Japanese stocks fell on Friday and the yen and U.S. dollar rose as investors retreated to safety with job losses and collapsing manufacturing deepening a global recession while Washington scrambled to salvage banks. Major European stocks were expected to open down as much as 0.7 percent, according to financial bookmakers, ahead of euro zone unemployment data and the first look at U.S. gross domestic product for the fourth quarter. Wall Street shares dove after a report said continuing claims for U.S. unemployment were at a record high, while Japanese stocks fell 3 percent after data showed unemployment in the world's second-largest economy at a near three-year high and industrial output plunging by a record 10 percent last month. The New Zealand dollar, once favored by investors because of its high yield, dropped to another six-year low after the country's central bank governor said interest rates will likely have to be cut further, a day after they were slashed by 150 basis points. The severely weak economic reports supported expectations that Japan's economy on an annual basis shrank by a double-digit percentage in the last three months of 2008. Focus later this evening will be on the U.S. GDP report, which is expected to show the economy shrank in the fourth quarter by the most since 1982. "There is no sign of bottoming out. As industrial output posted a record drop, it is hard to expect a recovery anytime soon," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp in Tokyo. The 3.1 percent decline on the day of Japan's Nikkei share average .N225 led the region, with the index sliding 9.8 percent in January -- its largest monthly decline since October 2008. Toyota Motor Co stock (7203.T) fell 4.1 percent after a company source told Reuters operating losses for the fiscal year ending March 31 will likely be bigger than the 150 billion yen forecast by the top automaker. Stocks in Asia-Pacific outside Japan .MIAPJ0000PUS were down 0.7 percent on Friday and 8 percent in January, according to an MSCI index. Hong Kong's Hang Seng index .HSI fell 0.5 percent, led by a 3.75 percent drop in HSBC (0005.HK) stock, which is being hounded by speculation about dividend cuts and the need for additional capital. HOPE IS TROUNCED Some optimism trickled into markets earlier this week after the U.S. Congress progressed on a $825 billion stimulus spending package and other efforts to ease the blow of a severe recession. Yet, the White House plan is expected to face formidable opposition in the Senate. In addition, the fate of the banking industry was still up in the air, with government negotiations about a plan to separate bad assets at the banks hitting a snag, according to CNBC TV. Downward pressure on equity markets lent some support to U.S. Treasuries. The yield on the benchmark 10-year note, which moves in the opposite direction of the price, slipped to 2.82 percent from 2.88 percent late on Thursday in New York. However, the yield was up around 60 basis points in January, the biggest one-month rise since April 2004, with investors concerned about the amount of new borrowing needed to finance the government's legion of rescue plans.

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