Japanese Economy, Leader Both Sinking

Premier's Low Ratings Limit Government's Options

TOKYO, Feb. 17 -- Japan's economy, the second-largest in the world, has recorded its worst performance in more than three decades. And the government's capacity to revive it has been weakened by the plunging popularity of Prime Minister Taro Aso.

Aso's effectiveness took another hit Tuesday morning, when a key member of his economic team said he would resign. Finance Minister Shoichi Nakagawa had come under withering criticism here after appearing to be drunk after a weekend meeting in Rome of finance ministers from the world's richest countries.

The economy shrank at an annual pace of 12.7 percent in the last three months of 2008, the government said Monday.

Exports during the quarter dropped a record 13.9 percent, as global demand evaporated for Japanese cars and electronics. Major companies such as Toyota and Sony have posted record losses, halted production in many factories and ordered widespread layoffs.

"There's no doubt that the economy is in its worst state in the postwar period," said Kaoru Yosano, minister of economic and fiscal policy.

The economy is falling faster here than in the United States or most other industrialized countries because of Japan's extraordinary dependence on exports for growth. Yosano said sales of autos, electronics and capital goods have been "severely hit" by the global downturn.

The yen's 18 percent gain against the dollar in the past year raised the worldwide price of Japanese exports just as demand for them fell off a cliff.

The pace of decline here has exceeded even the gloomy predictions of market experts polled by the Kyodo news service. They had forecast an annual fall of 11.6 percent. The 12.7 percent figure announced Monday marks the steepest slide since the 1973-1974 oil crisis.

The grim numbers are likely to increase popular pressure on the government to do more to stimulate economic recovery. But there may be little that the current government can do.

The public appears to have lost faith in the leadership of Aso, who has been in power less than six months. His approval rating fell below 10 percent in the most recent national opinion poll.

Further damaging the prime minister was the appearance last weekend of Aso's close ally Nagakawa in Rome, where finance ministers from the Group of Seven leading industrial countries met last weekend.

Nagakawa's slurred answers to reporters' questions after the meeting have been repeatedly broadcast by Japanese television, and he was facing enormous public and political pressure to step down.