Japan's recession deepens

SINGAPORE (Reuters) - Japan's exports and business sentiment tumbled, offering more evidence of a deepening recession, while Ireland became the latest nation to pump cash into banks crippled by the worst financial crisis in eight decades.

Japan, where interest rates were cut to a rock-bottom 0.1 percent last week and $54 billion in extra government spending was announced over the weekend, reported the worst ever drop in exports in November.

Adding to the gloom, a Reuters Tankan monthly survey, coming hot on the heels of the central bank's dismal quarterly poll, showed business sentiment at its lowest since the survey began more than 10 years ago.

"Sales have been falling at a speed we've never seen before," an official at an electric machinery firm said in the survey.

And in yet another sign that no nation or industry was left unscathed by the crisis that has spiraled from a U.S. housing market collapse, Ireland said it would pump $7.7 billion into its three major banks.

The relentless stream of bad news is set to continue later on Monday, when the world's top carmaker and Japan's industrial champion Toyota Motor Co is expected to forecast its first annual parent operating loss in 71 years.

The gloom depressed stocks in most of Asia, but shares crept up in Tokyo, encouraged by the government's move to bolster the world's second-biggest economy with extra spending and news that struggling U.S. carmakers secured $17.4 billion in emergency government loans over the weekend.

MARKET HOPES

"The market is growing hopeful about the situation as a whole as the government looks willing to do everything it can to stabilize the financial system," said Soichiro Monji, a chief strategist at Daiwa SB Investments.

"The U.S. autos bailout is also positive as it's better to help the automakers than let them fail."

Tokyo shares were up 1.4 percent while MSCI index of stocks elsewhere in Asia and Pacific slipped around 1 percent.

Toyota trailed the Tokyo market with a 2.8 percent loss, weighed by expectations that a collapse in global demand and soaring yen will hit its earnings.

Oil prices crawled back from last week's more than four-year lows below $34 per barrel, rising $1 to $43, but that had more to do with the dollar weakness than any sense of optimism about demand.

The global turmoil has already pushed much of the world's economy into recession, prompting policymakers to dish out trillions of dollars in bailouts and fiscal stimulus packages and drive borrowing costs aggressively ever closer to zero.

Taking cue from Washington, Canada pledged $3.3 billion for its carmakers over the weekend.

And Ireland, once dubbed the Celtic Tiger for its booming economy, was the latest to pitch in with 5.5 billion euros ($7.7 billion) earmarked for stakes in Anglo Irish Bank, Bank of Ireland and Allied Irish Banks.

But International Monetary Fund chief Dominique Strauss-Kahn warned all that may still not be enough to prevent a bad 2009 from getting even worse.

"I'm specially concerned by the fact that our forecast, already very dark ... will be even darker if not enough fiscal stimulus is implemented," he said in an interview with BBC radio on Sunday. The IMF has called for higher government spending and temporary tax cuts worth $120 trillion, or 2 percent of world annual economic output, to escape the worst economic downturn since the 1930s Great Depression.

RACE TO ZERO

Japan is just a step away from zero rates and some economists believe more dismal data expected later this week may force the central bank to return to its policy of flooding banks with cash to inflate the economy, which it abandoned only in 2006.

The U.S. Federal Reserve already ventured into that territory last week, slashing its benchmark funds rate to a range from zero to 0.25 percent and promising to supply banks with unlimited cash and keep rates low over an extended period.

There are growing expectations that the Bank of England, whose benchmark rate is now at 2.0 percent, may also join the race to zero soon.

The European Central Bank, which this month slashed its key rate by the biggest ever margin to 2.5 percent is expected to tread more cautiously, but one of its policymakers said it may cut again in January.

"If, among other variables, we see that inflation expectations are much lower than 2 percent, it's logical that we would lower rates," Bank of Spain Governor Ordonez told El Pais daily.

However, in a sign that ECB policymakers may be divided over the course of further action, board member Lorenzo Bini Smaghi dismissed suggestions that the ECB should follow the Fed's example.

"The United States' situation is very different from Europe's," he said in an interview with Il Messaggero daily published on Sunday.

"We must not forget that the current crisis was caused by a period of interest rates taken to a very low level for too long."

(Reporting by Reuters bureaus around the world; Editing by Lincoln Feast)