Grim Japan, U.S. figures show world crisis deepening

LONDON (Reuters) - Japan sank deeper into recession with industrial output tumbling at a record pace and inflation near zero, while data was expected to show the U.S. economy contracting at its fastest rate in 26 years.

As the world global economic crisis deepened, Euro zone unemployment hit 8.0 in December while inflation fell to a near 10-year low of 1.1 percent, Eurostat said on Friday, heightening expectations the European Central Bank, will slash interest rates in March.

British mortgage lending in December came off all-time lows to rise three times faster than expected, in what could be an early indication banks have started to lend again after capital injections from the government.

However, the trend was far from global. In Australia, private sector credit shrank in December for the first time since 1992 as foreign banks cut lending.

Japanese GDP figures in February are now expected to show its economy shrinking at a double-digit rate after industrial production fell 9.6 percent in December, with companies forced to cut output as demand for cars, electronics and machinery waned, while annual core inflation slowed to just 0.2 percent.

Rising unemployment, slowing household spending and no improvement in the industrial outlook added to investors' fears Japan was flirting with deflation and would post a horror GDP figure in February if exports do not bail it out.

"It is already a consensus view that core consumer inflation will turn negative soon, but we must watch if a worsening of the economy pushes Japan into a deflationary spiral even though the Bank of Japan sees no signs of that happening right now," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.

Worsening economic conditions could see drastic measures from central banks seeking inventive ways to support economies and help credit markets that are starving companies of cash.

HSBC, Europe's biggest bank and one of the few major banks that has not needed government support, said fair value accounting and capital adequacy rules had worsened the financial crisis, and called for a new set of principles and rules to boost financial market transparency.

Chairman Stephen Green said: "Business needs to co-operate with government and regulators in the creation of a new global marketplace for all industries and consumers."

U.S. SHRINKING

More bad news was expected in the United States on Friday.

Economists think the U.S. Commerce Department will report fourth-quarter gross domestic product, the broadest measure of economic activity, shrank an annualized 5.4 percent.

Figures on Thursday showed new U.S. single-family home sales fell 14.7 percent in December to an all-time low. The number of Americans receiving unemployment benefits jumped to a record 4.78 million in mid-January and first-time filings also rose.

U.S. President Barack Obama is seeking to get a $819 billion stimulus plan through the Senate, following its passage through the House of Representatives this week, before mid-February.

British mortgage lending rose three times as fast as expected in December, an early indication banks have started to lend again after capital injections from the government.

Despite the rise in British mortgage lending, UBS economist Amit Kara said the housing market remained tough.

"It's clearly better than expected, but it's important to remember that we are coming off all-time lows. These numbers are consistent with further pretty sharp falls in house prices.

In Australia, Reserve Bank of Australia figures showed total credit fell 0.3 percent in December, well below a forecast 0.5 percent rise, fuelling expectations the central bank would announce another hefty interest rate cut next week.

Economists said the surprise figure strengthened the case for a second stimulus package in Australia, accelerated income tax cuts and increased government spending.

Across the Tasman Sea, the once-favored New Zealand dollar fell to another six-year low after the central bank said interest rates would likely be cut further, a day after the benchmark rate was cut by 1.5 percentage points.

European stocks were little changed in mid-morning trade after Japan's Nikkei share average closed 3.1 percent lower on the bad industrial output and rising unemployment news. The falls followed a similar decline on Wall Street after record monthly U.S. unemployment figures.

On currency markets, the dollar was firmer against the euro but down on the yen.

LOSERS UNION

Major global companies are providing daily evidence of how deep the global crisis is biting, costing governments trillions of dollars and threatening millions of jobs.

Toyota Motor was likely to post a 2008-09 operating loss in excess of its latest forecast of 150 billion yen ($1.66 billion), a company source said, because of big production cuts planned in coming months. The Nikkei business daily said Toyota's loss would hit 400 billion yen.

Rival Honda Motor lowered annual profit forecasts for the fourth time in a year, and after a December 17 warning.

Toshiba Corp was in talks to merge part of its chip operations with NEC Corp's semiconductor unit as they battle slumping demand and prices, a source with knowledge of the negotiations said. Toshiba had already warned it would post its biggest annual loss ever and its shares slid 17 percent.

Separately, NEC said it would cut 20,000 jobs, including some already announced, by March 2010.

"It's a losers' union," said SMBC Friend Securities manager Fumiyuki Nakanishi. "The domestic chip industry appears at the brink of death."

(Additional reporting by Paul Tait in Singapore and Reuters bureaux; Editing by Jon Boyle)