We might see a temporary rebound in August but as a trend it is still going down

Ministry of Economy, Trade & Industry

Meanwhile retail sales fell 2.7%, the fourth monthly decline, as fears of more sweeping job cuts held back consumer spending.

On Thursday there were more redundancy announcements, including 10,000 at Kyocera, the world's largest maker of ceramic integrated circuits, and 2,200 at Oki Electric Industry, a telecoms equipment maker.

The government also advised that it expects a shortfall in tax revenues, because of the economic slump, and that it was stepping up its programme of building shelters for the unemployed and homeless.

The Nikkei 225 share index reflected the bad news by closing down 41.3 points, or 0.38%, at 10,938.4, the lowest close since 19 October 1984.

More bad news

"We might see a temporary rebound in August but as a trend it is still going down," the Ministry of Economy, Trade & Industry (METI) said, referring to the output data.

The July figures and predictions that next week's second-quarter growth data will be negative means Japan's economy is in danger of contracting for two straight quarters, the common definition of recession.

Earlier this week, figures showed the jobless rate had risen to a record 5.0% in July.

Prime Minister Junichiro Koizumi is now expected to deliver an extra budget to bolster the economy, but analysts think there may not be enough in the government's coffers to kick-start the world's second-largest economy.

"Mr Koizumi has done a good job of appealing to the electorate on issues other than the economy, but the markets have no confidence in him whatsoever," Ron Bevaqua at Commerzbank in Tokyo told the BBC's World Business Report.

"The timetable set is so ludicrously slow that the markets have no faith that any progress will be made," he added.

Revenue shortfall

Finance Minister Masajuro Shiokawa said on Thursday that tax revenues would probably fall short of government targets, which means Japan might have to sell more bonds on top of the current 28.3 trillion yen ($236bn; �163bn) issued before extra spending is taken into account.

It is a touchy subject for Mr Koizumi who has pledged to limit new bond issues to 30 trillion yen ($250bn) a year to cut ballooning government debt, which at 130% of gross domestic product is the highest in the industrialised world.

A supplementary budget could be seen as a retreat from this promise.

Ten emergency budgets worth 128 trillion yen since 1992 have so far failed to stimulate sustained economic growth.