Government spokesman Hiromu Nonaka said that while he hoped that debate on tax cut plans would begin in a special parliamentary session in November, he did not think it was practicable.

Meanwhile the government's economic planning agency said the economy was "in a prolonged slump, with conditions extremely severe."

The delay has been caused by disagreements with the smaller political parties over what form an economic stimulus package might take.

The small Liberal Party favours reductions in the sales tax, while the Buddhist Komei party wants to give taxpayers government gift vouchers which they must use on spending.

Since the government lacks a majority in the Upper House, it is trying to do a deal before introducing legislation.

Sales tax cut?

Government spokesman Hiromu Nonaka said that talks with the opposition would include a reduction in the sales tax which was raised from 3% to 5% in April 1997.

But many key figures in the government as opposed to such a move, which was introduced to help curb Japan's fiscal deficit.

Finance Minister Keichi Miyazawa said that reducing the consumption tax was impractical, while Economic Planning Agency head Taichi Sakaiya called such a move a "mistake."

"They are tied up in knots on tax reduction and can't fulfil the promises they made," commented Chris Calderwood of Jardine Fleming Securities.

Negative interest rates in London

At the heart of Japan's stalled economy is the troubled banking sector, with a severe credit crunch inhibiting economic growth.

"Lending by private financial institutions remains tight, and firms are growing more concerned about banks' lending attitudes," commented the Economic Planning Agency in its monthly report.

And in another sign of weakness the banking sector, London banks have cut their yen deposit rates to below zero in the last few days.

That means that the banks were in effect demanding that Japanese institutions pay them interest for holding their money.

For three-month deposits, Barclays Capital has offered -3% interest, while J.P. Morgan has offered -6% on longer deposits.

It is believed to be the first time that international capital markets have ever recorded negative interest rates.

The fact that such rates have been accepted "is an alarming reflection on the state of the Japanese economy" according to one banker.