NAGOYA, Japan, Jan 12 (Reuters) - Toyota shock has hit Japan’s car manufacturing district, leaving factories and small businesses reeling as orders dry up due to a global recession that has put the brakes on car sales worldwide.

Toyota is firing thousands of contract workers, causing a rise in the number of jobless and homeless. The greater Nagoya economy is being hit hard with business slowing at shopping malls and taxi drivers complaining that customers are scarce.

“When Toyota sneezes, everyone catches a cold,” said Toshiharu Nakano, who runs a Japanese kimono fabrics shop in Osu shopping arcade in Nagoya. “You see people walking around in this arcade but their purse strings are tight,” he added.

Hit by the financial crisis and a crippling rise in the yen, Toyota Motor Corp 7203.T has forecast its first-ever annual operating loss in its 70-year history and has unveiled an 11-day output suspension that is almost unprecedented in scale. [ID:nT299128] [ID:nT158]

That's a sharp turnaround from as recently as 2007 when Toyota was riding high after eight years of earnings growth that made it the world's biggest carmaker ahead of General Motors Corp GM.N.

With Toyota’s sales in the United States, its biggest market, declining by 37 percent in December, the pain is being felt all along the supply chain in Nagoya and across the Aichi prefecture, which thanks to car manufacturing is one of the most affluent regions in Japan.

At Takeshiro Kogyo Co., a 20-person factory that produces parts for Toyota car air conditioners and headlights, the fax machine used to spit out piles of orders. These days, faxes are rare.

“Nowadays, we only get faxes that show a decline in orders,” said Sumiko Takeuchi, the company president. She points to virtually empty shelves that were once fully stocked with air conditioner parts.

“In the past, we were sure that orders would pick up again. But this time, it feels like they’ll keep falling further.”

Since around November, Takeuchi has been forced to let several employees go, cut overtime, and close factories early.

“Right now, we just need to find ways to survive,” she said.

‘TOYOTA SHOCK’

Industrial production in central Japan, including Aichi prefecture, sank 12 percent in October from a year earlier as auto exports fell on weak global demand.

“In this region, we live on Toyota’s business,” said Yoshihiko Uchida from Nagoya Chamber of Commerce and Industry.

“If Toyota is regarded as the top part of Mount Fuji, it has a wide plain of supporting industries. Now, given uncertainty over future orders (from Toyota), small assembling firms and car parts factories are all worried,” he added.

Job offers in Aichi prefecture are on the decline, and department store sales in Nagoya fell 15 percent in November from a year earlier. It was the sharpest drop among 10 major cities in Japan.

Tax revenues are also declining sharply in the automaker’s hometown as well as Aichi prefecture, whose economy accounts for about 7 percent of Japan’s overall gross domestic product.

As the world’s second-largest economy is threatened by what some fear will be its longest ever recession, many manufacturers, including Toyota, are laying off contract workers, temps and part-timers to cut costs.

Many of those contracts came with accommodation in company dormitories so the lost jobs are swelling the ranks of the homeless.

The problem has taken centre stage in the political sphere as local media outlets zero-in on the plight of the jobless, and lawmakers facing an election later this year struggle to find solutions.

About 85,000 contract workers are being laid off across the country in the six months ending in March, of whom more than 10,000 are estimated to lose jobs in Aichi -- the biggest cut among Japan’s 47 prefectures, a government survey showed.

“People say there are still job opportunities in engineering or nursing care, but those who have been making cars cannot just move to those areas and do the job,” said Toru Sakai, chairman of a temp union in Nagoya.

Temporary shelters for the homeless have been quickly filled with newcomers, and food kitchens in Nagoya are attracting more homeless people at night.

On one rainy evening in late December, about 250 people lined up under a highway overpass for a warm plate of curry and a cup of hot tea.

“I was fired and lost a place to live as well,” said Yoshinori Sato, a 42-year-old former construction worker, looking down while finishing his curry. “I am now sleeping in an underground passage.”

Still, people in the region are proud of their history in manufacturing and craftsmanship, and confident of a comeback.

“We may not be able to completely rely on the auto industry in the future,” said Takeshiro Kogyo’s Takeuchi. “What we have now is a lot of free time ... So we can think about what we can produce by using machines that are used right now.”