Japan's battered economy has tipped yet closer to recession, as new figures show it contracted 0.8% in the second quarter of the year.

We must face up to this reality and respond

Yasuo Fukuda, chief government spokesman

The government admitted that the economy has been hit across the board, with public and private sector, housing investment and exports all falling. Only consumer spending managed a slight uptick.

With little sign of improvement in the short term, most observers think there will be a further contraction in the current quarter - and thus the two consecutive quarters of negative growth which make up the official definition of recession.

The situation has ramifications for the global economy. Throughout the 1990s, Japan's parlous state was less important, since the US was booming, sucking in imports and investing abroad.

Koizumi promises action, unlike his predecessors

But the phenomenon of the US, Europe and Japan all slowing together - something not seen since the 1970s - has worried policymakers.

It is also problematic for other Asian countries, who rely on Japan as an importer of first resort.

Early, tentative signs that the US slowdown may be bottoming out have begun to appear. But that still leaves massive job losses and narrowing investment plans intact.

All change?

The numbers and the broader situation are concentrating the minds of Japan's political leaders, who have begun work on a supplementary budget designed to cushion the blow of radical reforms.

"We must face up to this reality and respond," said chief government spokesman Yasuo Fukuda after the GDP figures were released.

It is not yet clear whether the Japanese government will in fact carry through the root-and-branch changes which most feel are necessary to correct the decade-long downturn.

Japan is a major export market

Ever since the bubble of rising share and asset prices popped at the end of the 1980s, successive administrations have done little but post huge supplementary budgets in the hope of kick-starting the country.

But most of the money has gone on public works projects designed in part to prop up the ruling Liberal Democratic Party's power base among construction companies and farmers.

And in the process, Japan's national debt has shot up to more than 130% of its GDP.

Capping the budget

This time, prime minister Junichiro Koizumi promises things will be different.

The budget preparations, he told reporters, will concentrate on help for small and medium-sized businesses, new industries, and the swelling ranks of the unemployed.

And the sums devoted to the supplementary budget will not exceed 30,000bn yen ($247.4bn, �169.9bn ), unlike the 100,000bn yen or more each previous one disbursed.

"I will not keep piling up public works projects as was the case in the past," Mr Koizumi said.

The additional measures, he said, would help cushion the shake-up of banks and corporations overburdened with massive amounts of bad debt, which are likely to impose a further brake on the economy.