As well, U.S. Treasury Secretary Henry Paulson is due to speak on the economy and markets later on Monday.