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Shoichi Nakagawa faces questions about wobbly performance at G-7 meet as government announces economy shrank at 12.7% rate in fourth quarter.

It wasn't the biggest economic contraction in more than three decades that piqued the attention of Japan's media on Monday. It was the apparent drunken attempt of the country's finance minister, Shoichi Nakagawa, to respond to questions at a press conference in Rome following the end of a Group of Seven meeting that fueled chatter in Tokyo.

Eyes drooping and red-faced, Nakagawa slurred his replies and fumbled his answers to reporters in Italy's capital on Saturday. Greeting him back at work in Tokyo on Monday was unequivocal evidence that Japan's economy is the worse for wear. In the three months to the end of the year, the world's second-biggest economy shrank by an annualized rate of 12.7% as exports collapsed. (See "Japan Hits The Skids" and "Asia's Economic Dragons Wheezing")

In a sign of how consumers have shunned made-in-Japan products, Toyota Motor (nyse: TM - news - people ), the nation's leading manufacturer, expects to lose close to $5 billion this year compared with a profit of almost $7 billion a year earlier. (See "Moody's Puts The Boot Into Toyota") Toyota and the rest of the Japanese economy may be in for an even bumpier ride going forward.

"Everything indicates that Q1 will be worse. It's a very severe economic adjustment," said Glenn Maguire, chief Asia-Pacific economist for Societe Generale in Hong Kong. Making matters worse for Japan is the yen. As investors take refuge in the Japanese currency, its value against the dollar and other currencies has gained some 40% in recent months. That means "further retrenchment in capacity and labor," added Maguire, who predicts that average real GDP contraction in 2009 will be between 5% and 8%.

In Rome, Nakagawa, along with other G-7 finance ministers and central bank heads, agreed that the state of the world economy was dire, describing it in a statement as "severe." The group also committed itself to "act together using the full range of policy tools to support growth and employment and strengthen the financial sector.

Back in Tokyo, Nakagawa reportedly blamed his condition on having imbibed too much cough medicine. Speaking on television, one former prime minister, Yoshiro Hori, admonished Nakagawa for his Rome performance.

Nakagawa's boss, Prime Minister Taro Aso, is struggling to deliver on the G-7 commitment. Stimulus measures have been bogged down by political wrangling both within the ruling Liberal Democratic Party and with the opposition Democratic Party Of Japan, which controls the upper chamber of Japan's parliament. With an approval rating dipping below 10% and a national election looming, the beleaguered prime minister, who promised that Japan would be the first industrialized nation to emerge from recession, may have to leave it to his successor to fix the economy.

The reality, reckons Societe Generale's Maguire, is that Japan will be "first in and last out," as a quarterly recovery is unlikely until the second half of 2010. With little hope to sustain it, reaching for the bottle may be the only way for some Japanese to dull the economic pain.

ROME, Feb 14 (Reuters) - The G7 industrial powers, fearing a 1930s-style resurgence of protectionism, ended crisis talks in Rome on Saturday with a pledge to do all they could to combat recession without distorting free trade.

Aware of their limits, they also adopted a more conciliatory tone towards China, a non-member regarded as vital to success at an April G20 summit in London where both rich and developing economies hope to produce visible progress on promises to make the global financial system safer and more accountable.

"We are confronted with a broader and deeper slowdown than has been experienced in decades," said U.S. Treasury Secretary Timothy Geithner.

"We will work closely with our colleagues in the G7 and the G20 to build consensus on reforms that match the scope fo the problem revealed by this crisis."

On the day in Rome, it was mostly renewed pledges from the gathered finance ministers and central bankers, amid mounting tension over the impact economic stimulus plans and state bailouts of industry could have on each other.

Geithner, making his G7 debut in the job, publicly rowed back on comments that Beijing was manipulating its exchange rate to its advantage in export markets and sought to soothe concerns over Washington's own anti-crisis plans.