Japan released yet another grim assessment of the state of its economy yesterday, and its currency hit an eight-year low against the dollar and banking shares dragged the stock market lower.

"The conditions ahead of us are harsh. I think we will have to cope with a lot of hardships before attaining a recovery," Economic Planning Agency (EPA) Minister Taichi Sakaiya told a news conference.

In its monthly report, the EPA depicted an economy that was still limping at low levels.

"Final demand is weak due to cautious sentiment among households and businesses. This effect is also spilling over to production and employment.

"In short, the economy is in an exceedingly severe condition led by a prolonged slump," it said.

Following the report, the dollar soared above 147 yen, its highest level since August 1990, on worries over battered Asian stock markets and concerns over Japan's banking sector.

The Tokyo share market fell in tandem, especially banking stock, with the key 225-share Nikkei average closing down 1.40 per cent, or 219.43, points, at 15,406.99. The average briefly dropped by more than 2 per cent to as low as 15,310.59.

Top government spokesman Hiromu Nonaka said Japan was strongly concerned about the yen's fall against the dollar.

"We are aware of the yen's falls in the Tokyo market today, and we are strongly worried . . . we are watching closely, and will take appropriate steps at the appropriate time," he told a news conference.

Earlier in the day, the Bank of Japan (BOJ) announced a fall in the domestic wholesale price index (WPI) for July, which fell 2.2 per cent from a year earlier, maintaining market fears of a deflationary spiral.

And at a regular monetary policy meeting, the BOJ's Policy Board announced it had decided to leave its ultra-low interest rate policy unchanged.