The key gauge of economic health came to zero in August, remaining well below the boom-or-bust line of 50 percent for the eighth straight month, the government said Friday in a preliminary report.

It was the first time since March 1998 that the key gauge has stood at zero, the Cabinet Office said.

In addition, the July reading of the diffusion index of coincident indicators, which measures the current state of the economy, was revised to 10 percent.

"The possibility is high that the economy is in recession following July's trend," said Cabinet Office economist Yoshihiko Senoo.

Senoo implied the state of the economy is more severe than the latest reading indicates, explaining that the survey does not reflect the negative effects expected from last month's terror attacks in the United States.

According to government economists, a reading of below 50 percent is considered a sign of economic contraction and a figure above that is viewed as a sign of expansion.

Business performance declined for all eight components surveyed in the coincident indicator. The eight include large-lot electricity, production, overtime work and consumption, and employment-related components.

The index of leading economic indicators, a measure of economic growth six to nine months ahead, came to 71.4 percent, topping 50 percent for the second month in a row.

Of seven components covered in the leading indicator, performance improved in five areas, including housing starts and new car sales, the Cabinet Office said.

The lagging index -- which gauges performance in the recent past -- was 16.7 percent, dipping below 50 percent for the first time since June.

The diffusion indexes of the coincident, leading and lagging indicators compare current economic indicators with their levels three months earlier.

Regional areas hurting

The recession in Japan's regional economies is deepening, the Ministry of Economy, Trade and Industry said Friday after compiling quarterly company surveys conducted by its regional bureaus.

The view is a revision from the ministry's report in June, when it used the word "recession" for the first time in a government economic assessment.

Eight of the nine regions across the country have seen their economies deteriorate since the June survey, except for Okinawa.

Okinawa's stagnant economy already makes it the worst-performing region in Japan.

"Regional economies are further receding," the report says. "Uncertainty is increasing for the future. A mood of slowdown is further growing across all activities."

The effects of declining output led by the information technology slowdown are spilling over into other industries, such as paper, pulp and chemicals, and a downward revision in corporate capital spending is anticipated as earnings continue to fall.

Public works and housing activities are also seeing declines, while personal consumption is weakening. partly due to consumers' preference for low-priced goods.

The report focuses on the increasing number of manufacturers shifting their production bases overseas, especially to China, amid fierce competition. Even Japan's famous high-tech firms are making the jump to cheaper countries.

Many companies are finding it more difficult to obtain necessary funds for research and development, despite their willingness to increase R&D outlays in severe business conditions.

Turning to the Sept. 11 terrorist attacks in the United States, the report says thousands of flights to the U.S. have been canceled, and tightened security checks at airports and ports are delaying the distribution of goods.

More firms in 15 new and upcoming business areas are also seeing lower than expected or sluggish growth, while half of them continue to report robust figures.

The report is based on surveys of 1,160 firms. Between 50 and 226 firms were polled in each region.

Bond cap in limbo

Finance Minister Masajuro Shiokawa suggested Friday that the government may have to ease its 30 trillion yen cap on new bond issuance if it needs to take measures to stimulate the economy in the event the global economy deteriorates further.

"The effect of the terrorist attacks on the United States is unclear. We must consider (a change in the policy) if the situation changes abroad," Shiokawa said after a Cabinet meeting.

On Thursday, Prime Minister Junichiro Koizumi suggested he is ready to back down on his plan to limit new government bond issues to 30 trillion yen for the current fiscal year.

"In a bold and flexible manner, we must take measures that can forestall unwanted turbulence in cases where unexpected confusion breaks out on security or economic policy fronts," Koizumi told the House of Representatives Budget Committee.