Japan's January trade deficit ballooned to 952.6 billion yen (9.9 billion dollars) -- the worst reading since records began 30 years ago -- as exports plunged 45.7 percent, highlighting the economy's vulnerability.

"Because of the shrinking global economy, Japan's business model of being dependent on exports is not working at all," said Barclays Capital chief Japan economist Kyohei Morita.

With the US, Europe and Japanese economies all in recession at the same time, none of them can get any traction from exports as they have done in the past, threatening a vicious downward circle of falling demand that could lead to a repeat of the 1930s Great Depression.

"In my view the global economy is heading into a depression so the prospect of a recovery in demand for Japan's goods in the near- to mid-term are very low," said Kirby Daley, senior strategist at Newedge Group in Hong Kong.

Tumbling exports also undermined Germany as official data confirmed that the economy, Europe's largest, contracted 2.1 percent in the fourth quarter of 2008 as the world's largest exporter saw its overseas shipments slump 7.3 percent.

If governments are to stand any chance of getting demand growing again, they have to fix banks that are very reluctant to lend after suffering hundreds of billions of dollars of losses on risky assets and bad debt.

Trillions of dollars of government help for the banks, especially in the United States and Europe, have so far failed to break the impasse and in his first set-piece address to Congress Tuesday Obama said more might need to be done.

A recent plan to shore up financial institutions choked with bad assets "will require significant resources from the federal government -- and yes, probably more than we've already set aside," he said.

"While the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade," Obama said.

"That would be worse for our deficit, worse for business, worse for you, and worse for the next generation. And I refuse to let that happen."

Obama spoke after US Federal Reserve Chairman Ben Bernanke held out hope for an end to the US recession later this year but also warned that a full economic recovery could take two to three years or longer.

Remarks by Bernanke that the government did not want to nationalise the banks helped ease concerns over their fate, especially for Citigroup, which many fear is on the verge of collapse and may have to be taken over.

His comments sparked a solid technical rebound on Wall Street, which gained 3.32 percent a day after hitting its lowest levels since 1997.

That in turn helped the Asian markets, with Tokyo up 2.65 percent after testing 26-year lows, and then Europe where in midday trade London was up 1.29 percent, Frankfurt gained 1.81 percent and Paris rose 1.56 percent.

In Tokyo, the government said it had started work on an emergency plan to halt further losses in share prices for fear that could make matters worse.

"We have begun considering what measures we should take," Chief Cabinet Secretary Takeo Kawamura, the government's main spokesman, said.

Japanese stocks are down more than 16 percent so far this year after a record 42 percent plunge in 2008 and the government is afraid that the banks, which have very large share holdings, will scale back lending even further as a result of the financial turmoil.

In London, British finance minister Alistair Darling said ailing banks had to clean up their balance sheets ahead of expected government action to ring-fence their toxic assets.

Writing in the Financial Times, Chancellor of the Exchequer Darling said such action was also needed internationally so that banks could resume significant lending and so help to rebuild the global economy.

"The task for banks is to clean up their balance sheets and rebuild for the future," Darling said.

"The challenge ... is to do this against a background of a sharply deteriorating global economy. We need to create the certainty that will enable the banks to lend to creditworthy people and businesses, which is essential if we are to see an economic recovery."

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