The plans are part of a desperate attempt to revive the economy which is mired in the deepest recession since the war.

Japanese workers fear unemployment

The government Economic Planning Agency has said that Japan's economy will contract in this financial year by 1.8%. That contrasts with its previous forecast of growth of 1.9% in the year to March 1999.

It will be the second year of negative growth for Japan. The economy contracted by 0.7% in the year to March 1998.

It is the steepest drop recorded by the EPA since it began forecasting 40 years ago.

At the heart of Japan's problems is the reluctance of consumers to spend, as worries about unemployment and bank failures have boosted savings even higher.

The latest figures show that Japan's households spent 2.4% less in August than a year ago.

More stimulus needed

Sony Chairman Norio Ohga wants quick action

Meanwhile, the head of one of Japan's biggest companies has called for urgent action by the government.

Norio Ohga, chairman of Sony, said, "Japan has to act rapidly to prevent a worldwide recession... (and spend) as much money as necessary" to clear up bad debts by the banks.

Japan's plans to reform its banking system are deadlocked over opposition objections to using public money to rescue failing banks.

But the Cabinet is considering a further economic stimulus package. Trade Minister Kaoru Yosano is reportedly arguing for an additional ¥10 trillion ($75bn) in public works spending next year.

The government is already planning to introduce a ¥10 trillion ($75bn) supplementary public works spending package and ¥6 trillion ($44bn) in tax cuts next year.

But the gloomy EPA forecast assumes that the economy will fall despite these measures.

"Although the positive impact from the comprehensive spending measures is expected to emerge, demand in the private sector will remain stagnant," the EPA said.

Sony, however, was remaining optimistic about its prospects.

Mr Ohga said: "It's in hard times that companies grow."