Jan. 30 (Bloomberg) -- Japanese manufacturers cut production an unprecedented 9.6 percent last month, deepening a recession that’s expected to be the worst in the postwar era.

The drop eclipsed the previous record of 8.5 percent decline set in November, the Trade Ministry said today in Tokyo. Economists predicted a month-on-month decrease of 8.9 percent.

Recessions in the U.S. and Europe and a slowdown in China have smothered demand for Japanese cars and electronics. Toyota Motor Corp., Sony Corp. and Honda Motor Co. are shutting factory lines and firing thousands of workers as plummeting sales abroad wipe out earnings.

“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.

Other reports released today showed that what began as an export-led downturn has spread to the domestic economy, taking a toll on households, whose spending accounts for more than half of the economy.

Job cuts by the country’s manufacturers drove the unemployment rate to 4.4 percent last month from 3.9 percent in November, the Statistics Bureau said today; household spending fell 4.6 percent, a 10th month of declines.

Consumer Prices

Consumer prices excluding fresh food rose 0.2 percent in December from a year earlier, slowing from 1 percent in November.

Retailers including Aeon Co., Japan’s largest supermarket operator, are lowering prices to lure cash-strapped households. Sentiment among consumers fell in December to the lowest level since the government started tracking the figure 26 years ago, a report last week showed.

Parliamentary gridlock has stymied the ruling Liberal Democratic Party’s efforts to pass a 10 trillion yen ($111.2 billion) stimulus package that seeks to encourage consumer spending. The Bank of Japan, which last month lowered interest rates to 0.1 percent, has little room to counter the downturn.

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 to become the longest on record, Hiroshi Yoshikawa, a Tokyo University professor who heads the committee, said in an interview this month.

Exports tumbled a record 35 percent in December, decimating corporate earnings and bringing the global recession home to Japanese households as companies cut work hours and fire employees.

Toyota, which is forecasting its first loss in 71 years, will halt its home production for 14 extra days this quarter.

“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,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “The numbers are frightening.”

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

Last Updated: January 29, 2009 18:51 EST