The Economic Planning Agency downgraded the state of the economy in its September report on Tuesday by saying the economy has entered "an extended slump and a very severe situation."
The description is a mark down from the report in August, which said the economy was in "a quite severe situation."
Highlighting the continued slump in housing starts and the battered stock prices on the Tokyo Stock Exchange, the September report also notes that personal spending was weak in July amid declining personal incomes.
Capital investment also dropped, especially for small and medium-size companies, though inventories remained high, despite recent indications of improvement, the report says.
The EPA also pointed out that the fall in Japan's housing starts in July -- some 11.3 percent from a year earlier -- to 100,677 units, or 1.1 million on an annualized basis, was the lowest level since August 1985.
The report also took note of the worsening employment situation, stating that "The number of employees is falling while involuntary unemployment is rising."