The process is a necessary step towards resucitating the moribund economy -- but right now it feels as if the cure is killing the patient. "Japanese corporations...really, have been carrying an awful lot of unproductive labour. Over the longer term, what you want to see is the unproductive labour being shaken out and employed in more productive areas," said Russell Jones, chief economist at Lehman Brothers.

"It's a good thing, but it's very painful when it's happening," Jones added.Japan's unemployment rate surged to a record 4.1 per cent in April, as the young found getting jobs ever harder and those near retirement age were increasingly shown the door.

The figure topped most forecasts and boosted chances that Japanese unemployment would exceed the US jobless rate, which was 4.3 per cent in April, perhaps by the end of the summer.

"The nextstop is 4.5 per cent, and we'll see where we go from here," Jones said.

Others said the jobless rate was on track to hit or exceed five per cent by the end of this calendar year as more companies fold, manufacturers shed jobs, and the bloated service sector finds itself increasingly unable to absorb excess workers.

In the long run, the process should boost corporate profits and generate growth, but the rising jobless rate and fears of worse ahead come at a time when Japan's economy is already weak and risks growing weaker.

Data released on Thursday showed that industrial output and retail sales both fell in April, while wholesale prices slipped in mid-May, increasing fears about deflation.

Policy-makers hope a massive 16 trillion yen stimulus package unveiled in late April will offset the downturn and ease the pain, but success is still in doubt.

"The fiscal package is big and at this moment I'm still assuming it stabilises the economy and gives us a bit of growth," Jones said.

"But if theprivate sector really does deteriorate dramatically in the short term, we might have to think again about that."

Freeing up labour and reallocating it to more productive areas are essential to revitalising the economy and in that sense, higher unemployment is a step in the right direction.

"The most important thing is that labour is being freed up," said Jesper Koll, chief economist at JP Morgan in Tokyo.

"Then what happens is one of two things -- either the resources are marked down and become cheaper, or they move to higher value-added or productive industries," Koll added.

So far, however, new high-growth sectors and nimble-footed entrepreneurs to run profitable and productive firms appear to be in short supply.

"What's invisible and very difficult to believe is that there will be new companies appearing which will be adding staff," said Chris Calderwood, chief economist at Jardine Fleming Securities.