Confidence among Japanese businesses fell at its fastest rate for more than three decades in the last quarter, figures out today showed, as the country's top banker warned that the economy could continue to shrink for at least another year.

In its quarterly "tankan" survey, the Bank of Japan [BoJ] said the confidence index among major manufacturers had plummeted from -3 to -24 in the three months to December, its biggest drop since February 1975.

The sharp rise of the yen and the global financial crisis have pummelled Japanese car and electronics makers, dragging confidence levels to their lowest since the dog days of early 2002, when it stood at -38.

The survey asked more than 10,000 businesses whether they view the economic climate in a favourable or gloomy light – a negative reading indicates that pessimists outnumber optimists.

The financial crisis has forced Japan's manufacturers to revise earnings forecasts, slash jobs and lower production. Last week Sony said it would cut 8,000 jobs worldwide, while Toyota estimates its net profit for this year will be a mere third of last year's earnings.

The strength of the yen, which reached a 13-year-high against the dollar last Friday, could force exporters to cut more jobs and reduce capital spending and output even further, analysts warned.

Opinions are divided over the central bank's response when its policy board meets later this week. While there is speculation it will cut interest rates to encourage borrowing and investment, the consensus is that rates will stay at 0.3% until around March next year.

Instead, the central bank may opt to pump more liquidity into the financial system to encourage lending, Takuji Okubo, an economist at Merrill Lynch, told the Associated Press.

"As interest rates get close to zero, there is really no incentive for people to trade in the money market," he said. "That's why the BoJ wants to keep at least some interest, to keep people trading."

The tankan results are further proof that Japan's recession is far worse than previously feared. The world's second biggest economy has contracted for two straight quarters, with some fearing that the slowdown could continue into the first quarter of next year. That would mark the first time the economy has declined for four straight quarters since the end of the war.

Last week the prime minister, Taro Aso, responded with a stimulus package worth ¥23 trillion (£169bn) in an attempt, he said, to drag Japan out of a financial maelstrom felt "only once every hundred years".

But in a newspaper interview published today, the BoJ governor, Masaaki Shirakawa, warned that the economy could continue to shrink for at least another year through to the end of March 2010. The bank had originally forecast modest growth for the next fiscal year.

The stockmarket offered only light relief for exporters. The Nikkei benchmark index gained just over 5%today, buoyed by speculation that George Bush will use part of a $700bn federal bail-out package to rescue struggling US carmakers.