Japan yesterday reduced its forecast for economic growth for the year to next March to minus 2.2 per cent from minus 1.8 per cent as the country battles its worst post-war recession, officials said.

The government, at a special meeting, approved the downward revision, the second in two-and-a-half months, along with its economic growth target of 0.5 per cent for the next fiscal year to March 2000.

A contraction of 2.2 per cent in gross domestic product (GDP) in the year to March 1999 will be the worst economic performance in Japan since the second World War and makes a stark contrast to the initial forecast of 1.9 per cent growth.

Referring to the growth target of 0.5 per cent for the year 19992000, the lowest for an initial growth target, economic planning agency chief Taichi Sakaiya said: "It is based on very firm ground and is the figure I can mention with confidence."

Finance Minister Kiichi Miyazawa said the 0.5 per cent growth "reflects the government's honest feeling" that it wanted to return to positive growth.

"It will not be a figure that can be attained easily," he admitted.

Prime Minister Keizo Obuchi reiterated that he would stake his political future on reviving growth.

The government must "break the cycle of recession and avoid marking negative growth for the third straight year" in fiscal 1999 (ending in March 2000), Mr Obuchi said.

The government predicts that the economy will return to growth next fiscal year, with consumer spending and housing investment picking up against a continued slump in corporate capital spending.

It expects that a record stimulus package including tax cuts would begin to take effect, with the financial system stabilised on progress in the disposal of bad loans.

The government estimates consumer spending to fall 0.5 per cent in 1998-99, but edging up 0.4 per cent in the following financial year. Private-sector housing investment is forecast to tumble 8.6 per cent in 1998-99, but rise 6.7 per cent the next year.

Corporate spending on plant and equipment is estimated to plunge 13.5 per cent in 1998-99 and sink a further 5.2 per cent in 1999-2000.

Trade Minister Kaoru Yosano, who had insisted that the growth target for the next fiscal year should be 1 per cent, said the economic management should "aim at a bit higher point, although the government estimate is 0.5 per cent."

But Chief Cabinet Secretary Hiromu Nonaka stressed it was more important to achieve a target rather than to hoist an ambitious goal.

"The responsibility imposed on us now is to attain a figure fully and then make efforts to have that figure head higher," Mr Nonaka told a news conference.

Tokyo announced last month a new stimulus spending package, the largest in Japan's history, worth more than 23 trillion yen ($190 billion). Parliament has also enacted legislation for a series of banking reforms, which set aside a 60-trillion yen pool of taxpayers' money to tackle the crippling bad bank loan crisis.

Private-sector think-tanks predict a worse future. US investment bank Merrill Lynch in October slashed its forecast for growth in Japan, saying that the world's second-largest economy will contract 2.5 per cent in the year to March 2000.

The economic planning agency on October 6th slashed its forecast for the year to next March to a contraction of 1.8 per cent from an earlier forecast of 1.9 per cent growth.