The EPA's official assessment of overall economic conditions for May was unchanged from the April report, but its analysis of individual economic indicators was different.

Its evaluation of private consumption had improved somewhat, while its assessment of other indicators, such as capital spending, production, jobs and exports, was downgraded slightly.

"There are some signs that the very bad economic uncertainty from late last year is subsiding. But stagnant final demand is having an impact on the real economy, such as production and employment," the EPA said in the report.

"Thus, the economy is stagnant and conditions are becoming more severe," the report added. Private consumption, which has been dampened largely by failures of some Japanese financial institutions late last year, is bottoming out, although it is still moving weakly due tostagnant income growth, the report said.

"That is seen in the index measuring the propensity to consume, which rose to 71.7 percent in March from 68.4 percent a month earlier," said Akira Furukawa, director of the EPA's Economic Research Bureau. "It is possible that some bright signs will appear in consumption."

Overall export growth has been capped because of a slowdown in exports to Asia, while imports are moving sideways, the report said. It added that the surplus in goods and services has been on a rising trend mainly due to a decline in import prices.

As inventories remain at high levels on the back of stagnant final demand, industrial production is on a declining trend. Firms' capital spending is weak, the report added.

The severe employment situation, reflected in a record high unemployment rate of 3.9 percent for March, has worsened further and the number of employed has fallen, Furukawa said.

Furukawa also said domestic wholesale prices remain weak, although the pace of the decline inwholesale prices is unlikely to accelerate. Consumer prices were stable, he added.

"There are mixed (economic) factors, positive and negative, seen in the May report. If the positive factors lose the tug of war, the economic situation may become more severe.

But that, I think, will be prevented by the implementation of (already proposed) government economic stimulus measures," Furukawa said.In late April, Japan announced a 16.65 trillion yen ($125billion) economic stimulus package featuring tax cuts, fiscal spending, public works projects, and steps to help resolve bad loan problems.