Jan. 30 (Bloomberg) -- Japan headed for its worst postwar recession as factory output slumped an unprecedented 9.6 percent in December, unemployment surged and households cut spending.

The drop in production eclipsed the previous record of 8.5 percent set only a month earlier, the Trade Ministry said today in Tokyo. The jobless rate soared to 4.4 percent from 3.9 percent, the biggest jump in 41 years.

Recessions in the U.S. and Europe and a slowdown in China have smothered demand for Japanese cars, electronics and machinery. Hitachi Construction Machinery Co. said this week that it will eliminate 569 jobs by March and shut a plant northeast of Tokyo for four days a week until June. Honda Motor Co. this week widened production cuts.

“Japan’s economy is falling off a cliff,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “There’s really nothing out there to drive growth.”

The Nikkei 225 Stock Average sank 3.5 percent as of 2:47 p.m. in Tokyo, led by Nintendo Co., which cut its profit forecast by a third yesterday. The Nikkei has fallen 10 percent this year, extending last year’s record 42 percent drop.

The yen traded at 89.32 per dollar from 89.99 before the reports were published. The Japanese currency’s 18 percent gain in the past year has compounded exporters’ woes by eroding the value of their profits earned overseas.

Households Cut Back

Household spending slid 4.6 percent, a 10th month of declines, separate figures showed. Consumer prices excluding fresh food rose 0.2 percent in December from a year earlier, slowing from 1 percent in November.

The month-on-month decline in production was steeper than the 8.9 percent economists predicted and the biggest since the figures were first compiled in 1953. Output tumbled 11.9 percent in the three months to December, the ministry said, the fourth straight quarterly drop. Companies planned to reduce production a further 9.1 percent in January and 4.7 percent in February.

South Korean output also declined by the most on record in December, plunging 18.6 percent from a year earlier, a report showed today.

“There’s a global synchronized recession and manufacturers are responding aggressively,” said Jan Lambregts, head of Asian research at Rabobank International in Hong Kong. “That’s going to have a profound impact” on economic growth.

The International Monetary Fund said this week that Japan’s gross domestic product will shrink 2.6 percent this year, the bleakest projection for any Group of Seven economy except the U.K. That contraction would be Japan’s worst since World War II.

Record Contraction

Nishioka at RBS estimated GDP fell at an annual 14 percent pace from October through December. That would exceed a 13.1 percent drop in the first quarter of 1974 to become the sharpest on record. Economists predict a report later today will show the U.S. economy, Japan’s biggest market, shrank an annualized 5.5 percent pace last quarter, the biggest drop since 1982.

Japan’s recession began in November 2007, a government panel that dates the economic cycle said yesterday. The slump may last more than three years and exceed the 1980 to 1983 downturn to become the longest on record, Hiroshi Yoshikawa, a Tokyo University professor who heads the committee, said in an interview this month.

“We’re in a very grave situation,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo today. “Japan is being hit by this wave of weakening global demand.”

Gridlock in Parliament

Parliamentary gridlock has stymied the ruling Liberal Democratic Party’s efforts to pass a 10 trillion yen ($111.2 billion) stimulus package. The Bank of Japan, which last month lowered interest rates to 0.1 percent, has little room to counter the slump other than by purchasing corporate debt to ease a credit squeeze, which it started to do today.

Exports tumbled a record 35 percent in December, decimating earnings. Toyota Motor Corp., which is forecasting its first loss in 71 years, will halt domestic production for 14 extra days this quarter. Smaller rival Honda plans to axe all of its 3,100 temporary workers in Japan.

“If the production cuts ended with the carmakers that would be one thing, but the carmakers drag down the steelmakers and the suppliers along with them,” RBS’s Nishioka said.

Last month’s increase in the jobless rate was the sharpest since 1967, the statistics bureau said. Some 400,000 non-regular workers will lose their jobs by March 31, the Japan Manufacturing Outsourcing Association said this week. That’s more than three times the 124,802 predicted by the Labor Ministry today.

“This deep recession could compel companies to cut full- time workers,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “The jobless rate could rise to around 5 percent, giving us more reasons not to expect consumer spending to support the economy.”

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: January 30, 2009 00:49 EST