Japan's central bank said on Friday a deterioration in corporate profits had gathered pace, as investors fretted about the health of the rich world's big banks and the economic gloom gripping cash-strapped eastern Europe.
Asian stocks fell, after the Dow Jones industrial average had closed at its the lowest level since October 2002 following a report that showed the number of U.S. workers claiming unemployment benefit rose to a record of nearly 5 million.
"There has been nothing of good news on the global economic front for some time and even the shock value of truly horrible data appears to have faded," said Patrick Bennett, Asia foreign exchange and rates strategist at Societe Generale in Hong Kong.
In its monthly report on Friday, the Bank of Japan reiterated that economic conditions were deteriorating rapidly — its bleakest diagnosis ever — and would likely continue to worsen for the time being.
Japan has been hit particularly hard by the global slump, triggered by the U.S. housing market meltdown, due to its heavy dependence on exports and chronically weak domestic consumption. News earlier this week that Japan suffered its worst quarterly decline since the 1974 oil crisis underscored the fragile state of the world's No. 2 economy, seen on course for its longer recession in modern times.
The contraction of Japan's main export markets is pushing firms such as Toyota Motor Corp and Sony Corp deep into the red, prompting job and production cuts and setting the economy on course for its longest recession in modern times.
Gloom at home and fears of more pain awaiting financial institutions and whole nations around the globe, sent Tokyo stocks plumbing new lows.
The Nikkei share index ended at its lowest since October and the broader Topix closed at its lowest in about 25 years, with bank stocks such as Mitsubishi UFJ Financial Group and Mizuho Financial Group among top losers.
"The market is now worried about the economic situation in eastern European countries such as Poland and the health of their banks, and then the implication for other European banks that had made loans to those banks," said Takashi Kamiya, chief economist at T & D Asset Management.
BANK SHARES TUMBLE
Shares of major U.S. banks tumbled on Thursday on concerns about government plans to mop up bad assets from their books. The KBW banks index fell to its lowest level since 1992, led by a 14 percent slide in Bank of America shares.
"There seems to be a whiff in the air that we're moving much closer to nationalisation, which would effectively wipe out stockholders," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale Illinois.
U.S. government data showed both a record number of continuing unemployment claims, nearly 5 million, and a surprisingly sharp drop in manufacturing in the mid-Atlantic states..
South Korea's won fell to near an 11-year low on fears that banks in Asia's fourth-largest economy may increasingly struggle to refinance their debts as the global credit crunch keeps dollars in short supply.
In eastern Europe, evidence has been mounting of governments having trouble finding sources of financing, as global economic woes have reduced the available cash to fund budget deficits, investment and domestic lending.
Romania is expected to decide later this month whether it needs to seek financing help from the European Union or the International Monetary Fund. Similar difficulties finding cash swept through Hungary, where bond yields jumped as buyers demanded a premium to invest in the region's wobbly economies.
German Chancellor Angela Merkel said that her country stood ready to help eastern European countries in financial trouble, primarily through the IMF.
European Commission President Jose Manuel Barroso said the commission was "contemplating all scenarios" and had 15 billion euros available after previously providing a total of 9.6 billion euros to Hungary and Latvia.
EMERGING MARKETS RISK
Garry Evans, pan-Asian strategist for HSBC in Hong Kong, said events in eastern Europe could hurt other emerging markets.
"The biggest risk for Asia, then, is one of sentiment," he said in a note.
"If conditions do continue to deteriorate for eastern European markets — even to the extent that they trigger intervention by the IMF or EU — this is likely to sour global investors' views on emerging markets in general."
In Britain, policymakers are grappling with how close interest rates can get to zero, Bank of England Deputy Governor John Gieve said.
He said Britain also faced a risk of entering a Japanese-style depression and that was why the bank's Monetary Policy Committee had cut interest rates to a record low of 1 percent this month.
