TOKYO - Japan's economy will probably shrink at an annual 12.1 percent pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said.

Gross domestic product in the three months ending Wednesday will fall at almost three times the 4.1 percent rate previously predicted, said Kyohei Morita, chief Japan economist at Barclays in Tokyo, after reports last week showed industrial production and exports posted the biggest declines on record in November.

"Given the speed and the length of the contraction, this recession could be the most severe in the postwar era," Morita said. "We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009."

Plunging sales of cars and electronics are forcing companies from Toyota Motor to Panasonic to idle plants and fire workers. The Nikkei 225 Stock Average tumbled a record 42 percent in 2008, eclipsing a 39 percent slide in 1990 that helped trigger a decade of economic stagnation and deflation.

A 12.1 percent annualized contraction would be the steepest since the first quarter of 1974, when the oil shock caused the economy to shrink 13.1 percent, according to Barclays.

Japanese government bonds completed the best year since 2002, with the yield on the benchmark 10-year bond falling 3.5 basis points to 1.165 percent, the lowest in more than five years, at the close in Tokyo Tuesday.

Closing down factories
Panasonic Electric Works, a Panasonic subsidiary, said it plans to shut three factories and eliminate 1,000 jobs by the year ending March 2011. Aeon, Japan's largest supermarket operator, will cut spending on stores at home and slow expansion in China.

"External demand has vanished," Tomoko Fujii, head of Japan economics and strategy at Bank of America in Tokyo. "Almost every industrialized nation is in a recession. Even in China, growth is slowing sharply."

Japan Research Institute went even further, foreseeing a 14.1 percent drop.

"I couldn't believe my eyes when I calculated the figures," said Takuto Murase, an economist at the researcher, which is owned by Sumitomo Mitsui Financial Group. "This could be the worst contraction in the postwar era."