A crisis of confidence in Japan's economic reform drive could plunge the country back into decline, global trade chiefs have warned.

The World Trade Organisation has urged Japan's government to stick to its shake-up plans, which last week saw the unveiling of 1 trillion yen (�5.2bn; $8.2bn) in tax cuts and measures to tackle the mountain of banks' bad debts.

"More than 10 years after the bursting of the 'bubble economy'... non-performing loans and overhanging debts still remain a burden on the economy," the report said.

Failure to tackle Japan's economic problems, in particular the bank debts - estimated at 50 trillion yen - could "jeopardise a sustainable recovery", the WTO said in its most substantial trade review of Japan for two years.

With signs of revival in exports and economic output, there were currently "tentative signs of moderate recovery in the Japanese economy", the report added.

Job losses

The WTO's analysts warned, however, that "unusually" high level of unemployment in Japan is spooking consumers. With confidence at a low, shoppers are reluctant to spend and so worsen the country's economic situation.

With companies employing "excessive" numbers of people, the WTO highlighted measures the government had taken to tackle "ineffective" corporate governance, and boost company efficiency.

The WTO also praised efforts to liberalise trade, while warning that "potentially important distortions to competition" were still apparent in Japan's agricultural sector.

Friday's report also underlined the growing contribution of services to Japan's economic output, with manufacturing accounting for 21.6% of economic output in 2000, compared with 23.0% five years before,

Manufacturers nonetheless accounted for 93% of Japan's exports last year.