Last year Kunio Shimizu, a retired executive of the Japanese newspaper Sankei, bought himself a plot of land with a little house outside Tokyo for 126 million yen (£700,000). Since then its value has fallen by one fifth, he told me with a rueful smile over lunch in a Tokyo restaurant.

The experience of Mr Shimizu underlines one of the basic problems in the world's second-largest economy. Where Dublin house buyers are rushing into the property market and counting their profits, Japanese people are sitting on their money or counting their losses. People are unwilling to spend.

Prime Minister Ryutaro Hashimoto has just launched Japan's largest-ever stimulus package, which is designed to put more money into people's pockets through tax cuts, but several Japanese and foreign analysts whom I talked to this week all say that those who benefit are more likely to save the windfall rather than splash out.

Housing is regarded as the only significant sector in Japan where spending could be stimulated but the conditions are not right. "Nobody is sure if land prices have hit bottom yet," said Mr Shimizu. "They are also worried about the future and feel the need to save and will not spend the money on anything else."

After eight years of economic malaise, pessimism among Japanese consumers about what lies ahead has been deepened by a steady flow of bad economic and financial news, which has prompted alarmist reports abroad of the country slipping into a black hole of depression and taking the rest of the world with it.

On Tuesday for example the government announced the shock news that unemployment in Japan, where workers expect to stay with a company for life, had risen in one month from 3.6 to 3.9 per cent, its highest since records began in 1953. The number of workers paid off in March rose 34.5 per cent.

The government stimulus package included new infrastructure projects to help employment and the circulation of money. Japan already has dozens of under-used facilities, including docks where no ships appear. It has 370 dams and is building 120 more.

"There are over half a million mostly small construction companies and they are destroying the landscape with concrete," said veteran Japan watcher, Karel van Wolferen, author of The Enigma of Japanese Power. The paving of river beds and erection of bridges which nobody used amounted to a "premature welfare system", he said.

The state is clearly trying to counter a situation where, overburdened by bad debts, the banks can no longer guarantee to provide loans to struggling companies to keep them afloat. Pessimism among small and medium-sized concerns about the future is consequently at an all-time high.

One of the first Japanese analysts to see what was coming was Akio Mikuni (58), former salaryman with Nomura Securities who broke ranks in 1975 to found the country's only independent credit rating agency. He forecast that in the coming years one in 10 of Japan's 3,000 public companies will fail or be taken over, including 10 to 15 banks.

Banks in Japan, he explained, were at the heart of large industrial groups called keiretsus, and their purpose was to sustain these groups. The powerful Ministry of Finance (MOF) directed cheap capital to industries to help them expand by deciding on the lending permitted by each bank. The system promoted exports and subsidised small and medium-size companies that would otherwise go under, thus maintaining high employment levels.

His controversial forecast that Japanese companies could not sustain their profits was vindicated in November with the collapse of one of the country's top 20 banks and of Yamaichi Securities, Japan's fourth largest broker.

He told me that if there is some sort of external shock to the dollar, as in 1995, he doubts the ability of the Japanese authorities to reverse the slide in the US currency, as it did then. Over the medium term banks are quietly selling their assets overseas and the ability of the Japanese to stop a rise in the yen, which would hit exports, is thereby diminished.

"The danger this time is that Japan may not be able to halt the dollar's collapse," agreed Taggart Murphy, a Tokyo-based financial analyst and author. "If the yen starts to rise there is no way the government can control it."

Demand for Japanese products is already tumbling in Asia. A dollar slide would devalue Japanese assets overseas, almost all held in US currency, and create a major crisis for Japanese banks and financial institutions. This could result in a sell-off of the billions of dollars Japan holds in US securities, with incalculable consequences for Wall Street.

A western ambassador expressed similar fears. "The big worry is if the Japanese sell their assets," he said. "This could bring about a world recession and reduce their ability to aid Asian economies and fund the IMF."

Some veteran analysts like Eamonn Fingleton, author of Blindside: Why Japan is still on track to overtake the US by the year 2000, believe the world is misreading Japan and reports of its economic demise are exaggerated. "Focus on industry," he said, pointing to the extraordinary efficiency of Japan's advanced industries and the fact that no hightech item in the world is made today without a Japanese-manufactured component.

"Those who say the Japanese economy is collapsing have not proved their case," said Mr Fingleton. He also believed the construction projects have merit. "Japan is a big country. Of course, there will be some that will be underused."

Others who support his view that Japan is not entering a great depression, like Jeffrey Sachs of Harvard University, maintain that a lot of the nagging of Japan by the west is concerned more with the threat of more cheap exports to the US and Europe rather than real fears of world recession.

Indeed the reaction of a visitor to Tokyo today could well be "Crisis? What crisis?" There are few signs of recession in the streets, no boarded up buildings, closed shops or homeless people, the usual symptoms of depression in Britain and the US. The roads are full of new cars and the pavements thick with umbrella-wielding salarymen hurrying to and from their offices.

While alarming for the Japanese, whose capitalist system is designed to maintain jobs, the unemployment figures are low by comparison with other industrialised countries. The 17,439 bankruptcies last year, the highest in a decade, amounted to less than a third of the figure in the booming US. The Japanese are also individually well-off by world standards. The average household has about £65,000 in savings. Reserves are so high that, as a western ambassador put it "Japan could put the South Korean deficit in its back pocket and not notice".

However, the statistics tell a depressing tale. Sales in Japan's department stores have dropped 14.5 per cent from a year ago. Production fell 3.9 per cent between January and February. Moody's, the American credit rating agency, reduced Japan's foreign debt outlook from stable to negative early in April, a blow to the pride of the world's largest creditor nation. The Organisation for Economic Co-operation and Development warned at the same time that the Japanese economy would shrink 4 per cent this year, the first decline since 1974. Foreign travel is down, partly because the yen is not so strong as it was, partly because older people worry more about the future.

Old Japanese customs like lavish entertaining are on the way out and conspicuous spending is criticised heavily by the media. "Receptions are less extravagant than in the past when you got caviar by the spoonful," said a diplomat. Mr Hashimoto held the annual government-sponsored reception for the cherry blossom at the unusual time of 8 a.m. on a Saturday because, the envoy suspected, he did not want anyone to notice.

Corruption cases in the banks and the MOF are being ruthlessly exposed, bringing public confidence in these institutions to a low level. On Monday the Finance Minister, Hikaru Matsunaga, punished 112 finance ministry officials for being excessively entertained by financial institutions, including one bureaucrat who was caught being wined and dined in a celebrated restaurant where the waitresses wear no knickers.

Cynics say the action against graft is not what it seems. "The exposure of corrupt individuals is not an indictment of the system, as many see it, but a defence and justification of the system," said Mr Murphy. "A lot of what is going on is not going on," quipped Mr van Wolferen who believes nothing fundamental is changing in the culture of the Japan as a weak government means there is no governing organ that steers the country in security and in a democratic manner. "No one has a mandate," he said. "Without a government that serves as a brain many of the problems confronting Japan are left unresolved."

The country's much-vaunted "big bang" deregulation has become a whimper, with special interest lobbies maintaining their influence on politicians, who in any event cannot bring themselves to introduce major reforms which would end the cherished life-time employment and throw millions out of work.

For example property values, though falling, are kept artificially high, said Tokyo consultant, Graham Harris. "This is to protect the banks and construction companies but they must take the pain if there is to be real change." He cited one "reform" as an example of window dressing. The top three executives of big companies were always allowed to keep an office and car after retiring, he said. Now they must give up these perks when they reach 80.

But some change is happening and overt bribery, like lavish entertaining, is less tolerated than before. Petrol retailing was deregulated two years ago and the results were dramatic: the cost of petrol tumbled, and the number of petrol stations fell while productivity increased.

America's Citibank is taking a share in retail banking its branches are visible all round the centre of Tokyo particularly among the young who are attracted by its higher interest rates. Japanese banks pay only 0.5 per cent interest.

In a significant move for foreign penetration in Japan, Merrill Lynch has acquired a branch network and 2,000 brokers from the defunct Yamaichi Securities. Over the next few years Western financial firms could draw in savers attracted to higher-yielding bonds and mutual funds.

Japan's problem appears to be compounded by complacency. Its misfortune, said one commentator, is to have too much money, so that people do not feel a real sense of crisis and the stimulus for radical reform is absent. Akio Mikuni believes that only a big shock will bring real change. Until then it is more or less business as usual as Japan Inc slips further into recession.