Japan’s government faced pressure for another stimulus package on Monday after plunging exports pushed the country, the world’s second largest economy, into its worst slump in 35 years.

Economists see little prospect for a quick rebound after a quarter-on-quarter fall of 3.3 per cent in gross domestic product in the last three months of 2008.

The decline was worse than economists had forecast and equivalent to an annualised fall of 12.7 per cent – the steepest drop since 1974 when import-dependent Japan suffered because of soaring oil prices.

This time, collapsing demand for exports and weak domestic consumption are to blame.

“This is the biggest economic crisis since the war,” said Kaoru Yosano, minister for economic and fiscal policy.

Government leaders have resisted announcing new action as a stimulus package drawn up last year, which includes a Y2,000bn ($22bn) cash handout, and the main budget for the year from April, move slowly through a parliament in which the opposition controls the upper house.

The decline in GDP is fuelling calls for more aggressive measures from the government and the Bank of Japan.

Senior members of the ruling Liberal Democratic party have called for a stimulus package of up to Y30,000bn to be drawn up. Mr Yosano acknowledged that there was a need to “exercise our minds” to find policies to boost the economy but said there was no obvious “good way” to spend so much money.

“The important thing is to handle matters calmly. Noisily running around in circles won’t solve anything,” said Mr Yosano, who has long stressed the need for Japan’s highly indebted state to rebuild its fiscal position.

The opposition Democratic party has been emboldened by comments by Junichiro Koizumi, LDP Diet member and former prime minister, who said there was no need for the ruling party to use its two-thirds majority in the lower house to push through the handout plan.

Economists warned on Monday that the current quarter could be as bad as the last three months of 2008 and that recovery would be complicated by looming deflation even if the rate of decline in GDP slowed down.

While plunging net exports accounted for three percentage points of the fourth-quarter drop in GDP, private consumption also fell – a sign of the effect on sentiment of layoffs and production line shutdowns by some of Japan’s biggest companies.

“The deterioration is penetrating into households,” said Kyohei Morita, chief economist at Barclays Capital in Japan.

Fears of an equally dismal contraction this quarter have been fuelled by a positive contribution of 0.4 percentage points to GDP from growing inventories in the last three months of 2008.

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