Japan could be forced to further cut its 0.5 per cent interest rate to stave off recession after new figures revealed business sentiment among manufacturing executives is at a four-year low.

The Bank of Japan's quarterly Tankan survey of business optimism found that many companies are looking to scale down spending on new equipment and factories, raising fears that Japan’s recovery could stall.

Economists believe that it is now invetiable Japan will experience a mild recession and have forecast that worsening conditions could prompt the BoJ to cut its interest rates, which have been on hold at 0.5 per cent for more than one year.

The Tankan survey found that confidence among manufacturers tumbled to 11 in March from 19 in December, slightly worse than market forecasts for a figure of 12.

This was the lowest poll result since a reading of plus 7 in December 2003 and was the second straight quarterly decline.

Glenn Maguire, the chief asia economist for Société Générale, said that there were now no bright spots in the Japanese economy and that investment interest was likely to be muted.

Mr Maguire said: "After stoical resistance in the latter half of 2007, Japanese corporate sentiment re-coupled with economic reality."

The Tankan poll, which covers more than 10,000 companies, showed that the confidence index for large non-manufacturers also dropped in March to 12 from 16 in December.

The indices represent the percentage of firms experiencing favourable business conditions minus the percentage of those seeing unfavourable conditions.

Explore Economics

• Pre-Budget Report 2008

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• Lloyds TSB wins vote for HBOS merger
• Bank of England discussed 2% rate cut
• Woolworths dives as it confirms takeover talks