That is in line with private-sector forecasts for the recession-wracked economy and a stark change from the rosy initial forecast for 1.9 per cent GDP growth.

Industrial output and capital spending will fall for the fiscal year, the government now says, personal spending will dip, unemployment will hover near record levels, the trade surplus will surge and consumer prices will barely budge.

Under the forecast, the tumble would eclipse that of the 1970s "oil shocks" and mark its first postwar string of two fiscal years of decline. GDP slipped 0.7 per cent in 1997-98.

The government's about-face follows recent admissions that the economy is onthe brink of a deflationary spiral, with manufacturers retrenching from decades of over-production, a shaky banking system bloated with bad loans, global markets in turmoil and consumers left shell-shocked.

A deflationary spiral is a cycle of price falls leading to cuts in output, which in turn hurts employment, causing households to cut spending and prompting more price cuts.

Agency head Taichi Sakaiya, a former economic commentator and the only non-politician in the cabinet, vowed on taking office in July to change the government forecast, which he said was "impossible" to meet. A quick check by Reuters of eight private Japanese think-tanks found an average forecast of a 1.9-per cent GDP decline, ranging from minus 1.2 per cent to minus 2.3 per cent.

Even Tuesday's revised forecast was subject to some major caveats -- the EPA said it had assumed there would be no "failures of large-scale (Japanese) financial institutions" or any "major turmoil of financial and currency markets in the global economy"during the fiscal year.

The revision was likely to prompt some action from the government but it remained unclear when or how much. The EPA reported its revision to a morning meeting of cabinet ministers that was to discuss measures to stimulate the world's second-biggest economy.

Several officials had said they expected prime minister Keizo Obuchi to instruct the government to think up new measures, as the trade ministry, businesses and foreign governments have been urging. Finance minister Kiichi Miyazawa, however, said as recently as Sunday that he was "not thinking about additional measures now".

The government in April announced a record economic stimulus package worth 16.7 trillion yen ($124 billion), which many economists say has failed to work but which the government has said will begin gradually boosting the economy soon.

Obuchi -- who took office in July after his predecessor quit over a recession-spawned electoral defeat -- immediately promised a supplementary budget worth more than 10trillion yen and income and corporate tax cuts of nearly seven trillion yen.

EPA officials said they had not calculated the effect of any of those steps, especially as none of the details of the extra budget or tax cuts have been worked out. But they said they indirectly factored in some improvement in business and household sentiment from the announced measures.

The downward revision of 3.7 percentage points is smaller than 4.7 point downgrade of 1973-74, but that was from a much larger base. Before Tuesday, the government had raised fiscal-year forecasts seven times and lowered them eight times since the early 1960s, an EPA official said.

Under Tuesday's revision, the government expects gross domestic product to fall to 495.4 trillion yen this fiscal year from 59.7 trillion yen in 1997-98. A boost worth 0.6 per cent of GDP from net exports would be swamped by a 2.4 percentage-point drag from the domestic economy.

The politically sensitive current-account surplus, the broadest measure of Japan'strade imbalance with the world, would climb to 3.3 per cent of GDP, well above the 2.5 per cent usually seen as a flashpoint for US anger.

Personal spending, a main engine for the economy, is seen falling a real 0.9 per cent, against the initial forecast of 2.5 per cent growth. Another traditional source of growth, corporate spending on plant and equipment, will drop 10.1 per cent, the agency said, revising a 3.5-per cent growth projection.

The government now expects industrial output to decline 7.3 per cent, revising an initial 1.8 per cent forecast rise. Unemployment is expected to log an average 4.2 per cent for the fiscal year, just under its present record high 4.3 per cent. Consumer prices are now forecast to edge up just 0.1percent for the year, instead of the initially forecast 0.7 per cent rise.