While domestic demand remains steady, net exports are falling rapidly, reflecting a sharp slowdown in overseas economies

Bank of Japan

The Bank's monthly economic report follows a previous review by the government on Friday, which admitted for the first time in more than five years that the economy is weakening.

Japan's industrial decline is attributed to a downturn in the export market.

"While domestic demand remains steady, net exports are falling rapidly, reflecting a sharp slowdown in overseas economies such as in the US and East Asia," the central bank said in its April report.

"Mainly due to these developments, industrial production is declining more sharply and excessive inventories of electronic parts and some materials are building up," the report added.

Manufacturers are vulnerable

Amid worsening business sentiment, manufacturers have been particularly hit, as growth in corporate profits slows down.

Japanese exports are falling

Japanese exports increased by 1.3% in February, down from a rise of 2.9% in January and double digit figures in 2000.

The central bank will also monitor downward pressure on prices while the world economies face a continued slowdown.

Deflation fears

Last month the Japanese government said that the economy, which has been fighting a slowdown for about 10 years, was in a state for deflation.

Declining prices - or deflation - are hurting companies, forcing them to make cutbacks. This in turn discourages Japan's weary consumers from spending, which is an important stimulus for the ailing economy.

Consumer spending has been lagging as the Japanese grow concerned about their job security and decide to save money instead of spending it.

Sales at department stores in Tokyo fell 0.6% in March from a year earlier, according to the Japan Department Stores' Association.

Zero interest rates

The Bank of Japan returned interest rates to zero last month in a further attempt to encourage growth.

Taro Aso warns of a recession

At its latest monetary policy meeting on Friday, the Bank decided to leave interest rates unchanged.

Last week Economics Minister Taro Aso warned that a slide back into recession was a real possibility.

"If the economy worsens rapidly due to US economic conditions, and there are signs it could contract, we should not hesitate to carry out an extra budget," said Mr Aso.

He is one of four MPs running for leadership of the ruling Liberal Democratic Party (LDP).

The winner will most likely become Japan's next prime minister.

The government and ruling parties last week unveiled an economic package to help banks clean up an estimated 32 trillion yen ($258.8bn) in bad loans.