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Japan - world's No. 2 economy - in recession

Government says country's gross domestic product contracted at 0.4% annual rate in third quarter.

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A financial crisis that began when the U.S. housing bubble popped has engulfed countries large and small around the world.

TOKYO (CNN) -- Japan -- the world's second-largest economy -- is in a recession, government officials announced Monday.

Japan's Cabinet Office confirmed that its economy shrank another 0.1% in its third quarter, following a 0.9% drop in the second quarter. The country's gross domestic product -- second to the United States -- has fallen by 0.4% this year, pushing Japan into its first recession since 2001.

The financial crisis has spread to all corners of the world. In Europe, the pain has been particularly acute. The European Union on Friday officially declared that the 15-nation group had entered into a recession, with its gross domestic product declining 0.2% for the second straight quarter.

Major indexes around the globe have plummeted over the last two months amid the economic gloom. The Russian stock market has lost 65.5% of its value since the start of the year. Stocks in Japan and the U.S. have been equally hard hit, falling 42% and 33%, respectively.

Japanese Prime Minister Taro Aso was among the Group of 20 world leaders that met in Washington over the weekend, unveiling a set of sweeping plans aimed at tackling the ever-expanding economic crisis, which has roiled financial markets worldwide.

The G-20 members at the historic two-day meeting managed to find some common ground on both the causes of the crisis and areas that need to be fixed.

The plans include interest rate cuts by central banks around the globe or potential economic stimulus packages, and boosting developing countries struggling under the weight of the crisis.

Japan's recession announcement was not unexpected. Part of the problem is the strong yen, which skyrocketed in recent weeks as turmoil in the world's financial markets and concerns about a global recession drove investors away from high-yielding currencies such as the euro and the pound. As a result, lower-yielding currencies like the dollar and the yen surged in value, because they are considered by many investors to be a safe haven.

Since Japan is such a big exporter of goods, a more robust yen hurts profits for Japanese firms as sales from abroad get translated back into yen. The more that the yen has climbed, the worse Japan's stock market has performed, which has resulted in a ripple effect on European and U.S. exchanges.

After an early selloff Monday, Japan's Nikkei 225 stock index rebounded. The index finished the session up nearly 1%.

-- CNN's Junko Ogura and Kyung Lah contributed to this report. To top of page

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