JAPAN warned yesterday that it was sliding deeper into recession after exports and business sentiment tumbled.

The world's second-biggest economy, which cut interest rates to 0.1 per cent last week, reported the biggest drop in exports last month.

Traders and analysts polled by Reuters believed that the Bank of Japan would return to a policy of flooding banks with cash to inflate the economy early next year, which it abandoned only in 2006.

The US Federal Reserve already ventured into that territory last week, slashing its benchmark funds rate to a range from zero to 0.25 per cent, and promising to supply banks with unlimited cash and keep rates low over an extended period. Adding to the gloom, a Reuters Tankan survey showed business sentiment at the lowest in 10 years.

Bank of Japan governor Masaaki Shirakawa said the worst was yet to come.

'The Japanese economy is deteriorating and, for the time being, its conditions are likely to become more severe,' he said.

The government's monthly economic report summed it up in a similar vein. 'Economic conditions are worsening,' it said, the first time it used such an expression since February 2002.

Japan's exports last month plunged 26.7 per cent from a year earlier, hit by a strong yen and sagging demand for its electronics, cars and other goods in key United States and Asian markets, including China.

Nonetheless, Tokyo stocks bucked the downward trend, rising 1.6 per cent, encouraged by the government's spending plans and last Friday's US$17.4- billion (S$25.2-billion) bailout of US carmakers.

China, the world's fourth-largest economy and the only major one that is still growing, has had its share of economic blues, with expansion rapidly slowing from turbocharged double- digit rates.

Meanwhile, the International Monetary Fund (IMF) warned that frantic global efforts may still fall short of what was needed to stave off the worst economic downturn since the 1930s.

IMF chief Dominique Strauss-Kahn said in an interview with BBC radio on Sunday: 'Our forecast, already very dark...will be even darker if not enough fiscal stimulus is implemented.' - REUTERS