Japan sank into recession with its ailing economy shrinking 0.5 percent in real terms in the July-September period from the previous quarter, the Cabinet Office said Friday. The drop translates into an annualized rate of 2.2 percent.

The gross domestic product, or the total value of goods and services produced within the nation's borders, fell for the second straight quarter.

Prices fell for the 14th consecutive quarter, consumer spending took a heavy hit and public spending began to slow, according to the report.

"Household spending was worse than I expected," fiscal policy minister Heizo Takenaka said. "The results confirm that we were correct in passing a supplementary budget."

While Takenaka said Japan "hasn't fallen into a deflationary spiral yet," he noted that "price falls from production factors have spread further than previously thought."

The numbers were along economists' expectations and had little impact on financial markets. But they were expected to add pressure for further government spending. It was also expected to increase pressure on the Bank of Japan to further ease its already ultra-easy monetary spending to halt the slide in prices.

"Households are cutting back on spending, businesses are slashing wages and prices are falling," said Akimasa Okada, an economist at NLI Research Institute. "For Prime Minister Junichiro Koizumi's administration's structural reforms to move forward, more attention needs to be paid to boosting demand."

Japan's economy has witnessed a series of starts and stops for more than a decade. The economy shrank for two consecutive quarters just three years ago, between January and June 1998.

Two consecutive falls in GDP meet the textbook definition of a recession.

Banks face mounting bad debts, unemployment is at a record high 5.4 percent and bankruptcies continue to climb. The global slowdown after the Sept. 11 terrorist attacks in the U.S. has hit exports, while consumer spending, which makes up roughly 60 percent of the economy, has taken a turn for the worse.

Friday's results show private-sector spending fell an unexpected 1.7 percent from the previous quarter. The quarter's figure was revised to a fall of 1.1 percent, instead of the previously reported rise of 0.5 percent.

Spending on radios, televisions, international air fares, clothes and recreation fell for the three months ending Sept. 30, the Cabinet Office said. Meanwhile, capital spending unexpectedly showed a quarter-on-quarter climb of 1.1 percent.

"If we take these numbers at face value, it means that the slump in household spending is falling more quickly than either the government or the Bank of Japan has reported," said Yasunari Ueno, chief market economist at Mizuho Securities Co. "It raises the old question about the reliability of this report."

The rapid falls in household spending came before Japanese companies felt the full impact of the global economic slowdown.

"I believe the October-December quarter will bring severe results," Takenaka said, adding the Cabinet Office's forecast of a year-on-year fall of 0.9 percent was attainable, based on forecasts of a speedy U.S. economic recovery.

Friday's number follows a 1.2 percent contraction in growth in the April-June quarter, revised from a fall of 0.7 percent.

"The numbers show the economic situation is poor," Finance Minister Masajuro Shiokawa said. "We should take this seriously. But GDP didn't fall as much as the previous quarter and that is heartening."

The government recently revised GDP figures dating back a decade -- in some cases statistically erasing entire recessions or making big upward revisions to figures.

"Because of the large upward revision to the January-March GDP made recently, the April-June figures actually represent an upward revision," said Minako Iida, economist at Deutsche Securities Co. "So a 0.5 percent contraction from there in July-September isn't too bad."

Koizumi has promised structural reforms and short-term pain that he said will bring the economy on to a long-term recovery track.

Some of that pain is already being felt as banks cut loans to loss-making companies.

Earlier this week, construction firm Aoki Corp. went under in a failure that Koizumi said showed that banks were making progress in clearing up their nonperforming loans, a key step for reforms.