Japan's economy contracted for the third quarter running in the period ending in June, its poorest performance since records began in 1955.

The worse than expected data, released yesterday, prompted many forecasters to downgrade their predictions for the current financial year, warning that the Japanese economy would contract.

Gross domestic product fell 0.8 per cent quarter-on-quarter, an annualised decline of 3.3 per cent.

That was against consensus forecasts of minus 0.6 per cent and minus 2.2 per cent.

The dismal data were released after the markets closed in Tokyo. The Nikkei 225 index suffered its largest single day points loss of the year, closing down 749 points or 5.11 per cent at 13,916.

The disappointing figures were caused by worse than expected private consumption and capital spending, as well as the failure of much trumpeted government spending programmes, at least so far, to boost the economy.

"It has become clear the government's target of 1.9 per cent growth is impossible," said Mr Taichi Sakaiya, Economic Planning Agency minister. He declined to give a GDP forecast for the July-September quarter, but said the outlook was "not good".

Mr Michael Naldrett, economist at Dresdner Kleinwort Benson, said his company would be cutting forecasts from about 1.5 per cent growth to a contraction of about 1 per cent for the year ending in March, 1999.

"The question is what the government can do, given the collapse in private demand," said Mr Richard Jerram, economist at ING Barings. "The politicians have been so obsessed by the banking bill they have forgotten about the real economy. "As for the bureaucrats, they have been so busy trying to boost the yen, they have ignored the fact that a weak currency is good for exports."

The yield on the benchmark 182nd 10-year government bond fell to a new low of 0.79 per cent.

"This is utterly unbelievable," said Mr Yasuo Ueki at Nikko Securities. "You could say this means the economy won't get better for 10 years. It means for the time being investors have no other place to go but bonds."

Personal consumption fell 0.8 per cent quarter-on-quarter, while capital spending plunged 5.5 per cent.