The ministry also called for stronger ties with robust East Asian countries to increase business opportunities for Japanese firms.

"The acceptance of foreign workers, in particular those with specialist and/or technical skills, contributes to the sophistication of economic activity and plays, in principle, a part in activating the economy," the white paper said.

Tokyo should deregulate labour regulations to enable more foreigners to work here and encourage foreign direct investment, which, in the end, would create more jobs in Japan, it said.

Foreign workers account for less than one per cent of the Japanese work force, while they account for about 18 per cent of the Swiss labour force and about 12 per cent of US work force.

"(Foreign direct investment)... is linked to the securing of employment opportunities through the provision of new products and services and risk money," the ministry said.

"It can also be an effective method in terms of vitalising the Japanese economy as it leads not only to management innovation... but also to the promotion of domestic structural reforms."

Japan should also help establish an "East Asian business zone" -- a multilateral free trade system -- as many Japanese firms expand in the region looking for new business opportunities.

The growing East Asian economy is becoming "a battlefield for competition among global corporations," the ministry said.

In order for Japanese firms to benefit the most from the market, the government should tighten economic ties with Asian nations through free trade agreements, it said.

The white paper added the world's second largest economy has been contracting since October 2000, when it last reached its peak.

"Although the downturn in production ceased and the economy bottomed out entering 2002, the unemployment rate rose to record levels and no dynamic recovery was witnessed," it said.

"Continued modest recovery is forecast for 2003."