Weak domestic demand brought a recovery in Japanese industrial production to a shuddering halt in the dying months of 2002, dragging output to its lowest annual level in 15 years and raising the risk of a return to recession.
A 0.1 per cent month-on-month fall in December announced by the government today means that output by Japan's factories and refineries fell 0.9 per cent in the three months to end-December after three quarters of rises driven by exports.
The December result, following a 1.6 per cent fall in November, was a bit worse than expectations of flat growth in a Reuters poll and underscored fears that the benefits of strong exports are being cancelled out by a weak economy at home.
In addition to three years of deflation that have crippled consumer confidence, a government crackdown on banks' huge bad loans and a looming conflict in Iraq are threatening to become major brakes on economic growth, economists said.
The Ministry of Economy, Trade and Industry (METI) said December's decline was mainly due to weakness in production of semi-conductor machines, trains and ships, although the drop was somewhat offset by a rise in output of cosmetics and steel. Steel exports in particular have been strong in recent months.
A recent global poll of economists showed Japan's economy was expected to grow by a meagre 0.1 per cent next business year, the slowest of any major economy.
In contrast, the US economy was expected to grow by around three per cent in 2003, Britain's by about 2.5 per cent and Germany's by 0.9 per cent.
For the whole of last year, Japanese industrial output fell 1.4 per cent, despite a shallow recovery in the overall economy. That was better than a 7.5 per cent slide in 2001, but still took output to its lowest annual level since 1988.
Any Iraq war would likely exacerbate that trend and put another brake on Japan's measly growth, which is promising to worsen its daunting structural problems such as a huge pension shortfall and the bank loan mess.