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The Bank of Japan’s Tankan survey of business confidence underlines the severity of Japan’s economic downturn. The diffusion index (DI) for major manufacturers during the three months through March declined to minus 58, down from minus 24 in December, and even worse than the minus 57 recorded in May 1975 during the oil crisis, which until now was the weakest DI since the BOJ started the survey in May 1974. The 34-point drop also was the largest ever.

The DI for medium-size and small manufacturing firms declined 28 points to minus 57, the lowest since December 1998. The DI is the percentage of firms reporting favorable business conditions minus that of firms reporting unfavorable conditions.

There are also ominous signs that the employment situation is worsening. The index gauging the degree of excess that large companies believe exists in their payrolls increased by 27 points to 35, the highest in seven years. In fact, the unemployment rate in February stood at 4.4 percent, a deterioration of 0.3 point from the previous month and the highest in three years. The effective ratio of job openings to job applications was 0.59, representing the ninth straight monthly decline.

The government must respond to the growing number of unemployed workers by strengthening social safety nets and bolstering job-creation measures. It needs an appropriate mix of short-term measures to lessen the immediate economic and social pains and long-term measures to put the economy on a growth path through increased domestic demand.

Prime Minister Taro Aso has ordered the government to work out new economic stimulus measures. This should be done in ways that boost employment. For example, the development of new energy sources such as solar power can both help reduce greenhouse gas emissions and create new jobs. Improving working conditions in medical and nursing care services will result in better services as well as add jobs.

Mr. Aso hinted that the government may go ahead and issue deficit-financing bonds for a fiscal 2009 supplementary budget. He should ensure that the money goes toward meaningful projects.

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