The Japanese government conceded on Wednesday that the country’s longest postwar period of economic expansion might be over as it reported a drop in its key measure of underlying economic conditions for June.

The June coincident indicators index fell a preliminary 1.6 per cent and the government downgraded its assessment of the economy to “deteriorating”. That marked an admission that the economy had probably entered a recession, with an official declaration possibly to come on Thursday on the publication of the government’s June economic report.

In its assessments in April and May, the government had said only that “a change in the phase of the economy may have taken place”.

The fall in the June coincident index, which was widely expected, takes place as the government assembles a stimulus package.

Ministers in the new cabinet formed last week by Yasuo Fukuda, the prime minister, have indicated their intention to focus on supporting the economy. They have suggested that the government may drop its goals of achieving a primary budget surplus in the year ending March 2012 and keeping government bond issuance to under Y30,000bn ($274bn, €178bn, £141bn).

The index of leading economic indicators, which is based on data including new job offers and share prices, fell 1.7 points in June.

Most economists expect the downturn to be relatively mild.

“Compared to past downturns it is not as serious because there are some positive factors,” Mamoru Yamazaki, chief economist at Royal Bank of Scotland in Tokyo, said. These include the relative strength of the financial system compared with past downturns and the healthy balance sheets of large corporations.

While small and medium-sized companies face a tightening of credit, Japan is not seeing a credit crunch on the scale it experienced in the 1990s, Mr Yamazaki said.

Many analysts do not expect a recovery until at least next year. External demand, particularly from Asian economies, which take roughly half of all Japanese exports, will be an important factor behind a recovery, Goldman Sachs said. The bank believes Asian demand could rebound next year and expects companies to increase capital spending, excluding land investment, in the year to March 2009.

Although the duration of recessions has averaged about 18 months since the 1960s, depending on how soon Asian demand, capital spending and the employment and income environment rebound, “the road to recovery could be shorter than expected”, Goldman said.

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