In a major television interview, Taichi Sakaiya, the head of Japan's Economic Planning Agency, said there are "strong concerns" that things could get worse.

A Japanese businessman looks anxiously at plunging stock prices on a stock board in Tokyo

He said: "It may record negative growth for three straight years."

Japan's economy contracted by 0.7% last year and the government recently revised its economic forecast for this year to minus 1.8%.

Mr Sakaiya said the government must take both short-term steps and long-term structural reform measures in order to nurse Japan back to growth.

Last Tuesday, the Japanese government admitted what everyone else in the world knew: the nation was in its longest and deepest recession since the end of World War Two.

Mr Sakaiya, a cabinet minister, told colleagues at a recent government meeting: "The latter half of this fiscal year and the start of fiscal 1999/2000 represent the moment of truth for the Japanese economy."

Pessimistic predictions

Mr Sakaiya, a former economic commentator and the only non-politician in the cabinet, vowed upon taking office in July to change the government forecast of 1.9% growth for this fiscal year, which he said was impossible to meet.

On Thursday, Mr Sakaiya proposed a "three-year Japan revival plan" that would include budgetary and tax measures, structural reform and deregulation.

He said: "I don't think the real economy will drastically improve by the year's end."

It is a worrying prospect for the business community in Japan.

Susumu Kato, chief economist at Barclays Capital said: "There are plenty of reasons for taking a pessimistic view of the Japanese economy's future, including current business conditions, plunging stock prices and the crisis in the financial system."

He added: "Should the forecasts (of a 1.8% contraction) come true Japan will enter a truly frightening phase quite unlike anything it has experienced before."

Unemployment would climb above its already record high, corporate profits would dry up and tax revenues would shrink.

Bank reforms crucial

The hope of recovery hinges on a series of bank reform bills, which are expected to pass through parliament before the current session closes this Friday.

Under the bills Tokyo would pour taxpayers' money into weak but solvent banks to keep them afloat and would nationalise the very weakest banks, selling off their bad loans.

In addition the government is planning a huge stimulus spending package, in a desperate effort to kick start the economy.

The sums of money involved are staggering.

The bank bills may be financed with a 50 trillion yen ($430bn) bailout fund and the stimulus package is expected to total 30 trillion yen.