It would be the largest budget deficit among any of the major industrialised countries.

The government has been hit by falling tax revenues caused by the recession. Finance Ministry officials say that the corporate tax revenues are expected to be at their lowest level for 10 years, as company profits have plummeted.

Japan's companies are making lower profits

The total budget deficit this year could amount to £50bn (¥10,000bn) and next year could be much worse.

"The fiscal situation is very serious," said one official.

That is because the government has pledged to introduce another ¥7,000bn in tax cuts in 1999 to help stimulate consumption, including tax vouchers to get people to spend.

The looming budget deficit has led Moody's, the credit rating agency, to downgrade Japanese government debt.

No one wants Japanese bonds

The government has been able to finance its deficit because of the high savings rate of Japanese households, who put much of their money in the government-run postal savings bank.

The government then uses its trust fund to buy up government debt.

Now a looming cash squeeze is making that route no longer possible.

The government plans to boost the sale of the bonds, which yield an interest rate of less than 1%, to private investors.

"There is a limit to how many more bonds the market can swallow without serious trouble," says William Campbell of J.P. Morgan.

Even Japanese institutions may not be interested. Their strong preference for keeping their money in safer havens has in Europe has led to negative interest rates on Euro-yen deposits.

Investors have been prepared to pay European banks to keep their money, rather than demanding interest on their deposits.